Alternative dispute resolution is widely accepted today in the legal community as well as society at large. With the reported decline in suits actually proceeding to trial, some have argued that the “A” in “ADR” should be dropped. But this wide acceptance was not always the case for every form of ADR.
The history and acceptance of mediation dates back thousands of years. There is evidence that tribal communities have practiced mediation techniques for centuries. The history of mediation in China is said to date back more than 4,000 years. Mediation by elders within the religious community was common in the early history of the United States.
Arbitration did not fare as well. Arbitration was usually accepted as a means of dispute resolution for existing disputes. For example, it is told that Abraham Lincoln arbitrated a land dispute between two farmers early in his career as an attorney.
However, agreements to arbitrate made before a dispute arose were at first not favored. A party could not ask the court to enforce the agreement. This started to change in 1920, with the adoption of the New York Arbitration Act.
The U.S. Supreme Court reviewed this “new” law in 1924. The case of Red Cross Line v. Atlantic Fruit Company, 264 U.S. 109 (1924), involved a charter contract with a clause saying that any dispute would be submitted to arbitration. When a dispute arose, one of the parties sought to have the provision enforced. Much of the case dealt with the jurisdiction of the court to hear a controversy over admiralty, but the ultimate question was the validity of the arbitration clause.
The U.S. Supreme Court noted that before the New York Arbitration Act, specific performance of the promise to arbitrate would not be enforced, the promise could not be pled to bar an action, and it would not support a motion to stay. The purpose of the New York statute was to compel performance of such clauses so the parties could be compelled to arbitrate Congress acted the next year and in 1925 passed the Federal Arbitration Act. The Act was a relatively short but powerful Act. Here is what it said about the enforceability of an arbitration clause: § 2 Validity, irrevocability and enforcement of agreements to arbitrate: A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
The term “commerce” necessarily refers to interstate commerce, or trade between persons in two or more different states, as Congress does not have the power to regulate commerce or trade within a single state. But the Act raised the question of how broadly we should interpret the phrase “a contract evidencing a transaction involving commerce.” Does any amount of interstate commerce invoke the Act, or must it be substantial interstate commerce activity? The U.S. Supreme Court addressed this issue 70 years later in the 1995 case of Allied-Bruce Terminix Companies, Inc. v. Dobson, 513 U.S. 265 (1995).
The case involved a home in Birmingham, Alabama. The previous owners had purchased a lifetime “Termite Protection Plan” from Allied-Bruce. The plan required Allied-Bruce to protect the home against the attack of subterranean termites, to re-inspect periodically, provide any further treatment found necessary, and to repair damages caused by any new infestation. The contract for the plan contained a clause that “any controversy or claim . . . arising out of or relating to the interpretation, performance or breach of any provisions of this agreement shall be settled exclusively by arbitration.”
Just before the sale, the homeowner had Allied- Bruce inspect the home. In the words of the Court, Allied-Bruce gave the house “a clean bill of heath.” Unfortunately, just after the sale of the home, the new owners found it swarming with termites. Allied- Bruce attempted to treat and repair the home, but the new homeowners found the efforts inadequate. The new homeowners sued the previous homeowners, Allied-Bruce, and Terminix.
Allied-Bruce and Terminix asked the court to stay the litigation and compel arbitration. The trial court denied the stay. The Supreme Court of Alabama upheld the denial of the stay on the basis of a state statute that made written, pre-dispute arbitration agreements invalid and unenforceable. The Supreme Court of Alabama found that the Federal Arbitration Act did not apply because the connection between the termite contract and interstate commerce was too slight. When the parties made their contract, they had contemplated a transaction that was primarily local and not “substantially” interstate.
The U.S. Supreme Court reviewed several preliminary questions in order to reach their ultimate decision. The Court first looked to the law as it existed when Congress passed the Act and what the lawmakers intended to change by passing it. English courts were opposed to anything that would deprive them of jurisdiction. The American courts followed this rule based more upon the antiquity of the rule “rather than upon its excellence or reason.” The Supreme Court further found that “when Congress passed the Arbitration Act in 1925, it was motivated, first and foremost, by a desire to change this antiarbitration rule.”
The Court also addressed the question of whether the Act trumps conflicting state antiarbitration law (such as the Alabama statute). Disputes about state laws can end up in federal courts when the parties live in different states. Would Congress have wanted state courts and federal courts to reach different outcomes about the validity of arbitration agreements in similar cases? The Supreme Court thought the answer was no. Therefore, the Act must apply to state courts and pre-empt any state statute that would invalidate arbitration agreements.
Having determined that the Act applied to the case and prevailed over the Alabama antiarbitration statute, the Court examined what Congress intended by the phrase “involving commerce.” How much interstate commerce brings the transaction under the Act? The Court found the Act’s legislative history informative on this point. The history indicated Congress’ expansive intent. The Act itself also indicated this expansive intent when it defined commerce in the language of the Constitution’s Commerce Clause itself. Thus a broad interpretation of “involving” is the most consistent with Congress’ apparent intent to exercise its Commerce Clause powers to the full.
Finally, the Court turned to the phrase “evidencing a transaction.” This could also be interpreted in different ways. The first involves what the Court termed the “commerce in fact” test. Did the transaction, in fact, involve interstate commerce? The second test was what the Court called the “contemplation of the parties” test. Did the parties intend to conduct interstate commerce?
The Court found that the second test could invite more litigation between parties to determine what was or was not “contemplated.” This interpretation would be counter to Congress’ intent for the Act to allow parties to avoid the costs and delays of litigation. The Court found that the “commerce in fact” test is the appropriate test.
Putting all the above together, the Court found that the Act applied in state courts and pre-empted any conflicting state statute. The Act applied to any contract that in fact did involve interstate commerce. What did all this mean for the new homeowners? They were compelled to arbitration. What was the interstate commerce involved? Although presumably no termites were transported across state lines, the termitetreating and house-repairing materials used by Allied-Bruce in Alabama came from outside the state.
Many construction projects involve materials from all over the U.S. Does this mean we must apply the Federal Arbitration Act? The Court’s ruling appears to point to that broad interpretation. However, it is important to remember that the Act only pre-empts state statutes that conflict with provisions of the Act.
Since a number of states, like Ohio, have adopted the model Uniform Arbitration Act or similar statues, many of the state laws have been harmonized with the federal law. It is also important to note that the Act does not address contractual rights between the parties. Contract law is a matter of state law, so states with identical arbitration statues may still have different substantive results for similar cases.