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Arbitration Overview

Wednesday, April, 4, 2012


Arbitration Primer
 ©2012 Judy Larkins of USADR, Inc.

Arbitration Overview

There are situations that require a binding decision – either from a court - or an arbitrator.   Most people are familiar with a court proceeding, so it begs the question… What is Arbitration?

Arbitration falls under the category of Alternative Dispute Resolution, commonly shortened to ADR.  ADR offers an alternative path for people to resolve their disputes in ways that are outside of the normal legal channels, such as filing a lawsuit in court.   

Arbitration is different than the court system.  It is not a judicial process, even though there is sometimes pressure to treat it as such.  Arbitration sprang from a premise that business and industry disputes may be best resolved outside of a criminal court system.  A general contractor, for instance, may act as an arbitrator in construction disputes.  The contractor has in-depth knowledge of the work and terminology used in the field, so the decision rendered by an industry arbitrator may be very different than a decision by a judge, whose background is steeped in the law.

Arbitration is common in business and commercial contracts.  These are the cases that arbitration was originally designed to address, and they represent the bulk of the cases today.  Arbitration is not generally used in criminal cases.

Using the court system to solve problems is often overkill.  The length of time necessary to get to hearing is often prohibitive.  The legal process is punctuated by formality and is often confusing to non-attorneys.  A business or layperson’s understanding of the Rules of Evidence often prohibits submitting evidence in litigation unless it is done in a narrow, specific way.  Legal formality fosters the need to hire an attorney, which adds to the cost of resolving the dispute, and the dispute itself is usually costly.  It is not uncommon for litigation to take years!  Additionally, the element of fairness may not be addressed by a judge because judges are bound by both the written law and an extensive body of case law, created over the years by a myriad of past cases that may or may not seemingly apply to your business case.

Arbitration offers a confidential hearing before a neutral decision-maker, often an industry expert, who delivers a binding award with limited appeal after providing the parties with a full and fair hearing.  A “party” can refer to an individual or a business entity such as a corporation or partnership.   
 
Arbitrators must disclose any known conflict of interest and sign an oath that they have no known bias and can be fair in dealing with the parties and the subject matter in dispute prior to accepting appointment to a case.

In most business contract and commercial cases, arbitration is confidential and the arbitration award is binding with very little opportunity for appeal. Confidentiality is perceived as a tremendous benefit, protecting the reputations of those involved in the dispute.  This is in stark contrast to courts of law, where decisions are published and referred to for years to come.  

Lastly, arbitration is not mediation.  Mediation also falls under the category of ADR, and often these terms are used interchangeably due to confusion.  To clarify, mediation is a formal negotiation of the matter and does not have a guaranteed conclusion.   Just like when you offer to buy a car, if the seller doesn’t like the deal, they can walk away.  If the seller likes the deal, they sign a contract and there is a legal consequence – the car’s ownership changes hands.  However, arbitration results in a decision, like it or not.  Arbitration offers a full and fair hearing of each party’s presentation of the evidence and testimony of the parties.  There is a big difference between mediation and arbitration, even though they both fall under the category of Alternative Dispute Resolution |ADR.   

Arbitration History & Current Use

Many of the United States government’s structures and legal concepts were based on the designs of the Greek Republic.    Arbitration is no exception.   Aristotle wrote extensively about the concepts of justice, equity, and the law, specifically addressing arbitration’s ability to provide a measure of fairness that the law may not be able to provide.  Fast forward 2200 years…

The US formally recognized the benefits of arbitration early in the last century, especially its benefits with regard to business transactions.  The Federal Arbitration Act | FAA was enacted in 1925 and places  specific emphasis on business and maritime contracts relating to the purchase, sale and transportation of goods, commercial contracts and the disputes that arise out of the terms and conditions of these types of transactions.    The FAA provides for mandatory, binding arbitration when parties contractually agree.   Interestingly, it limits employment arbitration for railroad workers, sailors and others in cases of dispute.  "Nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce."[i][1] Arbitration for criminal cases is not provided for in the FAA.

