Arbitration
What Is Arbitration?
Arbitration is a dispute resolution process in which a neutral third party presides over a case and makes a binding decision. It is a formal legal process that allows disputing parties to choose an impartial arbitrator to deliberate on their disagreements.
This process is often used as an alternative to court action, although it has some features in common with litigation.
The latter is more formal and involves numerous filings and court fees. Arbitration may save the disputing parties significant time and money and reach a legally binding resolution sooner.
How Arbitration Works
If you are a party to a contract, you must decide ahead of time whether you will use arbitration to resolve disputes. You can include the terms within the main contract or create a separate agreement outlining the contract terms. This is known as an agreement to arbitrate.
Your agreement should outline how you will select arbitrators. You may choose individuals in advance or by mutual consent whenever a dispute arises.
The American Arbitration Association (AAA) assists parties in selecting qualified, impartial arbitrators.
Once you have settled on an impartial arbitrator, it’s time to prepare for the hearings. Preparation is similar to the steps you would take when facing a court case—gathering evidence, speaking to witnesses, and preparing supporting arguments.
Arbitration hearings are not as formal as in a courtroom but are just as critical and contribute to the outcome. Remember that once you agree to arbitration, the decision will be legally binding. The Federal Arbitration Act (FAA) (Code 9 U.S.C. §§ 1-16) ensures arbitration awards are honored, provided the agreement to arbitrate is valid.
How are arbitrators appointed?
No one party should have an advantage in appointing an arbitrator. Remember, the arbitrator should be neutral and impartial. They must disclose any occurrence that might affect their neutrality.
Arbitrators are usually fully trained professionals with experience ruling over disputes. They are typically accredited by the American Arbitration Association (AAA) and have expertise in a precise type of dispute resolution.
Arbitrators and tribunals can be appointed via a few different selection methods:
- Selection by mutual agreement between the disputing parties.
- Chosen by an existing tribunal member.
- Appointed by a court or another appointed third party (if parties to the controversy cannot agree or the contract makes no provisions).
Upon appointment, they must ensure fair, impartial, and efficient proceedings.
What are the Different Types of Arbitration?
Arbitration can be used to settle disputes in diverse fields.
- Commercial arbitration: This is used when two commercial entities need to resolve a dispute regarding a contract or an agreement.
- Consumer arbitration: When a dispute occurs between a buyer and seller
- Labor arbitration: This happens when a dispute arises between an employer and an employee.
Arbitration can also be categorized based on jurisdiction, whether domestic or international, and based on the industry to which it applies.
Common uses of arbitration
Arbitration can be used in many situations, both nationally and internationally.
The following are examples of situations when you can use arbitration:
- Consumer agreements: You signed a credit card agreement with an arbitration clause. You may use that clause to force a credit card debt collection lawsuit out of court and instead use an arbitrator.
- Employment contracts: When an employment contract requires you and your employer to resolve disputes, such as harassment, termination, or discrimination, through a neutral third party instead of going to court.
- Business contracts: If a company breaches an agreement, an arbitrator can resolve the dispute and award damages. This can happen if, for example, the company fails to deliver a product in time, and the buyer incurs losses.
While arbitration can be optional, some contracts include mandatory arbitration clauses. Under such circumstances, the parties in a contract forego their right to litigation. You should read contracts carefully to ensure you are not unknowingly signing away rights to seek legal remedies.
Pros and Cons of Arbitration
The use of arbitration in dispute resolution has its supporters and critics. Each group’s arguments are based on the following advantages and disadvantages of arbitration.
Advantages of using arbitration
- Confidentiality: Arbitration is not as public as court cases, which attracts individuals and entities wishing to keep their affairs private.
- Faster than litigation: Court cases can drag on for years. Arbitration, on the other hand, leads to quicker resolutions, typically within months.
- Cost-effective: Arbitration skips filing and court fees, which can add up throughout the case.
- Flexible procedures: You can work out flexible hearing schedules.
