Arbitration is private adjudication—an alternative to court. Its early roots include trade disputes that required quick, on-the-scene resolution. The governing standards typically were industry or cultural norms, not legal precedents.
Today, in many contexts, parties want their disputes resolved under applicable laws and by a respected legal expert. They also want many features of court proceedings, such as scheduling conferences, motions, discovery, prehearing filings, hearings with sworn witnesses subject to direct and cross examination, and written decisions.
Some arbitrators are well equipped to handle their own logistics. But as arbitration became more formal, organizations cropped up to professionalize its administration. As independent third parties, administrators provide services that arbitrators or their personal assistants cannot.
An organization becomes an administrator by publishing rules of procedure for arbitration (and associated fees) tailored to the types of claims it hopes to attract. Legally, publishing rules constitutes an offer.
Acceptance does not occur immediately. Generally, in step one, parties agree that if they are unable to settle a dispute arising out of or relating to a contract, they will submit it to arbitration under the administrator’s rules. Then, months or years later, a party may accept the administrator’s offer by filing a claim seeking relief from the other party pursuant to this agreement.
Far less often, in step one, parties agree to resolve an existing dispute under an administrator’s rules. Since the dispute is already ripe, it is likely that one (or both) parties will file a claim promptly after signing such an agreement.
An administrator’s offer to process claims may also be accepted by a state or federal agency. This occurs when a statute provides for the arbitration of disputes between private parties in a regulated industry. Recent examples include the Federal No Surprises Act (part of the 2021 Consolidated Appropriations Act ) and comparable state programs addressing surprise (out of network) medical bills. If the service provider refuses to accept the rate of reimbursement offered by the insurer, the agency may refer the dispute to an approved administrator.
Administrators’ rules typically provide that a claim proceeds under the rules in force when the claim is filed. So if an administrator modifies its rules one year after a predispute agreement is signed, and a claim is filed two years later, the dispute proceeds under the modified rules. The parties must rely on the administrator to amend its rules and fees in good faith, with an eye toward fairness for all.
Also, the parties may agree between themselves to modify the rules. Administrators both tolerate and encourage such modifications. The ability to tailor the process is a key selling point for arbitration since courts allow no such freedom. Many administrators offer guides for customizing their rules, and some now have computer programs that generate an arbitration clause based on how the user responds to a series of questions. The user can cut and paste this computer-generated language into a contract.
Parties may amend an administrator’s rules in a variety of ways. For instance, they may limit discovery or motions, adopt rules of evidence, cap damages, require the prevailing party to pay the arbitrator’s fees and expenses, or make mediation a prerequisite to filing a claim. However, a contract of adhesion may not undo arbitration rules that an administrator has implemented in light of court decisions or regulations regarding such contracts. For example, many courts have found that, if an employer deprives employees of their right to go to court, it must foot all or most of the bill for arbitration. Administrators’ rules typically incorporate this requirement. So when an employee files a claim pursuant to a mandatory arbitration contract, the administrator holds the employer responsible for all or most of the arbitration costs even if—as is often the case—the contract requires the employee to pay half the costs. Allowing a contract of adhesion to override protections implemented for the benefit of those required to sign such contracts would make no sense.
An administrator should accept a claim if the filing party presents an agreement that at least arguably requires arbitration under its rules. This low threshold exists for good reason. Administrators are not adjudicators; they cannot resolve contested factual or legal issues. But administrators can—and must—reject claims that clearly fall outside their jurisdiction.
Consider, for example, a claim filed with Administrator A under a contract that calls for arbitration under the rules of Administrator B. Administrator A can reject the claim pro forma based on the plain language of the document. No reasonable argument can be made that it confers jurisdiction on Administrator A.
In contrast, if a party asserts that the arbitrator lacks authority for any number of reasons, the administrator should appoint an arbitrator to address the issues in accordance with its rules or the terms of the parties’ contract. For instance, a party may raise issues related to the scope of jurisdiction; whether the claim falls within the scope of the parties’ contract; whether it is a proper party to the proceeding, e.g., because the contract is with a recently sold subsidiary; or whether the claim is barred by a statute of limitations. Once appointed, the arbitrator should establish an appropriate schedule for briefing and argument.
Understandably, a respondent may be upset about having to select and pay for an arbitrator if they do not believe the arbitrator has jurisdiction. A respondent may also be concerned that participating in arbitration will signal consent to the arbitrator’s jurisdiction. An administrator’s rules or guidelines should clarify that contesting an arbitrator’s jurisdiction does not establish consent to jurisdiction.
