Think twice before agreeing to arbitrate. By asking yourself a few questions, you can make an intelligent decision as to whether or not arbitration of a dispute will be in your best interest.
The Basics
What is arbitration?
The essence of arbitration is that it is an agreement between two or more parties to try to resolve a dispute outside of the court system. The parties agree upon a third party as an arbitrator who will act as a judge and jury. After giving the parties the opportunity to present their side of the story and to present any relevant documents or other evidence, the arbitrator will act as King Solomon to decide who wins and who loses.
There are usually no set rules as to how arbitration is conducted. It is typically left to the agreement of the parties. To facilitate the process, though, the parties will oftentimes agree to use the rules of an established organization like the American Arbitration Association.
There can be binding and non-binding arbitration. A "binding" arbitration generally means that the winning party can take an arbitration award to a court of law and enforce it if the losing party does not comply with the terms of the decision.
"Non-binding" arbitration refers to a situation where the parties agree to use arbitration as a forum to try to resolve their differences, but neither party is bound to comply with any decision by the arbitrator.
What are some of the benefits of arbitration?
The number-one benefit of arbitration is that it serves as a forum to resolve disputes outside of the judicial system. Arbitration can be fast, quick and easy, whereas lawsuits can drag on for years and years. Since the rules of evidence and procedure are usually relaxed in arbitration proceedings, the parties are also in a better position to represent themselves without having to get lawyers involved.
It naturally follows that arbitration also tends to be less expensive than pursuing a lawsuit. While the parties will usually end up having to pay the arbitrator, his or her fees will inevitably be less than the attorneys' fees that they may have to pay to take the same case to trial.
Even in non-binding arbitration, a benefit can be that it serves to bridge the gap in an adversarial proceeding so that the parties can get a better glimpse of where things are headed if they are unable to resolve their differences. Most cases settle, but many times it is not until the parties are "on the courthouse steps." Non-binding arbitration may help to facilitate a settlement sooner rather than later.
Another good thing about arbitration is that an arbitrator is typically not bound by the strict rules of procedure in reaching a decision. He or she can consider a lot more facts and circumstances than a judge or jury. Arbitrators typically try to be practical and oftentimes look at compromise as being inherently fair. Thus, the likelihood is that an arbitrator's decision will award something to at least one of the parties. However, you would not expect that damages would be awarded that were anywhere near what a jury might have awarded if (and that is a big if) the matter were to have been tried before a jury.
Arbitration can also bring finality. Sometimes for the better, a decision on a binding arbitration cannot be appealed or overturned in the absence of a showing of extraordinary circumstances (for example, fraud, bias or other inappropriate actions on the part of the arbitrator). Thus, once a decision is rendered, the case is over. The losing party will typically not be able to appeal (which can make the matter drag on for years and years).
What are some of the drawbacks of arbitration?
There are no guarantees that arbitration will be a fair process. As noted, once a decision is rendered in a binding arbitration, the parties are generally stuck with that decision. Without the right to appeal, there is always the risk of being subject to the whims and prejudices of the arbitrator. Overall, this is probably the biggest drawback to the arbitration process.
Identifying other drawbacks will typically depend upon which side of the fence you are on. For example, if a party were concerned about a large jury verdict in the event a dispute ever arose, that party would negotiate for an arbitration clause so as to keep things out of court if a dispute happens to arise. For example, in view of the potential for a large jury verdict on a wrongful termination case, this might explain why an employer would want an arbitration clause in an employment contract. Given the potential for a large jury award on a malpractice action, this would also help to explain why a medical provider would want a patient to sign an arbitration clause.
Ironically enough, the rationale for having an arbitration clause in the first place may actually encourage parties to fight about something where a dispute otherwise could have been avoided. In the absence of an arbitration clause, the parties may be more inclined to compromise rather than pursue an expensive lawsuit. If arbitration is an option, though, there may not be the same deterrents and the parties may simply elect to fight about something rather than try to work out their differences more informally.
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