Constitutional Issues Raised by Inter-American Convention on International Commercial Arbitration ( 1980 )

Constitutional Issues Raised by Inter-American
Convention on International Commercial Arbitration
P ro p o sed legislation g iv in g In te r-A m e ric a n C o m m ercial A rb itra tio n C om m ission
( IA C A C ) p o w e r to am en d rules w h ic h h a v e been en acted by C o n g ress w o u ld result in
an im p ro p e r d eleg atio n o f legislative p o w e r to a p riv a te o rg an izatio n , and any am en d ed
ru le co u ld not co n stitu tio n ally be ap p lied to ag re e m e n ts e n te re d in to a fter th e effe ctiv e
d a te o f th e am en d m en ts.
P ro v isio n in p ro p o sed legislation allo w in g o n e H ouse o f C o n g ress to d isa p p ro v e am e n d ­
m en ts to IA C A C rules, a lth o u g h n ot a v e to o f ex ecu tiv e actio n , n onetheless violates
th e P resen tm en t C lauses.
A n a lte rn a tiv e rev iew m ech anism w h e re b y th e S e c re ta ry o f S tate w o u ld be req u ire d to
a p p ro v e o r d isa p p ro v e am en d m en ts to th e IA C A C rules w o u ld be c o n stitu tio n a lly
accep tab le, since th e am en d m en ts w o u ld not be binding on the g o v e rn m e n t but m erely
ad v iso ry.
March 20, 1980
MEMORANDUM OPINION FOR TH E ASSISTANT LEG AL
ADVISER FOR PRIV A TE IN TER N A TIO N A L LAW,
D EPA R TM EN T O F STA TE
This responds to your request for the views of the Justice Depart­
ment on the congressional review mechanism in the proposed imple­
menting legislation for the Inter-American Convention on International
Commercial Arbitration. You ask whether the review mechanism con­
stitutes a “legislative veto.” Our analysis of the review mechanism in
the proposed legislation raises an additional question whether Congress
may delegate its legislative power to the Inter-American Commercial
Arbitration Commission (IACAC), a private organization. While the
law is not clear in this area, we conclude that the delegation made in
the proposed legislation presents serious constitutional problems. We
believe, however, that the constitutional problems could be ameliorated
if IACAC’s amendments to its rules were applicable only to agreements
entered into after the effective date of the amendments. The review
mechanism in the proposed legislation, although not a veto of executive
action, is a legislative veto and is, therefore, unconstitutional. At your
request, we suggest an alternative review mechanism.
509
I.
The Inter-American Convention on Internationa) Commercial Arbi­
tration provides that, when parties of signatory nations have agreed to
submit to arbitration any dispute that may arise out of a commercial
transaction, the arbitration shall be conducted in accordance with the
rules of procedure of the IACAC unless the parties have expressly
agreed otherwise. Articles 1 & 3. The proposed implementing legisla­
tion for the Convention defines the rules referred to in Article 3 of the
Convention to be those rules as promulgated by the Commission on
January 1, 1978. § 306(a). If the IACAC modifies or amends its rules,
§ 306(b) would require the Secretary of State to transmit to the House
of Representatives and the Senate a document containing the rules as
modified or amended together with a report setting forth the reasons
for and the effect of such modifications or amendments. A majority of
either the House or Senate may disapprove the rules as modified or
amended within 90 days of the transmission. If the rules are not disap­
proved, the rules shall be published after 90 days have elapsed and shall
become effective 120 days after publication. If the rules are disap­
proved, the Secretary is required to use his best efforts to reconvene
the rulemaking body of IACAC to ensure that the rules applicable to
the signatory parties to the Convention are uniform.
II.
The threshold question presented by the proposed implementing leg­
islation is whether it involves an unconstitutional delegation of legisla­
tive power to a private organization. The legislation would incorporate
by reference and thereby enact the rules of procedure of the IACAC in
effect as of January 1, 1978. Since it is assumed that Congress would
review and approve the rules in enacting the legislation, the incorpora­
tion of those rules by reference does not involve a delegation of
legislative power to a private organization. C f United States v.