The FAA provides for the following:

  • Defines the types of transactions      suitable for arbitration and provides for enforcement of arbitration      agreements
  • It addresses issues such as      jurisdiction, appointment of arbitrators, and grants arbitrators the power      to subpoena, with enforcement through the US District court
  • The FAA also addresses awards, the      confirmation of awards and their limited appeal
  • And finally sets the expectation that      the state courts will uphold awards

State Arbitration Laws:  State specific arbitration laws have become increasingly common since 1955 when The Uniform Arbitration Act was adopted by the National Conference of Commissioners on Uniform State Laws.  Each of the 50 states may use The Uniform Arbitration Act’s standardized language as a starting point to create and adopt as their own state specific arbitration law, or they may create a state arbitration law that has no basis in the Uniform Arbitration Act.  It is noteworthy that the Federal Arbitration Act tends to be more liberal than individual state arbitration laws, which have become increasingly restrictive in the last few decades; going as far as giving the court the ability to appoint the arbitrator in some states, and retaining jurisdiction in commercial cases to perform a de novo (new) hearing of the evidence when parties challenge the award delivered under their state arbitration laws.   Extremely restrictive laws tend to erode the benefits of arbitration.  In these cases, arbitration becomes essentially a parallel tract to a court proceeding.  All of the entanglements of litigation result in a marked increase of cost, time, and formality across the board.   

Rules of Procedure:  Each arbitration forum publishes their own Rules of Procedure, which are a detailed “rules of the game.”   These rules vary in terms of technical terminology and the level of understandability for the layperson.  There is also variance in terms of formality and rigidity.  If the arbitration provision in the contract is silent on specific rules of procedure or fails to name the specific arbitration forum, then the parties may file with any established forum.  Additionally, parties may choose to use a different forum or set of rules by agreement when the need to arbitrate arises.

Governing Law:  You may be wondering if federal or state law is followed in a particular arbitration proceeding.  Each arbitration provision is unique to the contract, and when an arbitration provision is silent on what governing law is applied, the Federal Arbitration Act is generally applied. 

However, when arbitration is conducted as it was originally intended, it offers valuable benefits.  A carefully constructed arbitration process is an ideal path for resolving disputes, as opposed to litigating a commercial matter in the courts. 

Tenets of Arbitration  

The four basic tenets or principles of arbitration include reduced formality, faster resolution, less financial cost, and fairness and fair process.  

In its pure, original form, Arbitration is designed to be

  • Less Formal than a court proceeding.  Arbitration gives the opportunity for parties to represent themselves before a private decision maker – often an industry expert – who is thereby more familiar and knowledgeable about the subject matter in dispute.  For instance, an engineer may evaluate the testimony and evidence presented by the parties very differently than an attorney or judge, when listening to both sides in a construction dispute. 
  • Reduced formality invites people to present their case.  Many people feel more comfortable in a private, more relaxed setting, than in a formal court of law. 
  • If you are able to speak clearly and maintain your composure under pressure, you may determine that you are able to present your own case and avoid the costs of legal representation.  Attorney’s fees can be significant. 
  • Industry arbitrators recognize that the parties involved in the dispute know the details best, and invite a full and fair hearing according to the priorities of those presenting their case. 
  • The presentation of your case should be based on actual facts, rather than legal theories.

Arbitration accommodates a

  • faster means of resolution, significantly compressing the timeframes that are typically experienced in court.  In contrast to litigation, which can drone on for years, an arbitrated matter can be heard in a matter of months.

A properly designed Arbitration program should

  • save money.  The program should absolutely withstand the scrutiny of a cost/benefit analysis.  In other words, does the claim amount justify the cost to bring the matter to arbitration?  

 The ideal Arbitration process provides for a

  • a more equitable, or FAIR way to resolve disputes.  Arbitration should absolutely keep an eye on fairness and fair process, rather than basing decisions on the letter of the law - or determining the case based upon past decisions of other judges in previous cases.  The arbitrator will consider any case law presented, and let’s face it, case law may or may not be helpful; each case and circumstance is different. 

So why do we keep talking about PURE arbitration and emphasizing its original design?  Because in the last 30 or 40 years, arbitration in the United States has greatly increased in terms of cost and formality, sometimes reflecting the worst excesses of litigation: massive discovery, excessive production of documents, lengthy interrogatories, etc.  These changes have had a pronounced negative impact, eroding many of the original benefits that arbitration was designed to address.