When advising clients about arbitration, attorneys should explain that the client may have to pay both attorney’s fees and forum fees to refute meritless claims. Under the American rule—each party pays its own legal costs—innocence can be costly in either court or arbitration. But the optics in arbitration are worse because administrators, unlike courts, benefit financially from processing claims. Parties need to understand that administrators set a low bar for acceptance out of necessity, not self-interest.
In appointing decision-makers, administrators provide two benefits that are generally unavailable in court: choice and expertise. Parties benefit from choosing decision-makers, both practically and psychologically. In particular, the more input people have over resolution of their dispute, the more likely they are to perceive the outcome as fair. Administrators assist parties with choosing arbitrators by providing a pool of qualified candidates, which the parties may rank in order of preference. Usually, parties may also strike some candidates viewed as unfit or undesirable.
If time is of the essence (e.g., a petition for emergency relief), the administrator may have to limit party input into arbitrator selection. Similarly, to keep costs down, the administrator may restrict party input for a small dollar claim. Some administrators also reserve the right to select an arbitrator if several rounds of ranking and striking do not yield an acceptable candidate.
Administrators develop rosters of arbitrators with the subject matter expertise needed to render high-quality decisions in selected areas. Commercial arbitration is increasingly popular, in part, because commercial cases are increasingly complex. As science and technology advance, understanding the key facts in some disputes becomes more difficult. Concurrently, the laws enacted to govern our increasingly sophisticated society become more complex. To defray the costs of recruiting and training arbitrators who are subject matter experts, administrators have to charge fees. What the parties receive in return is far less risk of an incorrect and/or unworkable outcome.
Administrators directly support arbitrators by handling logistics, advising on procedural issues, and managing money. Most administrators now communicate, schedule, and handle documents through a web-based platform. These platforms promote both efficiency and confidentiality. Party representatives do not need to duplicate and send hard-copy documents, which is laborious and expensive, or send email attachments, which are easily hacked.
Telling an arbitrator how to decide a case is strictly off limits, but administrators can offer guidance on how to navigate unfamiliar or perilous territory. New and inexperienced arbitrators especially benefit from the wisdom administrators accumulate by processing thousands of claims. We all benefit from mentors when embarking on new endeavors, but because arbitrations are confidential, arbitrators cannot seek advice from colleagues. The only available sounding board is the administrator.
Money management is another key administrator role. Administrators pay arbitrators’ fees and expenses out of advance deposits collected from the parties, thereby relieving arbitrators of the burden of financial management and the awkwardness of soliciting funds while trying to appear neutral.
Administrators also relieve parties of any (potentially awkward) need to raise money concerns with the decision-maker in their case. As an escrow agent, an administrator can decline to issue an unreasonably high deposit request, and it can refuse to pay all or part of an invoice that seems excessive. If a deposit request or an invoice appears to be unreasonable, a lawyer, on behalf of their client, can work with the administrator’s case manager to resolve the issue.
While administrators shield arbitrators from direct contact with parties about money, they cannot blind them to case finances. If a deposit is not paid on time, the arbitrator—or the administrator in consultation with the arbitrator—may need to postpone a prehearing conference, suspend consideration of a motion, or cancel a hearing. If multiple deposit requests go unheeded, the administrator’s rules may call for suspension or termination of proceedings, and the rules may authorize sanctions against the nonpaying party. Because the arbitrator, not the administrator, determines the claim’s outcome, the arbitrator must decide whether the case moves forward and whether a sanction is warranted.
Additionally, to gauge whether sufficient funds exist to meet anticipated needs, arbitrators must know in real time how much money remains on deposit. Arbitration is inherently unpredictable. At the outset of a claim, arbitrators can only guess at their billable hours. A discovery dispute, a problem with securing key witness testimony, or a thousand other issues may arise unexpectedly. If a deposit is insufficient, the arbitrator risks never getting paid, especially if the case is already resolved.
Finally, rules of procedure in consumer and employment cases generally require the business entity to pay all or most of the deposit. Thus, the arbitrator cannot help but know which party is supposed to pay. So if funds are short, the arbitrator knows which party is at fault.
