Arbitration is a form of alternative dispute resolution in which all parties in a dispute submit their claims to a third-party arbitrator for a decision. It is commonly viewed as less expensive and faster than resolving a dispute in court.
Depending on the circumstances, taking a dispute to arbitration may be mandatory or voluntary, and the arbitrator’s decision could be either binding or non-binding.
Arbitrators do not have to follow established legal precedents in reaching their decisions and are not required to explain the reasons behind their decisions, although they are expected to follow a code of ethics approved in 1977 by the American Arbitration Association and the American Bar Association. Still, in a binding arbitration both parties agree in advance to adhere to the arbitrator’s ruling, and an arbitrator’s ruling carries the same legal weight as a decision made by a court of law.
An arbitrator may be a single person or a panel.
Arbitration differs from mediation in that an arbitrator reaches an independent conclusion, whereas a mediator attempts to facilitate a negotiated settlement between the parties.
- Cost and Time. An arbitration process generally moves faster than a lawsuit could maneuver through a court system, and is less formal, requiring less time from attorneys.
- Expertise. The parties to a highly complicated or technical dispute can shop for an arbitrator who has extensive knowledge in the field involved. Arbitrators can come from any field: They are not required to have a law degree.
- Privacy. Arbitration proceedings can be held in private, and decisions can be kept confidential.
- International recognition. Arbitration results can be easier to enforce internationally than a court’s decision, thanks to the United Nations-sponsored 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
- Firm Resolution. It is much more difficult to appeal an arbitration ruling than a court decision, although the U.S. Supreme Court has recently opened the door to arbitral appeals a bit wider.
- Short-circuiting legal options: Controversies have arisen over mandatory arbitration provisions in credit card and employment contracts that prevent consumers and employees from taking their cases to court.
- Costs. While arbitration proceedings are potentially less expensive than normal legal proceedings, the expense of hiring an arbitrator can weigh on parties who are involved in small monetary disputes or have a limited ability to pay.
- Lack of appeals. It is difficult to overturn a bad decision, even if the arbitrator’s reasoning was demonstrably faulty.
- Potential unfairness. Arbitrators can lack the appearance of fairness if they depend for a large share of their business on companies who frequently hire them to hear cases.
Binding Vs. Non-Binding Arbitration
In a binding arbitration, all parties agree to abide by the arbitrator’s decision before the process begins. Once rendered, the arbitrator’s decision carries the same legal weight as the ruling of a court.
In a non-binding arbitration, the parties agree that they will not be obligated to abide by the arbitrator’s ruling. After hearing all sides, the arbitrator renders a decision that carries the force of an opinion. The decision may or may not include a suggested damage award.
Non-binding arbitrations are commonly used by disputing parties to get a sense for the strength of their case. After the arbitration process ends, the parties are free to engage in litigation, to enter into binding arbitration or to engage in mediation to resolve their issues.
Mandatory Vs. Voluntary Arbitration
Mandatory arbitration means that all parties to a dispute are required, either by law or by contract, to use binding arbitration rather than litigation to settle their issue.
Mandatory arbitration clauses set out in contracts with a company often give the company the right to choose the arbitrator and to set the rules for the arbitration process.
Some states require arbitration for certain types of disputes, most typically auto insurance disputes. In those cases, the arbitration process is typically laid out in state law and arbitrators are chosen from government approved pools.
In a voluntary arbitration, the parties agree to submit to arbitration rather than take a case to court. The parties are free to negotiate the choice of an arbitrator and the terms for the process, but in a binding arbitration all sides are obligated to abide by the arbitrator’s decision.
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