Sharpnack, 355 U.S. 286, 293 (1958). See also Liebmann, G.W., Delega­
tion to Private Parties in American Constitutional Law, 50 Ind. L.J. 650,
680 (1975). However, the proposed legislation implicitly gives the
IACAC the power to amend those rules subject to one House’s disap­
proval of such amendments. In effect, the legislature would delegate to
a private organization the power to amend congressional legislation.
We believe that such a delegation raises serious constitutional problems.
In analyzing the delegation question, we are hampered by the fact
that “ [t]he case law has not crystallized any consistent principles, either
in the federal courts or in the state courts.” Davis, Administrative Law
Treatise §2.14 at 138 (1958). Nevertheless, a survey of the relevant
Supreme Court cases provides some guidance. In 1908, the Supreme
Court rejected a claim that a statute permitting the American Railway
510
Association to set the uniform height for drawbars on freight cars
constituted an invalid delegation, St. Louis, Iron Mountain & Southern
Railway Co. v. Taylor, 210 U.S. 281 (1908). Three years earlier, it had
upheld a delegation to miners to make regulations governing the re­
cording of mining claims and the amount of work necessary to establish
possession of a mining claim. Butte City Water Co. v. Baker, 196 U.S.
119 (1905).
However, more recently the Court found invalid a delegation to
producers of two-thirds of coal to fix for producers selling coal to
government contractors the minimum wages and maximum hours of
their workers. Carter v. Carter Coal Co., 298 U.S. 238, 310 (1936).
Holding that the delegation violated the Due Process Clause of the
Fifth Amendment, the Court stated:
The power conferred upon the majority is, in effect, the
power to regulate the affairs of an unwilling minority.
This is legislative delegation in its most obnoxious form;
for it is not even delegation to an official or an official
body, presumptively disinterested, but to private persons
whose interests may be and often are adverse to the
interests of others in the same business.
Id. at 311. In A.L.A. Schechter Poultry Corp. v. United States, 295 U.S.
495 (1935), the Court, addressing the argument that a delegation to the
President to approve codes of fair competition proposed by trade asso­
ciations was proper because a delegation to the trade associations alone
would be constitutional, stated:
But would it be seriously contended that Congress could
delegate its legislative authority to trade or industrial
associations or groups so as to empower them to enact the
laws they deem to be wise and beneficent for the rehabili­
tation and expansion of their trade or industries? Could
trade or industrial associations or groups be constituted
legislative bodies for that purpose because such associa­
tions or groups are familiar with the problems of their
enterprises? . . . Such a delegation of legislative power is
unknown to our law and is utterly inconsistent with the
constitutional prerogatives and duties of Congress.
Id. at 537. The Court in Schechter distinguished St. Louis, Iron Mountain
& Southern Railway Co., as involving a matter of a technical nature and
Butte City Water Co. as a recognition of local customs and of the rules
of miners concerning mining claims. 295 U.S. at 537.
Adopting this distinction, it could be argued that the IACAC rules
are not substantive regulations capable of imposing anti-competitive or
unfair restrictions but are merely “technical” rules promulgated by a
511
presumably disinterested body with a recognized expertise in arbitration
procedure. Cf. Liebmann, supra at 680-719.
However, because the rules may affect substantive rights,1 we are
reluctant to conclude on the basis of this distinction that the delegation
to the IACAC is clearly constitutional, especially in light of the scar­
city and age of federal case law approving delegation to private
bodies.2
Our concern about the effect such amendments might have on sub­
stantive rights would be significantly reduced if the amendments would
apply only to agreements entered into after the effective date of the
amendments. This approach would eliminate any potential for unfair­
ness because a party entering an arbitration agreement would have the
opportunity to examine the amendments to the IACAC rules and, if he
regarded the amendments as unfair, could either decline to agree to
arbitration or negotiate with the other party to the agreement the
application of other rules or modifications to the amendments.3
Whether you decide to apply the amended rules to all agreements in
the interest of uniformity or only to agreements entered into after the
effective -date of amendments will determine whether governmental
review is required. If the former approach is adopted, we believe that,
in order to minimize the possibility of a challenge to amended IACAC
rules, the rules should be subject to governmental review and adoption
by legislation.
III.