Administrators also assist if an arbitrator must be removed from a case and replaced with a new decision-maker. Arbitrators can no longer serve if they become ill or incapacitated, discover a previously unknown conflict of interest, develop a new conflict of interest, or exhibit incompetence or bias. If the arbitrator withdraws on their own volition, or if both parties ask the arbitrator to withdraw, the administrator can promptly appoint a replacement in accordance with its rules. In contrast, if a self-administering arbitrator steps down or is asked to step down, the parties either must agree on a replacement or petition a court to appoint a new arbitrator.
Further, if one party petitions the arbitrator to withdraw and the other party opposes the petition, the administrator can do what the arbitrator cannot: render a detached ruling that allows the process to move forward untainted. Arbitrators cannot be swayed by accusations the administrator shields from their sight. And it is worth noting that these accusations can be nasty. While honest disagreements about whether a relationship creates a conflict of interest are possible, petitions are sometimes filed in bad faith, under false pretenses, to delay proceedings, to drive up costs, or to derail an adverse decision.
Presenting a contested petition to the arbitrator creates a no-win situation, especially when it levels false charges. An arbitrator may not ethically step aside without good cause. Withdrawing is disruptive and costly, and it may add years of delay. A new arbitrator must decide the case on their own, starting at square one, and cannot be bound by the predecessor’s rulings on procedural or substantive issues.
If the arbitrator does not withdraw, a cloud of suspicion may hang over the resulting award. Did the arbitrator consciously or unconsciously retaliate against the petitioner for impugning their competence or integrity? Alternatively, did the arbitrator consciously or unconsciously favor the petitioner to protect against retaliation accusations, thereby disadvantaging the other party? No one—including the arbitrator—will ever fully know the answers to these questions.
But an administrator is motivated to view a removal petition objectively. Removing an arbitrator without good cause is not only costly and disruptive; it may also irreparably damage the administrator’s relationship with the arbitrator. Retaining a compromised arbitrator sets the losing party up for success in vacating the award. This is bad for business. Parties look to an administrator for enforceable relief.
After an award is issued, an administrator pays the arbitrator’s final invoice. It then returns any remaining funds to the parties in accordance with its rules, the parties’ agreement on fees, or the arbitrator’s award.
The administrator may also ask the parties and the arbitrator for post-award feedback. Party observations and recommendations are most credible when confirmed by the other side. Losing parties often let feelings about the result color their view of the process.
Administrators generally keep information about claims—including their existence—confidential. However, when an administrator handles a claim in accordance with a statute, some public reporting may be required after an award. In addition, several states now require administrators who manage numerous employment or consumer claims to publish data on case outcomes.
Administrators generally have no role in post-award litigation. Just as the trial judge and court clerk are not parties on appeal, an administrator is not a party to a proceeding to enforce or vacate an arbitration award. In arbitration, as in court, the case is between the litigants, not between the losing party and the decision-maker.
In addition, courts have held that administrators are immune from suit for actions taken while processing a claim. Their decisions speak of protecting the process from “undue influence” and from harassing suits by dissatisfied litigants. In other words, courts do not want administrators’ decisions to be skewed by fear of litigation, nor do they want administrators’ fees to be inflated by litigation costs. Further, even if administrators were not immune from suit, they would bear no responsibility for the award because the arbitrator is not their employee or agent. Arbitrators must decide the outcome free from the control or influence of others.
The second circuit has determined that administrators bear no responsibility for the consequences of their discretionary acts, although they are obligated to exercise discretion in accordance with their rules. If they do so, the parties received what they paid for. But courts differ on whether an administrator can be held liable for either violating or neglecting its rules and responsibilities. Some courts have immunized administrators from suit for violating their own rules. Others seem willing to permit a suit for breach of contract.
In sum, courts cannot second-guess administrators. Otherwise, the process would lose one of its key benefits—finality. In addition, post-award litigation would drive up the price of arbitration, depriving it of another key benefit—cost savings. However, courts have no choice but to step in if an administrator flat out fails to process a claim.
Disputes are stressful. Paying to resolve them adds to the distress. Knowing how administrators promote justice may provide some comfort. They do far more than relieve arbitrators of the logistical burdens of modern-day arbitration. Administrators keep rules current, provide efficient and secure technology, act as escrow agents, and serve as trusted advisors. If an arbitrator can no longer serve, the administrator can quickly appoint a replacement. If the parties disagree about whether an arbitrator should be removed, the administrator can issue a detached decision. Organizations function best when no single person is in charge of key functions such as operations, law, and finance. Likewise, arbitration is more efficient and just when responsibility is shared between an arbitrator and an administrator.