Disadvantages of arbitration
- Limited appeal rights: Unlike courts, you cannot just appeal an arbitration award you do not like. The appeal process is unclear; you may require that a court vacate the award, but only in line with the stringent Federal Arbitration Act guidelines.
- Possible arbitrator bias: Despite the clear impartiality requirement, several factors can affect an arbitrator’s viewpoint. The private nature of these proceedings also makes it challenging to address emerging bias issues.
- Costs in complex cases: Aside from arbitrator fees, complex cases require extensive preparation and discovery, which can cost more than you save by skipping litigation. In nonbinding arbitration, the costs can rise even further if the case eventually goes to court.
Before signing an arbitration agreement, ensure the pros outweigh the cons.
Arbitration vs. Mediation vs. Litigation
Arbitration, mediation, and litigation are dispute resolution processes. The differences lie in how formal the process is, who decides the case, and whether the decision is binding.
See the table below for a summary of this comparison.
| Arbitration | Mediation | Litigation | |
| Who decides? | Arbitrator | Parties to the controversy | Judge or Jury |
| Is the decision legally binding? | Yes | No | Yes |
| How formal is the process? | Structured, but not as formal as litigation | Informal | Formal |
As the table demonstrates, litigation is a formal court process; a judge or jury issues the legally binding decision.
Mediation is a voluntary procedure that parties can opt out of. It is also not legally binding. A decision made following arbitration, on the other hand, is legally binding.
Arbitration is also not optional, as it is usually a legal requirement due to a contract.
For your dispute to go to arbitration, you must have signed an arbitration agreement or consented to a clause within a contract.
The Arbitration Agreement and Clauses
An arbitration agreement is a legally binding contract that allows parties to resolve disputes outside the court. It can be drafted after a disagreement has occurred. Arbitration clauses serve the same purpose as agreements. However, they are segments within a wider contract (prepared in advance) that provide a similar dispute resolution alternative.
Arbitration agreements and clauses should specify their scope—the type of disputes that must be arbitrated. Both outline how arbitrators will be selected and appointed and aim to cut costs and reduce delays when conflicts arise.
What Is Arbitration?
Arbitration is a dispute resolution process in which a neutral third party presides over a case and makes a binding decision. It is a formal legal process that allows disputing parties to choose an impartial arbitrator to deliberate on their disagreements.
This process is often used as an alternative to court action, although it has some features in common with litigation.
The latter is more formal and involves numerous filings and court fees. Arbitration may save the disputing parties significant time and money and reach a legally binding resolution sooner.
How Arbitration Works
If you are a party to a contract, you must decide ahead of time whether you will use arbitration to resolve disputes. You can include the terms within the main contract or create a separate agreement outlining the contract terms. This is known as an agreement to arbitrate.
Your agreement should outline how you will select arbitrators. You may choose individuals in advance or by mutual consent whenever a dispute arises.
The American Arbitration Association (AAA) assists parties in selecting qualified, impartial arbitrators.
Once you have settled on an impartial arbitrator, it’s time to prepare for the hearings. Preparation is similar to the steps you would take when facing a court case—gathering evidence, speaking to witnesses, and preparing supporting arguments.
Arbitration hearings are not as formal as in a courtroom but are just as critical and contribute to the outcome. Remember that once you agree to arbitration, the decision will be legally binding. The Federal Arbitration Act (FAA) (Code 9 U.S.C. §§ 1-16) ensures arbitration awards are honored, provided the agreement to arbitrate is valid.
How are arbitrators appointed?
No one party should have an advantage in appointing an arbitrator. Remember, the arbitrator should be neutral and impartial. They must disclose any occurrence that might affect their neutrality.
Arbitrators are usually fully trained professionals with experience ruling over disputes. They are typically accredited by the American Arbitration Association (AAA) and have expertise in a precise type of dispute resolution.
Arbitrators and tribunals can be appointed via a few different selection methods:
- Selection by mutual agreement between the disputing parties.
- Chosen by an existing tribunal member.
- Appointed by a court or another appointed third party (if parties to the controversy cannot agree or the contract makes no provisions).
