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Arbitration - Module 4 of 5

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Module 4: Arbitration

What is Arbitration?

Arbitration is a form of Alternative Dispute Resolution, or ADR. Conflicted parties present their positions to a neutral person who makes a final and binding decision about the conflict. It is more formal than mediation or settlement conferences, but less formal than courtroom proceedings. Businesses often utilize this common type of ADR as a less expensive and faster alternative to traditional litigation.   

The history of arbitration in North America dates back to colonial times and was common practice for Native Americans as a tool for resolving conflicts between different tribes.[1] Colonists used arbitration to settle maritime and business disputes in England. In 1632, Massachusetts became the first colony to adopt formal arbitration laws, followed by Pennsylvania in 1705. Use of arbitration continued throughout the expansion of the country, and by the start of the 20th century, arbitration was an established tool for dispute resolution within the United States. In 1925, The Federal Arbitration Act was enacted, establishing a nationwide endorsement of the benefits of arbitration.[2] Today, arbitration is a widely used form of ADR, highly supported by the American court system.  

The arbitration process typically starts by filing a claim and/or submission agreement with an arbitration organization or arbitrator. Depending on the organization, the parties may be given the opportunity to choose their arbitrator from a provided list. Once an arbitrator is chosen, a hearing date is set. This private hearing starts with each side presenting its evidence and arguments. Though the process is less formal than a court hearing, the arbitrator sets the tone of the hearing and requires that all parties act in a professional and dignified manner. After listening to each side, the arbitrator may ask questions or request additional evidence. The proceeding is then concluded, and the arbitrator considers all presented evidence, finalizing with a written decision called an award.

Like a judicial determination by a judge or jury, an arbitrator’s award may take various forms. The arbitrator may award:  

-  monetary damages

- injunctive relief, which is an order for a party to act or not act,

- specific performance, mandating that a party perform a specific act, or

- rectification, which changes the provisions of a document or contract.  

Arbitrators hear various types of cases, from small disputes between neighbors to million-dollar business conflicts. Unlike mediation, which is less effective in cases where questions of law represent the key elements of the dispute, arbitration is often used for complex legal disputes. Alternatively, for cases that are highly fact-specific, such as personal injury cases, arbitration is also an affordable and time-saving alternative to a court proceeding.  

Commercial disputes are also frequently decided through arbitration which can be effective in helping corporations and businesses to avoid the expense of taking disputes to trial.. It is a standard practice for businesses to include clauses in their contracts that mandate the use of arbitration should a dispute arise.

Private vs. Judicial Arbitration

Private arbitration occurs when parties to a dispute agree to have their conflict settled by a neutral arbitrator instead of going to court. This agreement may be made at the outset of a business relationship, before any conflict arises, or after a dispute develops. The parties identify their own mutually agreeable arbitrator and take their dispute before that person for resolution. The courts may not become involved in the dispute at all. The decision-making may take place entirely outside of court rules and procedures, but the final decision is still generally binding on all parties.  

Judicial arbitration occurs when the court diverts a case away from the traditional judicial process and mandates that the parties attempt resolution through arbitration. The circumstances that trigger judicial arbitration vary by jurisdiction. Some courts are required by law to mandate arbitration for certain types of cases, while others use a financial threshold. For example, in the Superior Courts of California, certain cases involving controversies in excess of $50,000 are sent to judicial arbitration.[3]  

The decision of the arbitrator may be binding under judicial arbitration, depending on the actions of the parties. The Superior Courts of California give parties the option of choosing binding or non-binding arbitration.[4] The binding option means that they agree to the conclusive decision of the arbitrator, and there is no option for a later trial or appeal. If parties choose the non-binding option, they are each allowed to appeal and request a trial if they are dissatisfied with the decision of the arbitrator. Judicial arbitration is within and is a function of the court system and is subject to the court’s local rules of process, including the presentation of evidence.

Who Can Be An Arbitrator?  

There is no industry standard for the education required to be an arbitrator. However, unlike mediators, arbitrators are usually required to have certain threshold levels of education. Arbitrators can have various types of degrees, from business to psychology. Many of them are former judges or attorneys and many have earned law degrees. There are also numerous training programs available for people who aspire to work as arbitrators. Classes are offered at colleges as well as through certifying organizations.  

