Arbitration Law

Arbitration law is based on a long history of an alternative dispute resolution process, known under English common law as “the law of merchants.”

While in its freest form arbitration is an agreement between private parties, some trade unions historically included mandatory arbitration clauses in agreements. In those instances, the tradesmen in that union or guild promised to submit all disputes to, and abide by decisions made by, a named adjudicator.

Arbitration in modern business law evolved into a more mandatory process. It is quite common for lawyers to insert arbitration clauses into legal documents, such as contracts, as a method of handling disputes outside a traditional courtroom setting.

As a practical matter, that means that the services of a contract attorney are crucial. We invite you to use our free research tool to find an affordable arbitration lawyer near you to help with any contract or business law concerns.

Why do parties prefer arbitration?

The answer to that question is a practical one: settling disputes through the formal court system is expensive and time-consuming. Arbitration eliminates the delay that exists in formal litigation. As arbitration lawyers become more involved, the costs associated with the process tend to increase but still remain significantly less than the costs of prolonged litigation.

In addition, arbitration is not as contentious as formal litigation. The arbitration practice evolved to preserve the goodwill between parties who wanted to continue doing business together.

Another advantage lies in the perception that, as a general rule, arbitration decisions are not published. The decisions remain confidential unless the private parties who entered into the arbitration agreement decide to make them publicly available.

Why is arbitration faster than litigation?

Arbitration lends itself to a speedier conclusion than litigation for several reasons. First, while the arbitrator and the judge both weigh evidence, the evidentiary rules are not as complex in arbitration. It is easier to enter exhibits into evidence.

Second, pre-trial discovery rules and procedures are often greatly reduced in arbitration. In practical terms, that means the paper chase back and forth between the parties for interrogatories, depositions, and requests for documents does not lead to the consumption of huge amounts of time that are so evident in litigation.

Third, many pre-trial issues regarding witnesses and evidence are handled by a phone call with the arbitrator.

How is arbitration different from judge-made decisions?

Unlike cases settled by the formal legal system, one arbitration case does not set a precedent for others that follow. Unlike disputes settled through lawsuits, arbitration is a private matter between parties, settled by the persons involved. Such settlements are based on the practices and mores of the business sectors involved.

In general, litigants in formal court proceedings have the right to appeal the judge’s decision. In binding arbitration, however, both parties agree to be bound by the arbitrator’s decision and give up the right to appeal. If the arbitration is not binding, either party may appeal the award from the arbitrator’s decision to court in an arbitration lawsuit.

In most cases, the parties to an arbitration agreement consent to evenly split the arbitrator’s fee and expenses. In some court cases, the judge may assess both litigation costs and attorneys’ fees of both parties against the losing party.

Are arbitration disputes really private?

Interestingly, arbitration rules generally require confidentiality from the arbitrator and the arbitration provider. Arbitration rules do not, however, require confidentiality from the parties. That requires a separate confidentiality agreement in the arbitration clause.

Retaining confidentiality of arbitration disputes becomes critical after the award. If either party challenges the award in court, judges do not like to seal court files. A tightly worded agreement can go a long way to preserving confidentiality, but it will not prevent outside parties from gaining information after an award appeal moves to the courtroom.

Of course, there are also instances when confidentiality yields to the public interest; for example, when the arbitration involves a:

• Public utility
• Publicly-traded company
• Consumer arbitration
• Medical malpractice under a health plan.

Arbitration parties must take precautions to protect trade secrets, sensitive personal or financial information, attorney work product, and attorney-client confidentiality. Such precautions should take the form of a protection order under the terms of the arbitration forum.

Parties may even want to forego the arbitrator including their reasoning behind the award. Including the arbitrator’s reasoning may divulge confidential information if the award later moves to court in an arbitration lawsuit demanding confirmation or on appeal.

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What kind of awards can arbitration yield?

Arbitration awards often result in one party paying money to the other party. Alternatively, the award may specify that one party stop a specific business practice or add a stimulus to an employment contract.

If a losing party refuses to follow the terms of an arbitrator’s award, the winning party may file a lawsuit in court to confirm the award. In practical terms, this means that the court may enforce the arbitrator’s award in the same way that it would enforce a judge’s order. Each state has rules on how to enforce an arbitration award.

What are the bases for appeal of a binding arbitration award?

An unhappy party to a binding arbitration award may appeal to the court system for one of the following reasons:

• The arbitrator exceeded the powers granted in the arbitration clause;
• The arbitrator’s conduct prejudiced one party;
• The contract containing the underlying arbitration clause is unenforceable;
• The arbitrator ruled in “manifest disregard of the law”;
• The prevailing party won by exerting fraud or coercion; or
• The arbitrator miscalculated the financial award.

When a party wins an appeal in arbitration, the award is null and void. The parties may then resolve their dispute in court rather than by resubmitting to arbitration.

There is no automatic right to appeal an arbitration award. The agreement between the parties must allow an appeal in order for it to go forward. For instance, the parties may agree to use the American Arbitration Association (AAA) for an appeal. Appeals, naturally, add expenses to the process. The AAA treats the appeal like a new case filing.

State laws and the Federal Arbitration Act also provide a few limited ways to vacate, modify, or correct an arbitrator’s award. Consultation with an attorney is appropriate if parties find they need to appeal an arbitrator’s award.

How does mediation compare to arbitration?