In the recent years, United States Arbitration Association has recognized the need to return to, and focus on, the original values of arbitration. 

United States Arbitration Association Services  

USADR, Inc. offers a less litigious form of dispute resolution that is affordable.  The written rules and procedures are understandable in laymen’s terms.   You don’t have to be an attorney to understand the rules of the game. USADR offers an accessible means of resolving disputes by embracing and promoting the traditional values of arbitration: affordability, expediency, and Equity.

How common is it to be bound by an arbitration agreement? Virtually everyone who conducts business has entered into an agreement to arbitrate.  Arbitration clauses are commonly included in business and commercial contracts - such as credit card agreements, insurance policies, cell phone contracts, internet software terms and conditions, and other legally binding documents.  You may be completely unaware that you have signed an arbitration agreement, so when a dispute arises and you file suit in court, the court will reject your filing and refer you to arbitration instead.

If you have signed an arbitration agreement, you must arbitrate, even when the cost of arbitration exceeds the amount being disputed.

This may present a problem, because the costs of arbitration may climb quickly, and you may not be able, or willing, to bear the necessary fees to see the matter to conclusion.  Currently, most national, established arbitration forums are cost-prohibitive for small to mid-size claims.  It simply does not make financial sense to arbitrate when you must agree to an unlimited expense in exchange for a limited judgment amount.  In addition, the rules of procedure are frequently exhaustive;  written in Legalese that may be confusing to people outside the legal profession.  Many people feel that they have no choice but to hire an attorney to navigate the process, and the fees for representation are added to the administrative costs, as well as the hourly rate for the single arbitrator or panel of 3 arbitrators who act as a private judge, or judges, who are hired to hear the matter and make a decision.

United States Arbitration Association acknowledges the need to provide a means of arbitration that is efficient and contains costs.  We have carefully designed a process that is accessible, thereby paving the way to resolve disputes.

USADR offers 3 types of arbitration: 

  • Documentary Arbitration has been designed for claims under $15,000.  An all-inclusive flat fee per party is assessed for a hearing by a single arbitrator who renders a written simple decision based on the papers.
  • Arbitration by Teleconference addresses claims that are under $75,000.  An all-inclusive flat fee is assessed when the teleconference does not exceed 3 hours.  These matters are heard by a single arbitrator who renders a written, simple decision based on the papers and oral arguments at the Teleconference.
  • Standard Arbitration offers a physical hearing before a single arbitrator, and is designed for large claims that exceed $75,000.  A filing fee is charged per party, with additional costs such as an hourly rate for the arbitrator.  All fees are described in our straight-forward Fee Schedule posted on our website at http://usadr.org.  

 

The following is an overview of the 3 types of arbitration offered by USADR.  All parties are advised to read USADR Rules of Procedure at the time of filing for further detail.  The Rules of Procedure are posted on our website at http://usadr.org/rules .

The first type of arbitration offered by USADR is Documentary Arbitration, which is designed for claims under $15,000.  There is a per party flat fee to include the administrative filing fee, documentary hearing, and a simple written award.  In addition to the arbitration submission agreement, each party may submit written and digital documentation that supports their claim at the time of filing.  It is customary to provide a copy of the signed contract, a statement of claim, other documents, and any digital photos or video that supports the claim.  The statement of claim should include a detailed chronology of the dispute, any steps taken to resolve the dispute such as a demand letter, mediation or other actions, and a dollar amount that the party wishes to be awarded along with supporting documentation such as receipts, estimates, etc.

The dispute is reviewed based on the documents provided by the parties.  A simple written award is delivered after a single arbitrator reviews the parties’ documentary evidence presented for the case.  The documentary evidence reviewed by the arbitrator should include:

  1. The signed arbitration submission agreement.  
  2. A Written statement of claim submitted by the claimant and the response to the claim submitted by the Respondent.  These statements and responses are a detailed chronology of the dispute from each party’s perspective, along with any attempts made to resolve the matter, and any relief sought by the parties, such as the specific dollar amount and other remedies sought to satisfy the claim.  Keep in mind that the arbitrator cannot grant relief that is not asked for, so be sure to ask for everything you want, including attorney’s fees, interest, etc. 
  3. A copy of the signed contract between the parties that includes the arbitration provision.
  4. Pictures, videos, and notarized witness statements that support the claim or response
  5. Other documents that lend weight to the claim or defense that should be considered by the arbitrator

 

The second form of arbitration offered by USADR is Arbitration by Teleconference, which has been designed for claims under $75,000. 

