The Ins and Outs of Third-Party Arbitration

The Ins and Outs of Third-Party Arbitration

The Ins and Outs of Third-Party Arbitration

Many people participate in arbitrations every day. Arbitration covers disputes from business practices to disputes over fees to international investments. Parties may choose arbitration before or after a dispute arises, often by contractual terms. Businesses will opt for arbitration over litigation to save time and money when settling grievances before them. With arbitration becoming a regular part of life for many businesses and individuals, there are many misconceptions and questions around the arbitration process from those who have had little to no exposure to arbitration. If you are wondering what third-party arbitration is, what the process is like, and whether it may be right for your dispute, continue reading.

Third-Party Arbitration Defined:

Arbitration is a mechanism designed to resolve disputes. It is the most traditional form of private dispute resolution. Like other alternative dispute resolution mechanisms, its purpose is to allow parties to settle their disputes outside of traditional litigation. However, unlike mediation, negotiation, and conciliatory processes, the arbitration will create a binding order that can be enforced by the parties after arbitration is complete. These biding decisions will only be reviewed by courts in very limited circumstances. Therefore, it is best to think of arbitration as an adjudicative form of dispute resolution.

Arbitration is centered on the ideas that the dispute should be resolved by an impartial third party and that the parties should be able to settle their disputes as they wish. Courts will often be barred from interfering with an arbitration, especially in states that have adopted the Uniform Arbitration Act. The arbitration will also be bound by the federal and state laws that govern the process of arbitration and the applicability of the arbitral award, which will allow either party to enforce the award. The award will be rendered by a neutral third party, known as an arbitrator.

Arbitration Process:

The process of arbitration is governed by both the arbitration agreement itself and the local laws of arbitration. Because the arbitration is mostly governed by an agreement, it is vital to include items of importance in the agreement to arbitrate or to supplement the original arbitration agreement with an agreement for the specific dispute. The agreement itself may be reviewed by a court to determine its validity if one party questions it, so having a valid and complete agreement will ensure that the arbitration happens as the parties wish. Important considerations that should be agreed upon between the parties include:

  • The number of arbitrators
  • The appointment of arbitrators
  • The location of the arbitration
  • The governing substantive law for the arbitration
  • The rules governing the procedure

Once there is a valid agreement to arbitrate, one of the parties will initiate the arbitration and the arbitrator or arbitrators will be appointed. Arbitrators may be appointed by the parties directly, by existing arbitrators on the panel, or by an external party. External parties typically include arbitration organizations, such as JAMS, the American Arbitration Association, and ICSID. In this case, the parties will agree that an arbitrator or the panel will be appointed by the organization. Parties will also usually choose the rules of the procedure from one of these organizations to govern the arbitration. Another common scheme for appointment will allow each party to appoint an arbitrator and then the appointed arbitrators appoint a neutral third arbitrator. Once the parties have chosen an arbitrator, the arbitration will begin.

An arbitration will differ depending on the preferences of the parties and the panel’s decisions on the process. However, most arbitrations will include the following stages or steps:

  1. Preliminary Meeting: The panel will often call a meeting to begin the process and establish the rules governing the arbitration. It will also allow the panel and the parties to understand the process and expectations. The parties will often exchange information vital to the case at this meeting as well.
  2. Statement of the Claim and Response: Whichever party initiated the arbitration will have a chance to lay out the full claim, and the other party will have a chance to respond.
  3. Exchange of Information: The parties will submit briefs or memos that support their positions to the arbitrators that begin to present evidence. This allows the arbitrators to have a better understanding of the case and evidence moving into a hearing.
  4. Hearings: Hearings give the parties a chance to fully plead their case before the arbitrators. They may present evidence, question witnesses, and provide oral statements. The panel will hear the case and may ask for clarification. Arbitrations will not have a hearing if the parties can present their case fully in the filings.
  5. Final Submissions: The parties may submit a summary of the law and evidence to support their position to the arbitrators.
  6. Award: The arbitrators will decide as to the liability and the damages that are owed in the case.
  7. Enforcement: The award will be enforced by the courts and local authorities if needed.
  8. Challenge: This can take place before or during the enforcement phase. Challenges to awards are rare, and successful challenges are even more so. There are very limited circumstances that allow for challenges, and these are usually based on public policy issues, such as not enforcing an award because it is so blatantly unfair that it is not in line with societal standards. Occasionally, an arbitrator’s award may be challenged because of their biased actions and failure to act neutrally.

