Generally considered a genre of dispute resolution, arbitration is a proceeding used to obviate the litigation process. Arbitration seeks to expedite the resolution of disputes in an uncomplicated and inexpensive manner prior to the filing of a lawsuit. An impartial, private third party—an arbitrator—hears the parties’ dispute and makes a final determination that typically binds the parties. Litigation, by contrast, involves a lawsuit and, while also a method used to resolve disputes between parties, for the most part, tends to be lengthy and expensive. There are many benefits associated with arbitration; however, agreeing to submit to arbitration requires one to relinquish his or her right of access to the courts. Still, arbitration has been used more frequently throughout the past decade.
In theory, any contractual agreement may result in a disagreement. Businesses around the world understand that, many times, disputes are inevitable. Generally, disputes can be resolved in several different ways: litigation, mediation, conciliation, and arbitration. Arbitration and mediation are cost-effective alternatives to litigation. Arbitration is the submission of a dispute to one or more impartial persons for a final and binding decision. This is known as an award, which is made in writing and, generally, is final. Usually, awards bind the parties involved.
Non-binding arbitration is conducted similarly to binding arbitration, except that when the arbitrator issues the award after the hearing, it is not binding on the parties, who do not give up their right to a jury trial. In that case, the arbitrator’s award is merely an advisory opinion. Many cases go to settlement or binding arbitration after this phase. Alternatively, the parties may choose to go to trial. By contrast, mandatory arbitration, also known as court-ordered arbitration, is a judicial mandate intended to resolve pending court cases, utilizing informal rules of evidence and procedure in an advisory arbitration process ordered by the court at an early stage of a lawsuit. The availability of this process, in large part, depends upon local, state laws or court procedures.
Mediation is a process in which an impartial third party facilitates communication and negotiation and, therefore, promotes voluntary settlements by the parties themselves. This process can be effective for resolving disputes prior to arbitration or litigation. Arbitration, however, offers parties a decisive legal outcome to their dispute without the expense and inconvenience of court proceedings and attorney fees.
Businesses and government departments—even courts themselves—have used arbitration programs to resolve disputes, and there is widespread satisfaction with the process. Because the arbitrator renders a final decision upon hearing both parties’ arguments, arbitration is considered to be adjudicatory, not advisory. Similar to litigation, arbitration has a so-called appeals process. In other words, an arbitrator’s decision can be challenged under very limited circumstances only, for example, if you can demonstrate an arbitrator was biased; therefore, parties are not always bound by the award. This process is somewhat of a misnomer, however. For the most part, arbitration is considered a binding, adjudicatory process.
Providers of alternative dispute resolution services address areas such as employment, intellectual property, consumer, healthcare, financial services, technology, construction, and international trade conflicts. The largest provider in the United States is the American Arbitration Association (AAA); it plays a vital role in resolving complex matters, especially in such volatile industries as construction. The plans, specifications, site conditions, disciplines involved, construction methods, and goals in each construction project vary. Today’s projects, for example, are more intricate, the technology more advanced, and the trades working on them more specialized. Identifying and establishing systems to manage potential business disagreements on construction projects can help parties avoid delays and resolve disputes that could threaten an entire project.
Arbitration agreements are essentially of two types: (1) a future-dispute arbitration agreement, commonly referred to as an arbitration clause, which is contained in a broader contract between the parties and anticipates arbitration procedures to follow, should a dispute arise under the broader contract; and (2) a present-dispute arbitration agreement, known as a submission agreement, which counsel for the parties craft when the parties desire to arbitrate a dispute, but where there is no pre-existing contract clause.
Arbitration can take place only if both parties have agreed to it, unless of course, the proceeding is court ordered. For this reason, the parties are obligated to accept the terms of settlement, regardless of whether it is unfavorable. If the parties do not agree in advance to follow the arbitrator’s final decision, but merely agree to consider it, the process is termed conciliation. Additionally, parties are able to choose important elements such as the applicable law, language, and venue of the arbitration. In this vein, neither party enjoys home court advantage.
Parties may insert arbitration clauses into contracts to resolve future disputes. An existing dispute can be referred to arbitration by means of a submission agreement between the parties. In contrast to other forms of dispute resolution, specifically mediation, a party cannot unilaterally withdraw from the proceeding. Within the two main types of arbitration agreements, parties must agree on the terms of arbitration.
Terms agreed upon may be as narrow or as broad as the parties desire. For instance, the parties can agree in advance to the parameters within which the arbitrator may render his or her award. If the award is lower than the specified low, the defendant will pay the agreed-upon low figure; but, if the award is higher than the specified high, the plaintiff will accept the agreed-upon high. If, however, the award falls between the high and low, the parties agree to be bound by the arbitrator’s decision. The parties’ terms may include a form of binding arbitration wherein each of the parties chooses one number only, and the arbitrator may select only one of the figures as the award.
Whether to reveal the figure to the arbitrator is another decision the parties must make. In some instances, the parties exchange their own determination of that value of the case, but the figures are not revealed to the arbitrator. Subsequently, the arbitrator assigns a value to the case and the parties agree to accept the high or low figure closest to the arbitrator’s value.
Historically, arbitration was practiced by the Greek city-states, and in the Middle Ages high ecclesiastical authorities were called upon to settle controversies. In the first part of the 20th century, some countries—the United States and France—began passing laws that sanctioned and even promoted the use of private adjudication as an alternative to what was perceived to be inefficient court systems. The growth of international trade however, brought greater sophistication to arbitration. As trade grew, so did the practice of arbitration. Ultimately, this led to the creation of international arbitration as a means for resolving disputes under international commercial contracts.
Since then, great advances have been made, notably the establishment of the Permanent Court of Arbitration. Functions analogous to arbitration were performed by the Permanent Court of International Justice under the League of Nations: functions that belong to the International Court of Justice. Today, many treaties contain clauses providing for arbitration or conciliation of disputes. The most notable of these is the Charter of the United Nations.
The last decade has seen an unprecedented increase in professional liability claims, including those brought by businesses and individuals against accounting firms. Typically, those disputes were resolved by litigation that, in more than 90 percent of the cases, results in a settlement.
Increasingly, the international business community is using arbitration to resolve commercial disputes arising in the global marketplace. Supportive laws are in place in many countries that provide a favorable climate for the enforcement of arbitration clauses. International commercial arbitration awards are recognized by national courts in most parts of the world. Arbitration is popular in international trade as a means of dispute resolution because, among other methods used to resolve disputes, it often is easier to enforce an arbitration award in a foreign country than it is to enforce a judgment of the court.
- Paul Bland, Jr., Michael J. Quirk, Kate Gordon, and Jonathan Sheldon, Consumer Arbitration Agreements, 4th ed. (National Consumer Law Center, 2004);
- Michael W. Buhler and Thomas H. Webster, Handbook of ICC Arbitration (Sweet and Maxwell, 2005);
- Christian Buhring-Uhle and Gabriele Lars Kirchhof, Arbitration and Mediation in International Business, 2nd ed. (Kluwer, 2006);
- Redfern and M. Hunter, Law and Practice of International Commercial Arbitration, 4th ed. (Sweet and Maxwell, 2004);
- Tibor Varady, John J. Barcelo, and Arthur Taylor Von Mehren, International Commercial Arbitration, 3rd ed. (West Group, 2006).
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