In order to correctly answer the question “How does arbitration work?”, we need to understand the context behind the dispute. Arbitration is an adjudicatory alternative dispute resolution (ADR) process, in which the parties agree to have a neutral third party or parties decide the outcome of a dispute.
The Federal Arbitration Act (FAA) was enacted in 1925 to ensure the validity and enforcement of arbitration agreements. As a result, an arbitrator’s decision is binding.
The Arbitration Process
The arbitration process is similar to a trial in that the parties make opening statements and present evidence to the arbitrator. Compared to traditional trials, arbitration can usually be completed more quickly and is less formal. The parties choose an individual who can make the decision about the dispute after both sides present evidence and testify.
Arbitrators differ from mediators in that an arbitrator issues a final decision regarding the dispute. This is done after the hearing is completed, through an arbitrator’s award. When mediation is used a dispute resolution, the mediator’s role is only that of a facilitator.
The arbitration process is a private process and courts usually do not interfere unless an arbitrator’s actions are unfair, against public policy, or violate the terms of the agreement granting the arbitrator(s) their powers.
While the arbitration process is almost always consensual, it is mandatory in the United States securities industry and a non-binding step of U.S. litigation processes in certain state and federal court cases.
Arbitration comes in two forms: binding and non-binding arbitration. When arbitration is legally binding, the decision is final, can be enforced by a court judgment, and can only be appealed under very limited circumstances. When arbitration is non-binding, the arbitrator’s award is advisory and can be final only if all parties agree and accept.
According to the American Arbitration Association, AAA cases are often settled prior to the arbitrator’s decision. Some arbitration awards simply announce the decision also known as a “bare bones” award, and others give reasons, or a “reasoned” award.
Different Types of Arbitration & Dispute Resolution
When we think of arbitration, we usually think of a close substitute for litigation — in which the arbitrator allows streamlined discovery and hears limited motion practice before holding the arbitral equivalent of a litigated bench trial. We can call this highly adversarial form “judicialized” arbitration. It is usually presided over by a retired judge or experienced lawyer. Most cases take place over several days or weeks of confidential sessions in a conference room.
This form of arbitration has grown in the last six or seven decades, as corporate litigants sought relief from the cost, delay, publicity, and disruption caused by bloated, take-no-prisoners lawsuits and unpredictable juries. Arbitration, some say, is the new litigation. Some users even characterize it as worse than litigating.
Classical Commercial Arbitration Using an Expert Arbitrator
But quasi-litigation is not the only form of arbitration. The practice was popular in the trade guilds and commercial fairs of medieval England. The royal courts left trade conflicts to the guilds. Where there was a dispute over the quality of goods, their conformity with an order, or the custom and practice in the trade, a senior guild member would be asked to decide the outcome.
Trade practice became the rule of decision. There was no discovery and no motion practice. The guild’s decision-maker was trusted to know the right answer. Commercial mediation was quick and efficient.
Today, parties can select arbitrators with backgrounds that fit the dispute. Though common, a legal background is neither required nor universal. It’s not likely that discovery and motion practice will be entirely dispensed with, but the experience of the arbitrator can eliminate the need to do as much education and enable more focused efforts.
Final Offer Arbitration
The parties may use processes designed to emphasize speed and reduce the chance of outsized awards while increasing the chance of settlement. “Final offer” or “baseball” arbitration (FOA) features several rounds of negotiation followed by a final offer from each side. The arbitrator is constrained to choose one of these alternatives. Often, the parties will put forward relatively moderate proposals in an effort to be chosen as most reasonable.
In the so-called “night baseball” variant of arbitration, each party’s final offer is kept confidential and sealed until after the neutral drafts an award. The arbitrator then compares the award to the proposals and chooses a winner.
Not knowing the opponent’s final offer adds uncertainty about acceptable resolutions and leads to greater issue exploration in bargaining. If one party is more risk-averse than the other, the impetus to settle rises under the uncertainty of night baseball arbitration, leading to more concessions, more generous offers, and more frequent pre-arbitration settlements.
Less information in night baseball arbitration may lead to more tactical errors when bargaining. But the remedy for this is more information seeking, which promotes exploration of positions and more settlement. Final offer arbitration is used in Major League Baseball and public employee labor disputes.