The proposed legislative veto mechanism, although it does provide
some governmental review of IACAC amendments, presents other con­
stitutional problems. As you point out in your memorandum, this
review mechanism is unlike the classic “legislative veto” provision
1 For instance, the rules govern the place of arbitration, the choice o f law, the appointment of
arbitrators, and the right to an oral hearing. It is conceivable that the rules could be amended in such
a manner that American citizens could be disadvantaged in arbitration proceedings, e.g., a country
distant from the United States could be designated as the place of arbitration.
2 Other problems could also be present here. First, a problem could arise out of the concept that, in
a representative government, governmental powers should be vested in elected or disinterested public
officials. In this manner, governmental decisions ‘and processes are subject to the checks of a variety of
legal controls such as the oath of office, the conflict of interest laws, the control over appropriations,
the powers of appointment, confirmation, or removal, and ultimately the electoral process. Another
problem arises from the nature of the power vested in the private body. It could be argued that rule­
making power may be constitutionally vested only in “Officers of the United States” appointed
pursuant to the Appointments Clause, Article II, § 2, clause 2. See Buckley v. Valeo. 424 U.S. 1, 113-41
(1976). Finally, if it is constitutional to delegate legislative power to private organizations, such a
delegation should be subject to standards restricting the exercise of that power. C f A.L.A. Schechter
Poultry Corp. v. United States, 295 U.S. 495 (1935). Although the courts’ attitude toward delegation of
legislative power to executive agencies without specific standards has relaxed considerably, see gener­
ally K.C. Davis, Administrative Law Treatise, §§2.05, 2.06 and 2.15 (1958), the lack of the checks
mentioned above on a private organization’s exercise of that power would suggest that standards
imposed upon the exercise of legislative power by private organizations should be more stringent than
the standards imposed on public bodies.
3 Article 3 of the Inter-American Convention on International Commercial Arbitration applies the
IACAC rules only when parties to an arbitration agreement have not expressly agreed otherwise.
512
which purports to vest one House of Congress with the power to veto
Executive action. Instead, the provision would allow one House of
Congress to veto “private” action. Assuming, arguendo, that Congress
could delegate to the IACAC the power to amend rules that had been
enacted by Congress, the question is whether the Constitution author­
izes a procedure whereby one House may control the exercise of
discretion vested in the IACAC.
Article I, § 1 of the Constitution vests all legislative powers in a
Congress, consisting of a Senate and House of Representatives. Further­
more, those powers cannot be exercised absent participation by the
President. Article I, § 7, clause 2 requires “[e]very Bill . . . be pre­
sented to the President of the United States” for his approval or
disapproval before it can become a law. Article I, § 7, clause 3 provides
that “[e]very Order, Resolution, or Vote” to which concurrence of
both Houses is necessary shall be presented to the President for his
approval or veto.4
The Presentment Clauses thus provide two primary checks on the
exercise of legislative power—the principle of bicameralism and the
Executive veto. The veto provision in the proposed implementing legis­
lation would not respect these constitutional checks. The proposed
legislation would allow one House of Congress to disapprove amend­
ments to the IACAC rules, but that legislative decision would not be
presented to the President for his approval or veto. Nor would the
President be given the opportunity to veto any “approval” of the
amendments because the approval would be expressed by congressional
inaction. Further, exercise by one House of the veto power would
purport to place on the Secretary of State a legal duty to take steps to
reconvene the rulemaking body of the IACAC. In our view, legal
duties may not be imposed on the Executive by the exercise of some­
thing less than the full legislative process. Finally, if Congress could
constitutionally delegate to the IACAC its legislative power to amend
the rules, that power may be revoked only by affirmative legislative
action by both Houses of Congress and the President, not by one House
of Congress disapproving the exercise of that power.
IV.
If you decide that the IACAC rules amended should, as a matter of
policy, apply to all arbitration agreements, you may wish to consider an
4 Giving the President this integral role in the legislative process was believed necessary by the
Framers in order to limit congressional power. As James Madison put it: “(I]t is against the enterpris­
ing ambition of this [legislative] department that the people ought to indulge all their jealousy and
exhaust all their precautions." The Federalist No. 48, at 309 (New American Library Ed. 1961).
