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What is Arbitration?

Friday, May, 18, 2012

What is Arbitration?



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.  Those are big, chunky words, but in short, 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.  Big difference, even though both mediation and arbitration fall under the category of Alternative Dispute Resolution, or ADR for short. 


You don’t need a court system to solve your business disputes.