Arbitration sounds like a term you might have found in a union dispute a few decades ago, but it is more and more common in the business world. You'll run across it in employment contracts, credit card agreements, and retail contracts all the time, so it's good to know what it means and how it works.
Alternatives to Going to Court
Arbitration is a form of alternative dispute resolution (ADR), used in place of litigation (going to court) in the hope of settling a dispute without the cost and time of a court cage Litigation is a court-based process that involves a decision that is binding on both parties and a process of appealing the decision.
The differences between arbitration and litigation involve the processes themselves and the result of decisions on the disputes. Both are formal processes, but arbitration in many cases is less costly and results in shorter settlement times.
Cost-saving with Arbitration: An Example
A 2016 study by the American Arbitration Association compared case resolution time for arbitration and litigation in health care cases. The results showed that using arbitration resulted in faster litigation times.
Arbitration Claim Resolution times:
- AAA Healthcare Commercial Claims: 16.8 months
- AAA Payor Provider Claims (insurance companies and hospitals/doctors): 15.9 months
Compared to Litigation Claim Resolution times; U.S. District Court Healthcare Cases: 24.9 months
The Process of Arbitration
Arbitration is the process of bringing a business dispute before a disinterested third party for resolution. Arbitration can be held ad hoc (internally by the parties) or with support from an organization like the American Arbitration Association(AAA).
The parties select an arbitrator or a panel. Arbitrators don't have to be lawyers.' the parties can select an expert in a field.
Arbitration hearings resemble a trial. The third party, an arbitrator instead of a judge, hears the evidence brought by both sides and gives an opinion. Opinions are not public record, as are trial judgments. Sometimes that decision is binding on the parties.
Many business and employment contracts have arbitration clauses. Many retailers, credit card companies, and employers are using mandatory arbitration in their contracts, requiring that customers or employees consent to arbitration instead of litigation to resolve disputes.
Arbitration vs. Mediation
Arbitration is often confused with mediation, which is an informal process of bringing in a third party who goes between the disputing parties to help them settle a dispute. Mediating is a voluntary process, and it's not binding on the parties The mediator meets with the parties for discussion, but the mediator does not impose a settlement. The mediator tries to bring the parties together by discussion and caucusing (separate discussions).
Arbitration Clause in Contracts
Typically, arbitration begins when two parties agree to settle their dispute through arbitration. The decision may also have been made for them by the addition of an arbitration clause to a contract that both parties have signed.
A typical arbitration clause in a business contract might look like this (from the American Arbitration Association):
Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.
Selecting an Arbitrator
Arbitrators are trained professionals who have expertise in specific areas of arbitration, including employment, labor, construction, commercial, and international disputes. The American Arbitration Association maintains a roster of arbitrators in these and other areas that the parties can use in selecting an arbitrator.
How the Arbitration Process Works
Arbitration may or may not be binding on the parties. In binding arbitration, the decision of the arbitrator is final and it can be upheld in a court. In non-binding arbitration, adherence to the decision is voluntary for both parties.
Here's a general process for arbitration.
- Filing and Initiation: An arbitration case begins when one party submits a Demand for Arbitration to the AAA. The other party (the respondent) is notified by the AAA and a deadline is set for a response.
- Arbitrator Selection: The AAA works with the parties to identify and select an arbitration based on the criteria determined by the parties.
- Preliminary Hearing: The arbitrator conducts a preliminary hearing with the parties, to discuss the issues in the case and procedural matters, such as witnesses, depositions, sharing information, and other matters.
- Information Exchange and Preparation: The parties then prepare for presentations and exchange information.
- Hearings: At the hearing, both parties may present testimony and evidence to the arbitrator. Unless the case is very complex, this is usually the only hearing before the arbitrator.
- Post-Hearing Submissions: After the hearing, both parties may present additional documentation, as allowed by the arbitrator.
- The Award: Finally, the arbitrator closes the record on the case and issues a decision, including an award, if applicable.
If you want to arbitrate a case that involves a business or government outside the U.S. you may be able to use an international arbitration process. You can start by reading this article on international arbitration and filing a request with an international organization like the International Chamber of Commerce.
Do I Need a Lawyer for Arbitration?
It's a common myth that lawyers aren't allowed in the arbitration process. You can even represent yourself if you want; this is called "pro se," meaning on one's own behalf. A business can arbitrate pro se, with someone in the company representing that side.
Anyone is entitled to have an attorney but it isn't required. Arbitration, like litigation, is a final, legally-binding process that may impact your rights. Considering this, you may want to consult an attorney before and during the arbitration process
What Does Arbitration Cost?
Arbitration costs vary based on the complexity and detail of the case and the level of expertise you want from the arbitrator. Typically the cost of arbitration includes:
- Administrative fees, including filing fees and final/hearing fees,
- Arbitrator compensation, depending on how much work the arbitrator or panel must do on the case, (per hour, per day, or per hearing)
- Arbitrator expenses, like travel time, hotel, meals, plane ticket, and other travel costs
- Fees for a hearing room and meeting rooms, attorney fees, costs for expert witnesses (including travel costs), costs for copying and presenting exhibits