Alexander Hamilton viewed the veto power of the President as necessary to prevent legislative and
Executive powers from becoming blended in the same hands. Id., No. 73, at 442. For more extensive
discussion of the constitutionality of legislative vetoes, see 37 Op. A tt’y Gen. 56 (1933); 41 Op. A tt’y
Gen! 230 (1955); 41 Op. A tt'y Gen. 300 (1957).
513
alternative governmental review mechanism which would vest the Sec­
retary of State with the power and duty to approve or disapprove
amendments to the IACAC rules. This approach would cure the pro­
posed legislation of both constitutional infirmities. IACAC’s action in
amending the rules would not be an exercise of legislative power
because the amendments would not be binding on the government but
would be merely advisory. The courts have held similar schemes not to
be an unconstitutional delegation of legislative power. Sun-Shine An­
thracite Coal Co. v. Atkins, 310 U.S. 381 (1940); Todd & Co., Inc. v.
SEC, 557 F.2d 1008, 1012-13 (3d Cir. 1977); R.H. Johnson & Co. v.
SEC, 198 F.2d 690, 695 (2d Cir. 1952).
A model for this approach may be found in the Maloney Act, 15
U.S.C. § 78o-3, authorizing Securities and Exchange Commission
(SEC) registration of approved associations of securities dealers. Both
the Second and Third Circuits have upheld the Maloney Act against a
challenge that it unconstitutionally delegates legislative power to pri­
vate parties. Todd & Co., Inc. v. SEC, 557 F.2d 1008, and R.H. Johnson
& Co. v. SEC, 198 F.2d 690. Membership in a registered association, as
a practical matter, is essential to doing business in over-the-counter
securities.5 The Maloney Act authorizes these associations to adopt
substantive as well as procedural rules, to conduct disciplinary proceed­
ings and to enforce sanctions, including expulsion. The associations are
required to submit any changes in or additions to their rules to the SEC
for review. 15 U.S.C. § 78o-3(j). The rules as amended become effec­
tive if within 20 days the SEC has not disapproved the amendments.
The SEC is required to disapprove the amendments if they are not
consistent with the Act.
The Maloney Act resembles the proposed implementing legislation in
that amendments to the rules become effective unless disapproved. A
critical difference, however, is that the Act requires the SEC to disap­
prove amendments if they are inconsistent with the Act. The Act,
therefore, places an affirmative obligation on the SEC to consider
amendments, determine whether they are inconsistent with the Act and
disapprove them if they are.
The Secretary of State’s review of IACAC’s amendments, however,
would have to be conducted in accordance with the rule-making re­
quirements of the Administrative Procedure Act, 5 U.S.C. § 553,®
unless the Secretary’s review and adoption of IACAC rules could be
considered a foreign affairs function so as to trigger the foreign affairs
exemption, 5 U.S.C. § 553(a)(1), or unless an exception were otherwise
provided. We understand that your Department interprets that exemp­
8 An association may require its members to charge nonmember brokers the commissions charged
to the general public rather than the lower commissions charged to members. IS U.S.C. §78o-3(e).
6 See SEC regulations governing its review of amendments of registered association's rules. 17
C.F.R. 240.19b-4.
514
tion broadly. Bonfield, Military and Foreign Affairs Function Rule-
Making under the APA, 71 Mich. L. Rev. 221, 258-62 (1972). We
express no opinion on the applicability of this exemption. We would be
happy, however, to consider your views on this question and advise
you on the exemption’s applicability.
If you decide to apply the amended rules only to agreements entered
into after the effective date of the amendments, the amendments, be­
cause they would be presumed to have been agreed to by the parties to
an arbitration agreement, would not have to be approved by the Secre­
tary of State. If you feel that the implementing legislation should, as a
matter of policy, provide for some opportunity for governmental
review of amendments, you may want to consider a “report and wait”
provision. A model for this approach may be found in 28 U.S.C. § 2072which delays the effective date of procedural rules promulgated by the
Supreme Court until 90 days after the rules have been reported to
Congress. Within that 90-day period, Congress may through the legisla­
tive process revoke all or some of the rules.
L a r r y L . S im m s
Deputy Assistant Attorney General
Office o f Legal Counsel
515