How Does It Work? | How Does It Differ from Other Forms of Dispute Resolution?
When you’re seeking to resolve a legal dispute, you can take your case to court and let a judge and jury decide the outcome; however, alternative forms of dispute resolution, including arbitration, often can be more cost-effective. In many cases, arbitration is a voluntary process, but there are instances where parties to a controversy are required to submit their claims to binding arbitration.
What is arbitration? What are the different forms of arbitration? How does it differ from other forms of dispute resolution, particularly mediation?
Arbitration in the United States—What Does It Look Like?
Arbitration is an extrajudicial (out of court) process by which two or more parties seek to resolve a legal disagreement. In an arbitration proceeding, the parties work with either a single arbitrator or an arbitration panel, who hear arguments by the parties and render a decision. Arbitrators are neutral parties, with no interest in the outcome of the dispute, but they are typically individuals with some knowledge, experience, or expertise in the subject matter of the dispute. Parties to an arbitration are typically represented by counsel, and the proceeding can sometimes resemble a mini-trial. Parties to arbitration can provide arbitrators with both physical evidence and testamentary evidence. Unlike mediators, arbitrators have the power to render decisions and customarily do.
The Different Types of Arbitration
Arbitration may be used to resolve any type of legal dispute other than a criminal prosecution; however, it’s most often employed in commercial contexts:
- Labor disputes—The first use of arbitration by labor organizations occurred just after the end of the American Civil War (1866). Arbitration has since been extensively used in labor conflicts to resolve issues related to the terms of a new contract, as well as to resolve grievances related to alleged infringement of a collective bargaining agreement. Arbitration is also commonly used by employees who have no legal right to strike, such as many public workers.
- Securities and investment disputes—Arbitration has been used to settle disputes between investment firms and their customers. It’s fairly common for investors to enter agreements to take any disputes to binding arbitration. Such contract provisions have been upheld by the United States Supreme Court.
- Judicial arbitration—In a number of states, a range of legal disputes may be resolved through arbitration. Family law controversies are often subject to binding arbitration, as are employment disputes and medical care/billing disagreements.
The Difference Between Binding and Non-Binding Arbitration
The results of most arbitration proceedings are considered binding. That means that the parties must accept the ruling of the arbitrator(s). The parties have no right to appeal or review the arbitrator’s decision, unless there’s evidence of fraud or impropriety. In those limited situations where an arbitration is non-binding, either party may reject the decision of the arbitrator and take the case to trial.
The Advantages and Disadvantages of Arbitration
When compared with the traditional legal process, where a case makes its way to trial by jury, arbitration offers a number of advantages:
- It’s typically less complicated—Though there may be some discovery, it’s usually reduced in scope, saving time and money. Instead of filing motions, requests for production of documents, and other pleadings, the parties to an arbitration can make a phone call to the arbitrator, who will determine whether evidence must be produced. In addition, the rules of evidence that apply in a civil trial are not strictly enforced in arbitration, so there’s less conflict about admissibility.
- Arbitration can be kept private—Civil court proceedings are usually a matter of public record. The details and findings of an arbitration proceeding can be kept strictly confidential.
- Arbitration usually saves time and money—With a civil trial, you must go through a certain number of steps before you can get on the court docket for a trial. Arbitration can typically be scheduled at the convenience of the arbitrators and parties, with dates usually available within a few months.
- Arbitration is more final than a civil trial—With a civil trial, you may have the right to appeal to more than one court. In an arbitration proceeding, the decision of the arbitrator is generally final, unless there is evidence of fraud or impropriety. Of course, this can also be viewed as a disadvantage, as you may have no recourse if the arbitrator makes an erroneous decision.
Arbitration can, however, present some problems:
- There can be difficulties with fairness—You may have an arbitrator who naturally favors one party over another. It’s fairly common for arbitration clauses to favor parties who have more power, such as employers or large corporations. Furthermore, some arbitrators may ignore the law and make decisions based simply on their own individual perception of fairness. With an arbitration proceeding, you won’t have a “jury of your peers.”
- Arbitration can occasionally be more expensive than going to trial—This is particularly true where the legal issues are complicated. Furthermore, if you participate in non-binding arbitration, you may still have to pay legal fees for representation at trial in the event the other party rejects the arbitration ruling.
- Arbitrators can make inconsistent rulings—Because the rules of evidence are not strictly followed, decisions can vary.
- Arbitration clauses can preclude class actions—Consumers often sign agreements (such as credit card or bank agreements or phone service contracts) in which they agree to arbitration and also waive the right to bring a class action. In the event a consumer has a claim against a big corporation for a relatively small amount of money (say, a few thousand dollars), it may not be worth it for them to individually hire a lawyer and pay arbitration fees. (Arbitration fees alone can be thousands of dollars.) Since an aggrieved consumer cannot arbitrate their claim together with other consumers (as they could in a class action), they may be left with no practical legal recourse.
Arbitration Clauses in a Contract
Pursuant to the Federal Arbitration Act, an arbitration clause in a contract is generally enforceable, provided there is no evidence it was agreed to as a result of fraud, duress, or unconscionability. Fraud exists where someone made an intentional misrepresentation or misstatement of fact to induce a person to agree. Duress involves the use of coercive acts or unlawful threats to compel a person to sign an agreement. Unconscionability may be found where the terms of an agreement are so patently unfair or oppressive to one party that they suggest an absence of equal bargaining power.
How Is an Arbitrator Selected?
The arbitrator typically is chosen by mutual agreement of the parties. In those situations where the parties cannot come to an agreement as to who will serve as arbitrator, a court may appoint one.
What Is the Typical Cost of an Arbitration Proceeding?
Arbitrators typically charge by the day, so the total cost can vary, based on the complexity of the legal issues involved. The daily cost for an arbitrator will also vary based on the arbitrator’s experience and the geographic location of the arbitration proceeding. Daily fees can range from $325 to $2,000 per day. In addition, arbitration initial filing fees can range from $200 to $3,500 per case. An arbitration organization may impose additional fees that can amount to thousands of dollars. In most arbitrations, the parties evenly split the cost of the arbitration and each party pays their own attorneys’ fees.
How Arbitration Differs from Mediation
Arbitration differs from mediation in the following respects:
- The role of the arbitrator vs. the mediator—In arbitration, the arbitrator (or arbitration panel) is tasked with making a ruling, of determining the outcome. In mediation, the mediator is a third-party neutral who facilitates interaction between the parties, but the parties have complete control over the outcome. The mediator never makes a determination of which arguments have more merit.
- The admission of evidence—In an arbitration proceeding, evidence may be admitted and testimony taken. In mediation, because the mediator does not make any rulings on the merits of the case, there is no need to take testimony or consider evidence.
- The role of legal arguments—An arbitrator functions much like a judge, listening to legal arguments and rendering a decision based on the facts and the law. A mediator is simply an intermediary, helping the parties find a mutually beneficial solution.
Summary
When you have an unresolved legal dispute, arbitration can be a cost-effective and timely way to permanently settle your differences. Most arbitration proceedings are binding and final. The parties typically select the arbitrator, choosing someone with knowledge, experience, and understanding of the legal issues involved. At the end of an arbitration proceeding, the arbitrator renders a decision, finding in favor of one of the parties.
To see Resources for Further Research on Arbitration and Mediation, click here.