Arbitration: Dispute Resolution Outside the Courts

James L. Knoll

Arbitration is a dispute resolution process that is an alternative to trying your dispute in the court system with a judge and jury. If you have recently retained a stock broker to sell securities, purchased or sold a new house with the assistance of a realtor, bought a new car or opened a bank account, the small print of your contract likely contains a dispute resolution clause requiring all disputes to be arbitrated. More and more businesses seeking to control litigation costs and the size of verdicts are requiring customers to resolve disputes via arbitration. Several industries have gone so far as to establish their own dispute resolution rules and procedures. For example, the National Association of Securities Dealers (NASD) has established its arbitration procedures under the Federal Arbitration Act and state arbitration laws. After a 1987 decision by the United States Supreme Court affirming arbitrations in the broker-dealer/customer relationship where the parties had signed a contract containing a pre-dispute agreement to arbitrate, pre-dispute arbitration clauses have been included in consumer contracts with much more frequency.

Arbitration has existed for many years (the Federal Arbitration Act was passed in the 1920s, and the Uniform Arbitration Act written in 1955 has been adopted in some form by over 40 states). The courts both under the Federal Act and the various state acts have enforced arbitration agreements in contracts.

Why should you arbitrate? If you signed a contract containing an arbitration clause, you likely have little choice. Courts quite regularly uphold arbitration agreements. There are exceptions, but those are rare.

Arbitration has been used internationally in large commercial disputes for many years. Its supporters contend that arbitrations : 1) Are less expensive than resolving disputes through the judicial system; 2) Are thought to produce a resolution of the dispute faster than the court system; and 3) Achieve results that are apt to be commercially reasonable in complicated cases because each dispute is resolved by a panel of impartial persons who are likely to be knowledgeable about the areas of dispute.

Unlike the jury system, the arbitrators are selected because of their experience and expertise in the area of the dispute and quite often bring to the table a wealth of knowledge regarding the controversy. On occasion, the arbitrators are familiar with the parties and may have had past dealings with the them. The courts and Jurors, on the other hand, usually know little about the commercial issues and practices in dispute and have very little knowledge about the parties to the dispute. In smaller matters, like the ones involving most comsumers face, this may not always be the case.

The down side of arbitrations is that they can be expensive both in the fees paid to the agency setting up the arbitration and the fees paid to the arbitrators. While courts have a minimal filing fee and trial fees, the time of the judge, judicial staff and jurors is free to the litigants. Arbitrators get paid for their time.

Also, at times the arbitration process may not seem faster than the court system. Arbitrations were intended to limit the amount of pre-hearing discovery and motions surrounding the dispute that take place in court cases. Yet, as the use of arbitration has grown, more and more we see discovery and motions similar to those used in the court system. Fees paid to arbitrators for their participation in the arbitration can range from a low of $500 per hearing (usually a half day) to substantial daily fees. If three arbitrators are used, each arbitrator is paid a fee-- tripling the cost. While the parties usually split these fees, the agreement or rules under which one is arbitrating the dispute may provide otherwise. The fees may be allocated by the arbitrators to one party depending upon the outcome and the agreement or rules governing the arbitration.

Arbitration, unlike the court system, is a private dispute process. Court files are public and usually available to anyone wanting to know what you are doing. Arbitration files are not readily available to the public and rarely do arbitration awards appear in the newspapers. The arbitration hearing is also usually closed to the public. One reason for commercial entities using arbitration is to maintain some degree of privacy surrounding their disputes. The obvious exceptions are arbitrations involving a public body or large cases having a significant impact on an industry or government.

In most cases, the person with a grievance wants the grievance resolved. Under the rules of arbitration there is a method for filing a claim for adjudication of the grievance. Once the complaint is filed, the administrator of the arbitration process takes over, including assisting the parties in the selection of the arbitrators.

Arbitration differs from the Court System in several respects. The parties can select the person or persons who will decide the case. If an Arbitration administrator has been agreed upon in the contract documents, this group will often provide a list of potential arbitrators from which the parties are to choose. Some of these groups are the American Arbitration Association, JAMS, and USA&M. Of course, the parties can always choose other persons to act as the arbitrator if all sides agree to that person or persons.

The typical discovery practice is also limited and controlled by the arbitrators. The court system provides for broad investigation into the allegations and defenses asserted by the parties. The arbitration rules limit that right to investigate the other party's claims or defenses.

The Revised Uniform Arbitration Act permits parties to amend, waive or alter many of the requirements governing their arbitration. While the intent of the Act is to provide a default formula for the conduct of the arbitration proceeding, the parties have autonomy to alter that formula. Parties can agree to more discovery if they choose. They may also agree to a motion practice. However, there are a few provisions that cannot be waived. For instance, the arbitration agreement cannot include unconscionable provisions in violation of law.

While the arbitration hearing is formal, it is not as formal as a court hearing. Rules of evidence are usually relaxed and the atmosphere of the hearing room less imposing. However, the rules of evidence often carry substantial weight in arbitrators' decision making.

The decision of the arbitrators is binding and final. Unlike a court decision, there are very limited grounds for an appeal challenging an award. The Uniform Arbitration Act provides that a complaining party must establish that an award was procured by "corruption, fraud or other undue means", or that there was "evident partiality, corruption or misconduct by an arbitrator. Overturning an award has been extremely difficult.

Arbitrating consumer complaints is not necessarily a bad thing. However, the consumer should be aware if that requirement is a part of the contract. Those merchants who check their contracts may not be willing to deal with a customer who attempts to delete the arbitration clause. Some consumers may not choose to abandon their right to a jury trial.

Indeed, some arbitration clauses in consumer contracts have been found by the courts to be unenforceable because the arbitration restraints are very one sided and unfair to the consumer. However, successful challenges are few, and challenges can be expensive. Make sure the arbitration clause in any contract you sign is one you can or want to live with.