Court-Annexed Arbitration

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Court of Original Jurisdiction:
A court of original jurisdiction is the first place one brings a claim. This is the court which must hear the case first. If the losing party is dissatisfied (aren’t they always?) and can show cause, she might be able to have the case heard on appeal by the appropriate court which has appellate jurisdiction.

Court-annexed arbitration, sometimes referred to as judicial arbitration or court mandated arbitration, is a process by which courts divert certain cases to arbitration rather than trial. Most court systems today have such programs in place. In some such systems the arbitration is optional. Regardless, in most respects, in such systems, the arbitration proceedings themselves are not unique or apart from any other arbitration proceeding. There are, however, some important differences.

Court-annexed arbitration, obviously, does not have the same voluntary quality that usually accompanies parties’ decisions to arbitrate.

EXAMPLE: Jeb sues Harry claiming Harry was negligent in leaving the rake in his driveway which Jeb tripped over, injuring his pinky finger. As they are both residents of Cassedigit County, Jeb sues in the local county court. The court rules state that any torts claim for damages which are equal to or less than $100,000 must be arbitrated, under the court’s supervision. Jeb and Harry have no choice here but to submit to the court’s will.

Note, that these systems must be careful not to deprive parties of their right to a trial by jury. One way this is achieved is by offering a party the right to a trial de novo following the conclusion of arbitration. Various disincentives must be in place to prevent every party who loses in arbitration from later seeking trial.

In In re Smith Case, 381 Pa. 223 (1955), at the relative infancy of arbitration in the United States, the Supreme Court of Pennsylvania handed down a decision which is still cited today as one of the leading cases in this area. A Pennsylvania law passed in 1952 gave local courts of original jurisdiction the ability to require arbitration when the amount sought by the plaintiff was less than $1,000. The arbitrators’ fees, instead of being paid by the parties as would normally be the case in voluntary arbitration, were to be paid by the county.

The law did not dictate that all courts must institute a court-mandated arbitration system, but simply made it permissible to do so in this manner by adopting the appropriate rule of the court. The Court of Common Pleas of Lancaster County availed itself of this new law, and adopted a rule requiring all cases in which the amount at controversy was less than $500 shall be submitted to “Boards of Arbitration” consisting of a three-member panel of arbiters selected from the county's bar members. Each arbitrator was to receive $25, though the court could permit compensation of a greater amount should arbitration prove to be a lengthy process in a given case.

At issue was whether by establishing rules of court requiring arbitration the court was depriving litigants of the right to trial by jury as guaranteed by Article I, section 6 of the Constitution. The court also noted that the 14th Amendment Due Process clause might also be threatened by compulsory arbitration. This would be true, however, only if the arbitrators were to make the ultimate and final determination of the rights of the parties, but because the parties in this case were given the right to appeal following arbitration, no Constitutional rights were trampled. See In re Smith Case at 230.

In accordance with the 1952 state law, the mandatory arbitration system in Lancaster County did not render final the arbitrators’ decision, but instead there was a mechanism under the Act for appeal. The court describes this process in detail:

Each of the parties was given the right to appeal from the [arbitration] award to the court in which the cause was pending …but such appeal was subject to certain restrictions, one of which was that the party appealing should pay all the costs that had accrued in the action [absent a showing of poverty and inability to pay]. Another condition of the right of appeal was that … if the plaintiff were the appellant, that if he did not recover a greater sum than the award of the arbitrators he would pay the costs that would accrue in consequence of the appeal and also one dollar for every day lost by the defendant in attending on the appeal; if the defendant were the appellant the condition of the recognizance was that, if the plaintiff obtained a judgment for a sum equal to or greater than the award of the arbitrators, he would pay the costs that would accrue in consequence of the appeal and also one dollar for every day lost by the plaintiff in attending on the appeal. -In re Smith Case at 266.

While the system as described by the court is not necessarily easily understood, what is most important is this: somewhat similar to the role-played Rule 68 settlement offers discussed in Chapter 4, there are incentives here for parties to settle their disputes in arbitration rather than appeal the award and seek a trial de novo. If a party is confident that she has been truly wronged by the arbitrator’s award, then the rules governing court costs, etc., will not be a strong disincentive to her filing an appeal with the court. If, however, a party is simply seeking to pay a little less, or be awarded just a bit more, he would certainly think twice before appealing the award.

Different courts today have fine-tuned the mechanism described in In re Smith Case, and variations on the theme have passed Constitutional muster. As court-annexed arbitration gains in popularity, however, it also gains in complexity, leading some to wonder whether the “quick and simple” argument in favor of arbitration over litigation still applies today. Arbitration proceedings are beginning to look more and more like trials, with formal discovery rules, rules of evidence, and complex mechanism to address the various issues which naturally arise during the arbitration process.

In addition to the increasing resemblance between arbitration and litigation, arbitration is increasingly leading parties to litigate matters other than the substantive issue which gave rise to the conflict in the first place. In Chapter 8, we move on to a number of recent court cases involving arbitration proceedings which have raised precisely such further legal issues.

As you read these cases, you might want to ask yourself whether the level of sophistication involved in modern arbitration, combined with the likelihood that parties now run to the court with issues stemming from arbitrations, might warrant another look at the extent to which court-annexed arbitration actually saved litigants time, and whether it saves anyone (including the taxpayers!) money.

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