What is the Federal Arbitration Act?

The Federal Arbitration Act, which is encoded in the United States Code at 9 U.S.C. Section 1, et seq., grants an explicit right to parties to resolve legal disputes privately through a certified arbitrator. The parties must mutually consent to arbitration in order for the decision of the arbitrator to be a binding result. Further, within one year of the arbitrator’s decision, it must be confirmed by a court. The only way by which the Federal Arbitration Act allows appeal of the arbitrator’s decision is if the consent to take the case to arbitration was unfairly coerced, fraudulently obtained, or the contractual clause agreeing to arbitration was patently unfair.

The Federal Arbitration Act, passed by the United States Congress in 1925, authorizes parties to agree to circumvent the courts and settle their dispute with an arbitrator — a private party, generally a lawyer, who hears the facts as told by each side and renders a decision on the dispute. This legislation was designed with the purpose of giving a less formal alternative to dispute resolution. Additionally, by providing for a legal alternative to the courts, Congress provided some relief to the increasingly congested American court system.

There was some initial resistance to the Federal Arbitration Act in some circles who believed making arbitration an option would undermine the judicial process. Challenges to the authority of the United States Congress to enact such legislation were raised by many different people. However, under the Commerce Clause of the United States Constitution, Congress has the power to regulate anything affecting interstate commerce. It was determined that the Federal Arbitration Act fell legitimately within that Congressional power.

As long as both parties agree to submit their dispute to arbitration, generally through a contractual provision, they may do so under the Federal Arbitration Act. There are, however, some restrictions that make arbitration unappealing to some. For example, by submitting to arbitration, the parties waive their right to appeal the decision of the arbitrator. Once the arbitrator enters the award in court, it is considered on par with a judicial decree and the losing party must follow the order.

There are limited circumstances in which an arbitration decision may be challenged under the Federal Arbitration Act, all of which have to do with the consent of the party to waive their right to the judicial process. If the consent to arbitrate was obtained through a misrepresentation or threats by the party seeking consent, then the decision will be invalidated. Further, if the clause of the contract that dictates the circumstances in which a party may elect to go to arbitration is considered unfair to the point that it “shocks the conscience” — a contracts law concept called “unconscionability” — then the decision will also be invalidated. Otherwise, the arbitrator’s decision is completely binding on both parties.