Types of Arbitration:

Arbitration can be broken down into a variety of types based on the subject matter of the arbitration or the style in which the parties or arbitrators choose to run the procedure. When based on the subject matter, arbitration is usually broken into three categories of disputes. These are:

  • Commercial: This involves a dispute between two commercial entities. It can be based on manufacturing issues, a stream of commerce issues, or price disputes. This is the most common type of arbitration.
  • Consumer: This involves a dispute between a buyer of goods or services and the seller or manufacturer.
  • Labor: This involves disputes surrounding employment and services rendered for an employer or contracting party. Labor arbitration includes rights arbitration, which states that a company has violated or misunderstood a term in a collective bargaining agreement, and interest arbitration, which helps to establish the resulting collective bargaining agreement.

Additionally, there are a variety of other types of arbitration that are known as such because of the way the arbitration is conducted. Examples include:

  • Med/Arb: This is a blend of mediation and arbitration. The parties will first agree to mediation, and if no settlement can be reached, they will submit the claim to arbitration. This is common in labor disputes.
  • Mandatory: Some states allow the courts to send a case to arbitration to resolve the case. This is usually for disputes under a set amount of money, such as $50,000.
  • Non-Binding Arbitration: This seems to undermine the definition of arbitration, but occasionally, parties will agree to use arbitration to be granted an advisory award. Usually, if the parties do not like the advisory award, the case will enter binding arbitration or move on to court.
  • High-Low: In a high-low case, the parties will agree to a bracket that establishes the highest and lowest amounts that they will pay. If the arbitrator’s award is below this bracket, the party that must pay will pay the lowest agreed-upon term. If the arbitrator goes above the term, the party will pay the highest agreed-upon price.
  • Baseball: Here, the parties will each choose an amount that they want, and the arbitrator must select one of the two figures.

Benefits and Drawbacks of Arbitration:

Arbitration is often a great choice for parties who are unable to achieve a settlement through other dispute resolution mechanisms to do so outside of court. It brings with it many advantages to the process, including:

  • Choosing the Arbitrator: In court, the judge is appointed to the case. In arbitration, the parties are often free to choose the arbitrator. This ensures that the parties have faith in the decisionmaker to be impartial and fair.
  • Spending Less: The relaxed nature of an arbitration allows the parties to save money in preparation, expert witnesses, and court fees. However, the parties will need to pay arbitrator’s fees, but this money is usually saved by the money not spent in other areas.
  • Saving Time: Because the process is flexible and dependent on the schedules of the parties rather than the court, the process is often faster than litigation.
  • Keeping the Dispute Private: Arbitration, unlike litigation, is not recorded publicly and allows the parties to keep the dispute and all arbitration proceedings private.
  • Finalizing the Dispute: Because the arbitrator issues an award, the dispute will have a final judgment and the parties can move on.

While these are some fantastic reasons to consider arbitration, it is also important to consider the drawbacks, including:

  • Losing the Ability to Appeal: There are very few reasons an award will be set aside, so challenges are often lost.
  • Considering More Evidence: Because arbitration is not bound by the rules of evidence, an arbitrator may consider evidence that would be inadmissible in court.
  • Splitting a Recovery: Because arbitrators can make decisions in fairness, they may rule that both parties are culpable and split who can recover.

Arbitration is a great dispute resolution mechanism that brings flexibility and a sense of control into the proceedings. However, it may not be the right mechanism is certain circumstances. Considering the definition, the process, and the benefits will help you make an informed decision about your case.

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Emily Holland
Emily Holland is a Contributing Editor at ADR Times. She is also a recent graduate of Pepperdine Caruso Law. While in law school, Emily served as an executive editor on the Pepperdine Dispute Resolution Law Journal and had the opportunity to learn about ADR from world-class professors of the Straus Institute for Dispute Resolution. She calls the city of Minneapolis home, and spends her free time running through the parks or searching for the best matcha from local coffee shops. Emily can be reached via email at [email protected]