- There must be an arbitration clause.
- Discovery is limited.
- Arbitration may not be that much less expensive than litigation.
Arbitration is an alternative means of resolving disputes between parties. Most contracts transacted by consumers today contain an arbitration clause requiring any and all disputes relating to the subject of the contract be resolved by arbitration and not by a court proceeding. Although the Federal Arbitration Act governs most arbitration contracts in the United States, arbitration is largely a creature of contract. Parties are free, for the most part, to craft their own arbitration procedures and means of administration.
Before arbitration may proceed, it must be shown there is a contractual agreement between the parties that contains an arbitration clause. Once shown, arbitration of a dispute between the parties to the contract may be compelled. Because arbitration is, for the most part, a creation of contract, much variation and flexibility in arbitration practice is possible. There are few restrictions on how arbitrations may be conducted. Most contracts provide for arbitration to be administered by an arbitration company. The most often used companies are the American Arbitration Association (AAA) and JAMS.
Some contracts may provide that arbitration is to be conducted by an arbitrator to be selected by the parties independent of any arbitration company. Arbitrations may be conducted by a single arbitrator or by a panel of arbitrators. Arbitrators may be appointed by agreement of the parties or may be appointed by AAA or JAMS.
Generally speaking, discovery is limited in arbitration, and a hearing may be obtained much sooner than in a trial setting. Once an arbitrator is appointed, a scheduling conference is held between the parties and arbitrator, establishing deadlines for final pleadings, the exchanging of witness lists and exhibits, as well as setting the date for the arbitration hearing. Subject to approval of the arbitrator, the parties may agree to conduct the hearing according to their own preferences. The proceeding itself usually loosely follows court procedure but is more informal. The rules of civil procedure and rules of evidence are not strictly enforced in arbitration. At the conclusion of the hearing, the arbitrator may call for final briefing before a final ruling, called an award, is issued. To be enforced, an award must be reduced to a judgment. Once the award is reduced to a judgment, it may be enforced as any other judgment in the jurisdiction is enforced.
Proponents of arbitration claim the procedure is quicker and less expensive than a court proceeding. Although it is true that initial filing fees, at least for consumer claims or medium-sized cases, may not vary much from court costs, the fees charged for the arbitrator’s time can be considerable, especially if more than one arbitrator is conducting the arbitration. Contracts may provide that the defendant pay all arbitration costs, or they may establish cost-sharing among the parties. To properly evaluate whether arbitration is less costly than a court proceeding, it is essential to closely check all fees and expenses that will be charged by the arbitrator or the company administering the arbitration. Depending on the number of parties involved and the complexity of the dispute, arbitration may not necessarily be a less expensive alternative.
If agreed by the parties and the named arbitrator(s), full discovery may be conducted in arbitration much as in a court proceeding. It is less likely that dispositive or other motion practice will be included in arbitration. In a court proceeding, court costs are relatively modest and the judge is elected or appointed, so there is no specific cost to pay for the adjudicative officer for the dispute.
Proponents also tout the relative privacy of the procedure. Opponents cite the privacy of the procedure as a disadvantage, claiming there is no record of how disputes are resolved or how particular arbitrators rule, and, therefore, there is less predictability and less oversight of arbitrators. The actions of a judge, in contrast, are a matter of public record. A judge may be held accountable for his decisions, come reelection or reappointment time, unlike an arbitrator. Opponents also cite the limited pool of arbitrators and claim that arbitrators tend to rule in favor of businesses. There is some perception that arbitrators may be reluctant to rule for consumers or plaintiffs because it may limit their future opportunities for appointment as an arbitrator. In contrast, proponents assert the advantage of a dispute being resolved by a person who is familiar with the particular industry or type of business involved.
The right to appeal is very limited in arbitration. The Federal Arbitration Act governs the limited circumstances that allow for the appeal of an arbitration award. The advantage to limited appeal is its finality. The disadvantage is that there is rarely a review of mistakes of law.
Arbitration remains a viable option for parties looking for ways to control costs and the resolution of potential disputes. As a general rule, courts enforce arbitration clauses as written. Parties may craft their own particular procedure to provide a fair management and outcome of the conflicts that arise in their businesses and daily affairs.