Alternative Dispute Resolution: Arbitration
Arbitration, much like mediation or negotiation, is an alternative dispute resolution (“ADR”) method. ADR methods represent alternatives to traditional litigation. Thus, when parties agree to an arbitration, they take the matter of dispute out of a state or federal court.
To better understand how arbitration works, it may be beneficial to compare arbitration to litigation and other ADR methods.
Negotiation is generally informal and involves a series of offers and counteroffers between the parties, until they reach an agreement to resolve their dispute. It is, by definition, a voluntary process, that may or may not ultimately resolve the dispute.
Mediation is typically a voluntary process (though it can be required by a court) in which a third person, referred to as the mediator, tries to assist the parties in resolving their dispute. Oftentimes, a trial court judge will suggest, or even order, mediation. The mediator’s role is to help the parties reach an agreement and thus to resolve the case. The mediator can suggest the terms under which the parties should settle the case. However, the mediator lacks the authority to require the parties to settle their dispute or to dictate terms.
Litigation is a lawsuit, which could result in the case being settled by motion or by trial, with or without a jury. The United States Constitution guarantees a right to trial by jury in many civil cases at the demand of either party.[i] Should a jury make a “bad” decision (one not supported by the facts or the law), the trial court judge has an obligation to correct the jury’s verdict. This could result in the jury’s verdict being dismissed, reduced or even increased. If the trial court judge fails to correctly apply the law, an appeal can be filed.
Arbitrations are an alternative to these three methods of settling a dispute. Unlike mediation or negotiation, an arbitration is binding on the parties. It is binding in at least two ways. First, the arbitrator’s ruling resolves the dispute, even if one or both parties do not agree with it. Second, an arbitrator’s ruling will likely prevent any meaningful appeal or modification by a trial or appellate court.
Arbitration can involve disputes between large, sophisticated businesses, insurance companies, a large corporation and a consumer, and even a dispute between two or more individuals.
Arbitration is both permitted and encouraged pursuant to a federal law -- the Federal Arbitration Act (“FAA”).[ii] Under this law, both parties (or sometimes just one party) to a dispute agree to waive their rights to a trial. This is commonly done before the parties even realize that there is a dispute. Such an agreement is referred to as a pre-dispute arbitration agreement. These are common in contracts that are negotiated and signed at the outset of a business relationship. Examples of such agreements can be found in mortgages and contracts for credit cards, cable television, or cell phones. It is virtually impossible to buy a new automobile or have a loved one admitted to a nursing home without signing an agreement with an arbitration clause. If an authorized individual signed the agreement, it is most likely binding.[iii]
Arbitration is intended to avoid the time and expense associated with litigating a dispute. Instead, one person (or sometimes a panel) decides the case. This person, the arbitrator, acts as a substitute for the trial court judge, the jury, and even the appellate court. The arbitrator’s decision is final and it is unlikely to be reversed or modified on appeal.[iv]
Sometimes a three-arbitrator panel judges a case. One popular method of appointment is having each party select one of the arbitrators. The two arbitrators then select the third arbitrator. Unless there is an agreement to the contrary, a unanimous decision by the arbitration panel is not required – a majority vote is sufficient.
Virtually all arbitration agreements identify a forum. This is the organization that establishes the parameters of the arbitration, such as who can serve as an arbitrator, who is responsible for paying for the arbitration, limitations on discovery, and whether the parties can request an evidentiary hearing. One of the more common arbitral forums is the American Arbitration Association (“AAA”).[v]
The arbitral forum will typically have a list of “approved neutrals.” These are the people who are permitted by the forum to serve as arbitrators. An arbitrator may agree to arbitrate a dispute for a set fee, although arbitrators typically charge by the hour for their time. Most approved arbitrators are either retired judges or experienced attorneys. However, some organizations, such as the Better Business Bureau, prefer local professionals who are familiar with a subject matter area – such as a structural engineer for a dispute involving the construction of a house.