Due to the complex questions of law that are often involved, arbitrators sometimes specialize in a particular practice area. For example, one arbitrator may hear cases involving labor and employment disputes, while another may only work on contract disputes. These specializations can develop from education, experience or a combination. If a transactional attorney chooses to leave law practice to become an arbitrator, for example, he may choose to solely arbitrate contract disputes. 

Though arbitrators act in judicial capacities, and may even be former judges or attorneys, their powers are derived from the parties’ consent to be governed by their jurisdiction. The Eighth Circuit Court of Appeals, in I.S. Joseph Company v. Michigan Sugar Company, considered the power of the arbitrator in deciding whether an arbitrator or the court holds the power to determine enforceability of an agreement.[5] The court ruled that the court itself held the authority to decide enforceability, due to the limitations placed on arbitrators. The holding stated that “any power that the arbitrator has to resolve the dispute must find its source in a real agreement between the parties. He has no independent source of jurisdiction apart from the consent of the parties. If there is in fact a dispute as to whether an agreement to arbitrate exists, then that issue must first be determined by the court as a prerequisite to the arbitrator's taking jurisdiction.”

Neutrality is a crucial aspect of arbitration. For the parties to have confidence in the process, they must believe that the arbitrator has no bias or predisposition towards either party. This issue was recently litigated in a public case involving the National Football League and its arbitration regulations.

State ex rel. Hewitt v. Kerr arose from an age discrimination accusation against the NFL’s St. Louis Rams. Based on an arbitration clause in the plaintiff’s employment agreement, the trial court required resolution through arbitration. The plaintiff appealed the court’s decision requiring arbitration.[6] The Missouri Supreme Court found the NFL arbitration act unenforceable due to the designation of the league commissioner as the sole arbitrator. The court also ordered the trial court to appoint a neutral arbitrator to decide the case. The justices held that “(1) the terms of Plaintiff’s employment contract designating the commissioner of the National Football League as the sole arbitrator with unfettered discretion to establish the rules for arbitration are unconscionable and, therefore, unenforceable; and (2) Missouri’s uniform arbitration act provides a mechanism to imply the terms missing from the arbitration agreement and provides the rules for appointing an arbitrator to replace the NFL commissioner.”[7]

Associations Governing Arbitration

There is no single governing body that controls who can and cannot work as an arbitrator. However, there are independent organizations that establish model rules for arbitration and maintain rosters of arbitrators for the public to access. The American Arbitration Association is a nonprofit organization that administers cases and maintains the International Centre for Dispute Resolution which provides ADR services globally.[8] The organization is highly respected, having worked to develop industry-wide standards for conduct. They also provide ADR education options nationwide. Members of this organization are independent arbitrators who meet strict standards of experience and ethical behavior. While not mandatory, it can be helpful for arbitrators to seek membership with AAA.

The Association for Conflict Resolution is another association for ADR professionals and arbitrators seeking to enhance their experience. The organization is strictly informational, offering conferences and webinars to members.[9] However, it does grant the “Advanced Practitioner Designation” as its highest rank to members who demonstrate “a higher level of knowledge, skill and training in their respective areas.” Parties can go to the organization’s website to search for arbitrators with this designation.

Choosing an arbitrator in a given case depends on the details of the arbitration agreement. It may state that the arbitrator must be a member of a specific association or have expertise in a particular area of law. In the case Americo Life v. Myer, the Supreme Court of Texas ruled that the court of appeals incorrectly selected arbitrators in a manner that differed from the arbitration agreement.[10] The court noted that the arbitration panel chosen by the lower court was established outside of the arbitration agreement’s express terms, and the “panel, therefore, exceeded its authority when it resolved the parties' dispute.”[11]

Arbitration Clauses and Agreements

Though arbitration clauses were commonly included in business contracts prior to the Industrial Revolution, they were often ineffective due to a lack of enforceability.  It was not until the New York Arbitration Act in 1920 that state governments began recognizing arbitration clauses as valid and enforceable. The New York Arbitration Act was later followed by the United States Arbitration Act of 1925, which expanded arbitration clause enforceability nationwide.[12]    

To be valid and enforceable, agreements to arbitrate must be specific and unambiguous in their wording. The American Arbitration Association provides this standard arbitration clause for parties wanting to use their services in the event of a dispute: “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 in accordance with its Commercial [or other] Arbitration Rules, and judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction thereof.”

