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Choice-of-Law Must Be Explicit to Bypass FAA

Mark A Kantor

Choice-of-Law Must Be Explicit to Bypass FAA
focus35 via Getty Images

On August 1, 2019, the U.S. Court of Appeals for the First Circuit issued an opinion discussing the relationship between a choice of law clause in a contract and the arbitration law that governs judicial review of an award issued pursuant to an arbitration clause in that contract. Dialysis Access Center, LLC v. RMS Lifeline, Inc., No. 17-2014 (1st Cir. August 1, 2019).

The parties’ management services agreement contained an arbitration clause. It also contained a general choice-of-law provision stating that the contract was to "be construed in accordance with the internal substantive laws of the Commonwealth of Puerto Rico.” A dispute arose which the parties arbitrated. After the arbitration award was issued, the parties disagreed about whether Puerto Rican arbitration law or the Federal Arbitration Act (FAA) governed judicial review of the award.

Dialysis Access Center (DAC, the losing party in the arbitration) argued that, because the parties agreed that substantive Puerto Rican law would govern the contract, Puerto Rican arbitration law should also provide the standard of judicial review applicable to the arbitration award rather than the FAA. Puerto Rican law provides a much more vigorous standard of judicial review to arbitration awards than does the FAA (“more akin to a judicial review of an administrative agency decision, which permits some greater scrutiny of the merits of the award”).

The Court of Appeals rejected DAC’s argument. It concluded that the parties must “explicitly” agree to have another law displace the FAA. If there is no explicit agreement, then the FAA applies. The court quoted its earlier decision in Puerto Rico Telephone Co.:

[T]he mere inclusion of a generic choice-of-law clause within the arbitration agreement is not sufficient to require the application of state law concerning the scope of review, since there is a strong federal policy requiring limited review . . . [A] generic choice-of-law clause, standing alone, is insufficient to support a finding that contracting parties intended to opt out of the FAA's default regime for vacatur of arbitral awards.

427 F.3d at 29 (internal quotations and citations omitted).

This result is not a novel development in U.S. federal arbitration jurisprudence. However, it is possible that certain state courts might give more weight to a general choice-of-law clause.