Upon appointment, they must ensure fair, impartial, and efficient proceedings.
What are the Different Types of Arbitration?
Arbitration can be used to settle disputes in diverse fields.
- Commercial arbitration: This is used when two commercial entities need to resolve a dispute regarding a contract or an agreement.
- Consumer arbitration: When a dispute occurs between a buyer and seller
- Labor arbitration: This happens when a dispute arises between an employer and an employee.
Arbitration can also be categorized based on jurisdiction, whether domestic or international, and based on the industry to which it applies.
Common uses of arbitration
Arbitration can be used in many situations, both nationally and internationally.
The following are examples of situations when you can use arbitration:
- Consumer agreements: You signed a credit card agreement with an arbitration clause. You may use that clause to force a credit card debt collection lawsuit out of court and instead use an arbitrator.
- Employment contracts: When an employment contract requires you and your employer to resolve disputes, such as harassment, termination, or discrimination, through a neutral third party instead of going to court.
- Business contracts: If a company breaches an agreement, an arbitrator can resolve the dispute and award damages. This can happen if, for example, the company fails to deliver a product in time, and the buyer incurs losses.
While arbitration can be optional, some contracts include mandatory arbitration clauses. Under such circumstances, the parties in a contract forego their right to litigation. You should read contracts carefully to ensure you are not unknowingly signing away rights to seek legal remedies.
Pros and Cons of Arbitration
The use of arbitration in dispute resolution has its supporters and critics. Each group’s arguments are based on the following advantages and disadvantages of arbitration.
Advantages of using arbitration
- Confidentiality: Arbitration is not as public as court cases, which attracts individuals and entities wishing to keep their affairs private.
- Faster than litigation: Court cases can drag on for years. Arbitration, on the other hand, leads to quicker resolutions, typically within months.
- Cost-effective: Arbitration skips filing and court fees, which can add up throughout the case.
- Flexible procedures: You can work out flexible hearing schedules.
Disadvantages of arbitration
- Limited appeal rights: Unlike courts, you cannot just appeal an arbitration award you do not like. The appeal process is unclear; you may require that a court vacate the award, but only in line with the stringent Federal Arbitration Act guidelines.
- Possible arbitrator bias: Despite the clear impartiality requirement, several factors can affect an arbitrator’s viewpoint. The private nature of these proceedings also makes it challenging to address emerging bias issues.
- Costs in complex cases: Aside from arbitrator fees, complex cases require extensive preparation and discovery, which can cost more than you save by skipping litigation. In nonbinding arbitration, the costs can rise even further if the case eventually goes to court.
Before signing an arbitration agreement, ensure the pros outweigh the cons.
Arbitration vs. Mediation vs. Litigation
Arbitration, mediation, and litigation are dispute resolution processes. The differences lie in how formal the process is, who decides the case, and whether the decision is binding.
See the table below for a summary of this comparison.
| Arbitration | Mediation | Litigation | |
| Who decides? | Arbitrator | Parties to the controversy | Judge or Jury |
| Is the decision legally binding? | Yes | No | Yes |
| How formal is the process? | Structured, but not as formal as litigation | Informal | Formal |
As the table demonstrates, litigation is a formal court process; a judge or jury issues the legally binding decision.
Mediation is a voluntary procedure that parties can opt out of. It is also not legally binding. A decision made following arbitration, on the other hand, is legally binding.
Arbitration is also not optional, as it is usually a legal requirement due to a contract.
For your dispute to go to arbitration, you must have signed an arbitration agreement or consented to a clause within a contract.
The Arbitration Agreement and Clauses
An arbitration agreement is a legally binding contract that allows parties to resolve disputes outside the court. It can be drafted after a disagreement has occurred. Arbitration clauses serve the same purpose as agreements. However, they are segments within a wider contract (prepared in advance) that provide a similar dispute resolution alternative.
Arbitration agreements and clauses should specify their scope—the type of disputes that must be arbitrated. Both outline how arbitrators will be selected and appointed and aim to cut costs and reduce delays when conflicts arise.