In Eagle vs. Fred Martin Motors Co., the appellant challenged an arbitration clause in an automobile sales agreement, asserting that it was unenforceable due to inconsistency. The Ohio Appeals Court agreed with her contention, finding that the arbitration agreement can be unenforceable for various reasons, including

(1) the “arbitration costs and fees are prohibitive, unreasonable, and unfair as applied…,

(2) “a huge disparity in bargaining power and the element of unfair surprise,

(3) “the characteristics of secrecy and limitation of consumer rights found within this clause also contribute to the substantive unconscionability of the arbitration clause, and

(4) “failure to provide a copy of a purchase agreement… precludes enforcement of the agreement.  As such, an agreement cannot be binding on a buyer, it necessarily follows that any arbitration clause in this agreement cannot bind the buyer.”[13]

There are two types of arbitration agreements. The first consists of preemptive clauses, executed at the beginning of the contractual relationship and requiring all parties to participate in arbitration should a future dispute arise. For example, when consumers sign up for cellular phone service, they typically sign agreements containing arbitration clauses, even though there are no existing conflicts between the consumers and the phone companies. The second type, called a reactive arbitration agreement, is executed after a dispute has arisen, where all parties agree to resolve their conflict through arbitration. Under this circumstance, no preemptive clause is in place and the agreement to arbitrate is made in response to a recently surfaced dispute.  

To be binding, a reactive agreement to participate in arbitration requires the consent of all parties to the dispute. For example, in County of Contra Costa v. Kaiser Foundation Health Plan, Inc.,[14] Kaiser, a health insurance company, provided coverage to someone who was injured in a city bus accident. The health insurance policy had included an arbitration clause. The injured person sued Kaiser for indemnification for alleged medical malpractice and, in the same action, sued the bus company for negligence. The bus company filed a cross-claim against Kaiser for indemnity, and Kaiser answered by alleging that the bus company was subject to mandatory arbitration, relying on the preemptive agreement between Kaiser and the injured party. The California Court of Appeal denied Kaiser’s motion to compel arbitration, because the bus company had not agreed to the arbitration clause. Though the insured and Kaiser had agreed to an arbitration clause, the issue could not be settled properly without participation of the bus company. As such, Kaiser could not compel the arbitration.

Arbitration Agreement Disputes

Disputes over arbitration clauses have become common for several reasons. Consumers are often surprised to learn that they are subject to an arbitration agreement, as people commonly execute contracts without reading them, so they have no knowledge that arbitration is required. When a dispute arises, and they try to file civil actions, they learn that binding arbitration clauses are in place. There’s also the feeling of unfairness. In consumer and labor conflicts, consumers and employees often feel that arbitration clauses benefit companies more than them. They also see these agreements as unfair denial of court access.

The reactions of the courts have generally been to uphold arbitration clauses as a matter of public policy. As stated by the Ohio Court of Appeals, “a presumption arises favoring arbitration when the claim in dispute falls within the scope of the arbitration provision.”[15] However, an improperly authored clause can mean trouble for the party wishing to arbitrate. Courts have consistently held that these clauses must clearly inform all parties that they are giving up their rights to sue in courts. This was demonstrated in the case Defina v. Go Ahead and Jump 1, LLC. A trampoline park sought to enforce its arbitration clause against a patron who wanted compensation for alleged injuries.[16] The Superior Court of New Jersey, Appellate Division, held that the clause was unenforceable because it “did not clearly and unambiguously inform plaintiff that he was giving up his right to bring claims… in a court of law and have a jury decide the case.”

In our last module, we’ll look at the enforceability of arbitration awards and the process by which the winner of an arbitration award can confirm the award and use the court system to enforce it.

[1] Massey, Jr., Robert V., “History of Arbitration and Grievance Arbitration in the United States,” 2005 http://www.wvu.edu/~exten/depts/ilsr/arbitration_history.pdf.

[12] 43 Stat. 883

[16] Defina v. Go Ahead and Jump 1, LLC, A-1861-17Ts, (N.J. Super. Ct. App. Div. June 5, 2018)