Hybrid Forms of Arbitration
Some forms of dispute resolution combine arbitration and mediation. For example, in med-arb, the same neutral first attempts to mediate a dispute and then serves as arbitrator if an agreement cannot be reached.
Med-arb combines the self-determination of mediation with the finality of arbitration. Critics argue that med-arb is unfair because the neutral, who may later arbitrate, hears evidence during a private caucus in mediation to which the non-caucusing party cannot respond. But concerns about exposure to improper evidence reflect doubts about the neutral’s ability to disregard that evidence, rather than a flaw in the med-arb process itself.
But judges are expected (and often presumed) to disregard inadmissible evidence presented to them for consideration. Further, to the extent the problem is an unavoidable feature of the process, participants have consented to it.
In arb-med, arbitration takes place before mediation, eliminating concerns about improper evidence. As in night baseball FOA, settlement efforts take place under the added pressure of an undisclosed arbitration award.
Labor arbitration is the last step in the collective bargaining process. The right to collective bargaining is guaranteed by the National Labor Relations Act (NLRA) as a substitute for disruptive and costly strikes. It provides a resolution where collective bargaining has broken down and there is no right to strike, as with public employees, or where the effective contract contains a no-strike clause. Of course, the parties may also voluntarily agree to some sort of labor arbitration.
The labor arbitration clause usually selects straightforward judicialized arbitration when the grievance process falls. However, the matter must be resolved quickly. The NLRA requires only sixty days’ notice to the employer (90 days in a healthcare setting) of the desire to modify or terminate a CBA. Only thirty days’ notice (sixty in a healthcare setting) is required to notify the Federal Mediation and Conciliation Service and state agencies. Thereafter, a strike (if permitted) may occur. (Ten days written notice is required in a healthcare setting).
The short time frames explain the frequent use of FOA and hybrid forms of arbitration, which increase pressure to settle and maintain tight time frames. There is no need for time-consuming and expensive discovery, especially if both parties have adequately prepared, anticipating possible positions and preparing responses.
The arbitrator is usually a retired judge or experienced labor lawyer. Unions or management may utilize bargaining representatives or labor relations specialists, but research shows that lawyers obtain better results in arbitration. The focus is on the interpretation of the CBA, especially in a particular facility given existing workplace conditions.
Which law controls the arbitration is very important. In the United States, the Federal Arbitration Act (FAA) covers disputes affecting interstate commerce. According to one professor, the US Supreme Court “has a crush on” arbitration, and is extremely deferential to its enforcement. Most states are equally deferential, but details and the expertise of a state’s courts vary. So certain jurisdictions are preferred for particular case types (New York, for instance, is often the chosen law for financial disputes).
Up to 90% of international commercial contracts contain arbitration clauses, which are broadly enforceable under a treaty known as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, or simply the New York Convention.
Internationally, certain case types (such as patent disputes) are per se not arbitrable in some countries. Patent arbitration is allowed in the U.S. but is only binding on arbitration agreement signatories. That is, a patent may not be wholly invalidated in arbitration. Royalty rights may be determined.
What Does the Arbitration Agreement Say?
While the law governing the contract provides default rules if the parties have not specified procedures for arbitration, the agreement is the foundational document granting an arbitrator power. The agreement determines what conflicts may be arbitrated. All disputes between the parties? Only those arising out of or relating to a contract? Those with more than a certain amount in dispute? Those concerning a certain subject or department? Are certain subjects to be “carved out?”
Is the court to be involved in certain questions? It usually is, unless these are expressly assigned to the arbitrator by a delegation clause. What relief may the arbitrator award? What will be done about emergency relief, which the arbitrator lacks the ability to grant?
These are choices to be made depending on the needs and goals of the signatories. Because the arbitration clause is the arbitrator’s charter, it must be carefully drafted.
Arbitration is an important and rapidly developing field of law, business, and daily life. Less than two percent of federal actions end in jury trials. Mediation and arbitration programs are now a necessary part of the lawyer’s toolkit. In the age of the pandemic, they are being done successfully online.
For more info on how arbitration works, alternative dispute resolution, and more, contact ADR Times today!