October 2, 2009

Why do we care about the Federal Arbitration Act?

By Why do we care about the Federal Arbitration Act?

Author: Timothy Sandefur

The Pacific Legal Foundation files a lot of friend-of-the-court briefs in cases involving the Federal Arbitration Act. This isn’t the sort of thing that grabs headlines, and sometimes people wonder why we would care about something that seems like an awfully arcane area of the law. But in fact, these FAA cases have a deeper importance than it might seem, at first.

Arbitration is a way of resolving disputes without going to court. It’s usually faster and cheaper than court, because it’s handled by private enterprise, and the judges usually have more familiarity with the specific issues than judges do. So businesses will often put clauses in their contracts that require arbitration instead of litigation if a dispute later arises. Thus arbitration is said to be a matter of contract. Like other contracts, it represents an exercise of choice by the people who sign the contract.

That’s what contract law is about: freedom of economic choice. And under the Federal Arbitration Act, arbitration contracts are required to go to arbitration; people who agree to use arbitration instead of the courts are not allowed to get out of those agreements and go to court, except in rare circumstances.

But many people believe that individuals make poor economic choices, and they want to override those choices or allow courts the power to let people out of their agreements if those agreements later turn out to have been unwise. Under the authority of legal theories like “unconscionability” and “public policy,” some judges and law professors have sought ways to re-write the terms of contracts that people later come to regret. On the flip side, others have sought to impose what they call “efficient” outcomes on people by imposing decisions on them that they might not have made themselves.

That’s what the case of Stolt-Nielsen v. AnimalFeeds Corp. is about. This case is currently pending in the U.S. Supreme Court, which has recently been hearing a lot of cases involving the Federal Arbitration Act. Now, in many of these cases, PLF has filed briefs supporting the side that wants to go to arbitration. But in the Stolt-Nielsen case, we filed a brief supporting the party that doesn’t want to go to arbitration. And the reason is that, in this case, the parties did not agree to use arbitration to resolve their disputes. Instead, a lower court forced the parties to do so, partly on the grounds that arbitration is more “economically efficient” than lawsuits.

Now, it may be true that arbitration costs less money than litigation. But that doesn’t make it “efficient.” In fact, “efficiency” is a very slippery term. It really just means, that which accomplishes what you want to accomplish as quickly as possible with the least amount of waste. But different people want to accomplish different things. So you can’t claim that something’s efficient just because it’s cheaper: sometimes people prefer to go the more expensive route, and if that’s what they choose, then it’s “inefficient” to override their decision.

More importantly, overriding their decision deprives them of their freedom of choice. And that’s what the right to contract is all about. To force a person to go to arbitration against his will is just as bad as to allow that person to avoid the consequences of his actions if he changes his mind after having agreed to go to arbitration.

What courts ought to do is to enforce the contracts that people make, as long as those contracts don’t involve fraud or force or deceit of any sort. Enforcing the contracts that people make is the surest way to protect the rights of conscientious, hard-working wealth creators—and to promote responsible decision-making in the future. Letting people out of their bargains, or imposing things like arbitration on them against their will, deprives them of both freedom and responsibility.

That’s why PLF cares about these complicated arbitration cases. You can read our brief in the Stolt-Nielsen case here.

What to read next