There is cost is a per party flat fee to include the administrative filing fee, a 3 hour teleconference hearing, and a simple written award.  If the teleconference exceeds 3 hours, an hourly rate is charge to each party for each hour block that exceeds the 3 hour limit.  In addition to the arbitration submission agreement, each party may submit written and digital documentation that supports their claim at the time of filing.  It is customary to provide a copy of the signed contract, a statement of claim, other documents, and any digital photos or video that supports the claim.  The statement of claim should include a detailed chronology of the dispute, any steps taken to resolve the dispute such as a demand letter, mediation or other actions, and a dollar amount that the party wishes to be awarded along with supporting documentation such as receipts, estimates, etc.

The dispute is heard by a single arbitrator based on the documents and oral arguments of the parties.  A simple written award is delivered.   The arbitrator will hear the presentation of the parties’ case, to include:

 

  1. The signed arbitration submission agreement.  
  2. A Written statement of claim submitted by the claimant and the response to the claim submitted by the Respondent.  These statements and responses are a detailed chronology of the dispute from each party’s perspective, along with any attempts made to resolve the matter, and any relief sought by the parties, such as the specific dollar amount and other remedies sought to satisfy the claim.  Keep in mind that the arbitrator cannot grant relief that is not asked for, so be sure to ask for everything you want, including attorney’s fees, interest, etc. 
  3. A Copy of the signed contract between the parties that includes the arbitration provision
  4. Pictures, videos, and notarized witness statements that support the claim and response
  5. Other documentsthat lend weight to the claim and that should be considered
    1. Oral argument by both parties and the presentation of their respective cases at the teleconference
 

 

The third type of arbitration offered by USADR is Standard Arbitration with a Physical Hearing, which is offered for claims that exceed $75,000. 

 

All costs are assessed to each party equally.  The administrative filing fee is paid at the time of filing the arbitration submission agreement.   Additional fees and arbitrator hourly rates apply. 

An initial pre-hearing teleconference is scheduled for the purpose of establishing procedures, setting dates, and resolving any pre-hearing disputes either by the decision of the arbitrator or joint agreement.  The teleconference is usually attended by the arbitrator, the parties and their representatives.   After the teleconference, a scheduling order is issued to the parties by the arbitrator which details the dates and decisions and establishes the amount of the hearing deposit.

All parties are given a full and fair hearing of their evidence and testimony at the physical hearing.  A simple award is rendered unless the parties jointly agree that they want a detailed, reasoned award.

The dispute is heard by a single arbitrator, unless all parties agree that they would like a panel of three arbitrators.  Additional fees apply for a panel of three.  The arbitrator or arbitrators base the decision and award on the documents and oral arguments of the parties.  A simple written award is delivered unless the parties unanimously request a detailed, reasoned award at the time of the filing.   The parties may present:

 

  1. A Written statement of claim submitted by the claimant and the response to the claim submitted by the Respondent.  These statements and responses are a detailed chronology of the dispute from each party’s perspective, along with any attempts made to resolve the matter, and any relief sought by the parties, such as the specific dollar amount and other remedies sought to satisfy the claim.  Keep in mind that the arbitrator cannot grant relief that is not asked for, so be sure to ask for everything you want, including attorney’s fees, interest, etc. 
  2. A Copy of the signed contract between the parties that includes the arbitration provision
  3. Pictures or videos that support the claim and response
  4. Presentation of witnesses or subpoenaed documents
  5. Other documents that lend weight to the claim and that should be considered
  6. Oral argument and presentation of the case at the physical hearing

United States Arbitration Association is confident that the tiered arbitration services more closely matches the needs of the parties when taking into consideration the cost/benefit analysis of the claim amount.  USADR welcomes your questions, and invites inquiries either addressed to our email  [email protected] or by calling us at 303-864-9674.  We take your dispute seriously and are committed to assisting you in gaining resolution so that you are free to get on with your life!



[1] (United States Code Title 9 Chapter 1).  http://uscode.house.gov/download/pls/Title_09.txt