Unless otherwise specified in the arbitration agreement or the arbitral forum’s rules, it typically is understood that the resulting cost of the arbitration will be split equally between the parties. However, many arbitration agreements require that the party who is seeking to enforce the agreement pay for the cost of the cost of arbitration.
The scope of discovery is more limited in an arbitration proceeding than in a civil action. If the matter was litigated, it is likely that the applicable Rules of Civil Procedure would govern the various forms of discovery available, including interrogatories,[vi] requests for production of documents,[vii] depositions,[viii] and subpoenas to compel individuals to either testify or produce documents.[ix]
Instead, the arbitrator will follow the rules of the arbitral forum. The arbitral forum will have rules that address the number of depositions that can be taken, number of document requests and interrogatories that can be propounded, and even the number of witnesses who can testify at the hearing.[x]
Some arbitration proceedings are simply a matter of the parties submitting position statements and supporting documents to the arbitrator, who then reviews them and issues a ruling/decision. This is common in disputes between insurance companies in which they are trying to determine which of their insureds caused a wreck (or, if both parties to the wreck were at least partially liable, their corresponding percentage of responsibility).
Other arbitration proceedings result in hearings before the arbitrators or arbitration panels. The procedures established by the arbitral forum will dictate what is permitted into evidence, how long the hearing can last, and whether the parties will be permitted to make opening statements or closing arguments. The arbitrators are the triers of fact, as there are no juries in arbitration proceedings. The authority of the arbitrator to issue subpoenas to require people to attend the hearing or for third parties or for entities or individuals not parties to the dispute to produce documents is also limited.
Arbitration can be very expensive. In addition to each arbitrator charging for his or her time, the arbitration forum will charge various administrative fees. Oftentimes, the fees are based on the amount in dispute and the number of parties to the arbitration.[xi]
An arbitrator typically has no authority to enforce his or her decision. Therefore, it may be necessary for the prevailing party to file a lawsuit to enforce the arbitrator’s award. If the arbitration took place because one of the parties to a pending lawsuit filed a motion to compel arbitration that was granted by the trial court, the prevailing party to the arbitration can simply file a motion with the trial court to enforce the arbitration decision. Otherwise, a separate lawsuit to get a judgment to enforce an award will be necessary.
As previously addressed, rarely is an arbitrator’s decision ever vacated or overturned by a court. This is true even if the arbitrator incorrectly interpreted the facts or misapplied the applicable substantive law.[xii]
Disputing parties can pursue the path of arbitration to resolve their issues to save money and time. Arbitrations do have their shortcomings, but as this presentation demonstrates, they offer numerous practical advantages over litigation and other forms of ADR.
[i] U.S. Const., amends. VI and VII.
[ii] 9 U.S.C. §§ 1-16.
[iii] See Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983) (“The FAA is a “congressional declaration of a liberal federal policy favoring arbitration agreements.”); see also Carraway v. Beverly Enters. Ala. Inc., 978 So. 2d 27, 30-31 (Ala. 2007) (brother had authority to sign arbitration agreement on behalf of his sister applying for nursing home admission).
[iv] 9 U.S.C. §§ 10 (identifying bases upon which an arbitration award can be vacated by a court).
[v] See A.A.A.’s Top 10 Ways to Make Arbitration Faster and More Cost Effective (http://info.adr.org/toptenways/).
[vi] Fed. R. Civ. P. 33.
[vii] Fed. R. Civ. P. 34.
[viii] Fed. R. Civ. P. 30.
[ix] Fed. R. Civ. P. 45.
[x] See A.A.A.’s Consumer Arbitration Rules (https://www.adr.org/sites/default/files/Consumer%20Rules.pdf)
[xi] See A.A.A.’s Commercial Arbitration Rules and Mediation Procedures Administrative Fee Schedules (https://www.adr.org/sites/default/files/Commercial%20Fee%20Schedule.pdf).
[xii] See Hall Street Associates LLC v. Mattel Inc., 552 U.S. 576 (2008) (manifest disregard of the law is not an independent basis for vacating an arbitration award).