Commercial Litigation and Arbitration

Arbitration Agreement’s Selection of State Arbitration Act Does Not Entirely Displace FAA or Effect Waiver of Right to Remove — Intent to Apply State Vacatur Standards Must be Clear

From Pepper Hamilton, LLP v. Underwriting Members of Syndicate 53 at Lloyd's, 2010 U.S. App. LEXIS 17195 (3d Cir. Aug. 18, 2010):

The FAA is divided into three chapters, two of which are implicated here. Chapter 1 (the "domestic FAA"), 9 U.S.C. §§ 1-16, is a set of default rules "designed 'to overrule the judiciary's longstanding refusal to enforce agreements to arbitrate.'" Volt Info. Scis., Inc. v. Bd. of Trs. of the Leland Stanford Junior Univ., 489 U.S. 468, 474, 109 S. Ct. 1248, 103 L. Ed. 2d 488 (1989). Chapter 2 (the Convention's implementing legislation), 9 U.S.C. §§ 201-08, by contrast, is intended "'to secure for United States citizens predictable enforcement by foreign governments of certain arbitral contracts and awards made in this and other signatory nations.'" Suter v. Munich Reins. Co., 223 F.3d 150, 154 (3d Cir. 2000) (citation omitted).

The domestic FAA "simply requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms." Volt, 489 U.S. at 478 (citations omitted). It "does not . . . prevent [] the enforcement of agreements to arbitrate under different rules than those set forth in the [domestic FAA] itself." ***Id. at 479. Thus, when "parties have agreed to abide by state rules of arbitration, enforcing those rules according to the terms of the agreement is fully consistent with the goals of the FAA." ***

We have interpreted the FAA and Volt to mean that "parties [may] contract to arbitrate pursuant to arbitration rules or procedures borrowed from state law, [and] the federal policy is satisfied so long as their agreement is enforced." ***

This is not because the agreements "cease being subject to the FAA," but is instead because "the FAA permits parties to 'specify by contract the rules under which . . . arbitration will be conducted.'" *** Thus, enforcement of an agreement to use state rules and procedures in lieu of the federal default rules is "not because the parties have chosen to be governed by state rather than federal law," but "because federal law requires that the court enforce the terms of the agreement." *** But while parties may opt out of the FAA's default rules, they cannot "opt out" of FAA coverage in its entirety because it is the FAA itself that authorizes parties to choose different rules in the first place. Although Volt and Roadway addressed only the domestic FAA, the principles undergirding those decisions apply to the Convention's implementing legislation. An agreement by parties to apply the rules and procedures of state law neither operates as an "opt out" of the domestic FAA nor as an "opt out" of the Convention's implementing legislation. It is federal law that allows the parties to make and enforce agreements that fall under the FAA or the Convention. Accordingly, we reject Ario's argument that the FAA, in its entirety, is inapplicable here.

2. The parties did not clearly and unambiguously agree to waive the right of removal

Though the parties may not opt out of (and are governed by) the FAA, it is still possible to waive specifically the right of removal under 9 U.S.C. § 205.***

We are aware of only one decision from our sister circuit courts that has found a clear and unambiguous waiver of the right to remove pursuant to § 205. See Ensco Int'l, Inc. v. Certain Underwriters at Lloyd's, 579 F.3d 442 (5th Cir. 2009). There, a divided panel of the Court of Appeals for the Fifth Circuit held that a choice-of-law provision in an insurance policy met the clear and unambiguous standard where the parties agreed that "[a]ny disputes arising under or in connection with [the insurance policy] shall be subject to the exclusive jurisdiction of the Courts of Dallas County, Texas."

Ario contends that there is similar "clear and unambiguous" language in the reinsurance treaties' arbitration provisions expressing the parties' agreement to waive the right of removal. He argues that because the parties agreed that "the arbitration shall be in accordance with the rules and procedures established by the [PUAA]," this waived the reinsurers' (and Ario's) right to remove to federal court under § 205. We disagree that this was sufficiently clear and unambiguous to effect a waiver. Not only do the arbitration provisions not make any mention of removal, the lone provision in the reinsurance treaties to refer to removal, the service-of-suit provision, explicitly states that "[n]othing in [it] constitutes or should be understood to constitute a waiver of Reinsurers' rights . . . to remove an action to a United States District Court." Nor is there any language akin to "exclusive jurisdiction" that is fundamentally incompatible with the preservation of the right to remove. Far from expressing a clear and unambiguous waiver of the right to remove, the reinsurance treaties expressly preserve it.

[Vacatur Standards]

[T]he domestic FAA allows parties to agree to apply state law enforcement mechanisms in lieu of the FAA default rules. Of course, "[t]he FAA is not the only way into court for parties wanting review of arbitration awards," and parties "may contemplate enforcement under state statutory or common law." Hall St. Assocs., 552 U.S. at 590. "[T]he FAA standards control 'in the absence of contractual intent to the contrary.'" Roadway, 257 F.3d at 296 (quoting Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 59, 115 S. Ct. 1212, 131 L. Ed. 2d 76 (1995)).

We require the parties to express a "clear intent" to apply state law vacatur standards instead of those of the FAA. *** We chose the "clear intent" standard because it furthered the FAA's goal of enforcing parties' actual bargains, and we concluded that the default application of the FAA caused fewer problems than application of other standards in the absence of "clear intent." ***

[W]e err on the side of concluding that parties do not intend to opt out of the FAA scheme. In the face of the reasonable inferences that (1) the arbitration provisions were concerned solely with the conduct of the arbitration itself, and (2) the service-of-suit provision was concerned with judicial enforcement of any arbitration decision, we believe that the parties did not have a "clear intent" to apply the PUAA vacatur standards in lieu of the FAA standards. We thus apply the FAA's vacatur standards and not those of the PUAA.

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