Mediation refers to the procedure in which the parties to a dispute arrange a meeting with a disinterested third party who is neutral to the dispute and impartial to the parties involved. The neutral person functions as the go-between to assist the parties in negotiations to find a solution to their disagreement.

Unlike judges and arbitrators, a mediator does not decide the dispute for the parties and has no power to impose a resolution. The mediator’s role is to help the parties resolve the dispute themselves by expressing their differences of opinion on the issue. By its nature, mediation is non-binding. The parties must agree to any decision on the issues.

If the mediation process does not result in a conflict resolution, then the parties may move to arbitration where the arbitrator has the authority to resolve the dispute and make an award.

What are the steps in mediation?

What is a typical mediation like? Like any productive meeting, there are five steps involved in resolving disputes and coming to a meeting of the minds:

• Step 1: The Introductory Meeting
• Step 2: The Statement of the Problem
• Step 3: Gathering the Necessary Information
• Step 4: Identifying the Problem
• Step 5: Bargaining Over the Problems

The introductory meeting means just that. The parties get together with the mediator for the first time. The mediator introduces themselves and gives assurance that the mediation session will be fair and neutral. The mediator may also give a preview of what the mediator gleaned about the problem from pre-mediation papers. The mediator will also layout the mediation process for the parties.

The Statement of the Problem step is when each party explains to the mediator what they think the problems are. Each side must be silent as the other side tells its story. Mutual respect for the other side’s opinion is a cornerstone of mediation. Mediation seeks reasonableness in resolution.

The Information Gathering step takes the form of the mediator seeking the facts and evidence that will help the mediator lead the parties to a reasonable conclusion.

During the Identification of the Problem step, the parties detail what they believe is the main issue.

The final step, Bargaining, is the meaty part of the mediation. The mediator may put a proposed settlement out for discussion. The parties then proceed to modify the proposed settlement until they can come to a reasonable resolution. In a particularly tense bargaining environment, the mediator may meet with each party individually to discuss proposed settlement options. Such private meetings are confidential between the negotiator and each party. The private discussions create a safe environment in which the parties can discuss the issues.

At its heart, mediation is another tactic for resolving disputes that put the parties in the driver’s seat and avoid the expenses and time consumed by a court trial.

Is mediation faster than arbitration?

Yes. Mediation is the appropriate first step because many times it is faster than arbitration.

In arbitration, the process is similar to a court proceeding in that the arbitrator listens to arguments and weighs evidence before presenting the decision. Arbitration may take several months while the arbitrator gathers the evidence and hears the arguments. The arbitrator will end the hearing when all the evidence is in which usually takes about a week. Then the arbitrator will take some time to come to the decision and make the award.

In mediation, there is no evidence and the mediator helps the parties negotiate toward a satisfactory conclusion of the dispute.

Both processes are faster than filing a lawsuit.

Are there downsides to mediation?

Yes. The most obvious downside to mediation occurs when one or both of the parties are adamant in their opinions on the dispute. Since the mediator has no power to impose a resolution, the process can drag on and become quite expensive. It is important to keep in mind that mediation only works if the parties commit to finding a reasonable resolution.

Mediation means one party will pay money and the other party is willing to get less in settlement than they would in court. If either party doesn’t accept that it should pay money at all, then mediation is not the right venue.

Mediation is also not the appropriate means of resolution if the parties base their complaint on a cherished principle. In that instance, no amount of negotiation that requires turning that principle aside in return for money will provide an acceptable position.

What are the downsides for arbitration?

Many contracts today contain arbitration clauses. This is especially true in employment contracts and some consumer areas. Arbitration often favors the large employer over the employee who needs a job or the manufacturer over a consumer who does not understand the rules of arbitration. These clauses are often mandatory for employees if they want to work for the corporation.

There also is no jury in arbitration. Juries are the great leveler in courtroom proceedings, created to avoid bias and unfairness.

In addition, the private setting for arbitration means that the award often goes without review by a court. Cases of bias or unfairness of the arbitrator may not come to light.

Further, arbitrators who make quality decisions can also charge high fees that would not be allowed in court. This is especially true in cases of employment law where arbitrators often charge substantial fees.

Furthermore, in non-binding arbitration, the parties may go to court for confirmation of the award or to revoke the award. In that case, the original arbitrator’s fees are added to the court costs of the subsequent litigation thereby increasing expenses.

Finally, having simpler evidentiary rules has a flip side: A judge may not allow some evidence in a courtroom that an arbitrator may allow in an arbitration hearing. Moreover, the evidence presented from a witness using documents means the witness is not available for cross-examination. In a court case, an attorney who faced the actual witness on the stand would cross-examine the testimony.

These instances make an arbitrator’s ruling unforeseeable at times. They may result in unorthodox resolutions as well.

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Which Way to Go: Arbitration Award or Settlement?

The resolution of an arbitration dispute may result from the arbitrator’s award or through a settlement between the parties. A settlement may take place through negotiation or by mediation. 

After an arbitrator issues an award, the responding party may ask a court to vacate the award; that is, challenge the award’s reasonableness. The court may issue an order vacating, modifying, or confirming the arbitrator’s award.

If the award is confirmed by the court, the award as issued by the arbitrator stands. In that instance, FINRA rules say that the industry party must pay the award within 30 days. 

As a defense, the broker may claim:

• Payment of the award in full;
• Agreement between the parties for payment installments;
• A timely filed motion to vacate or modify the award;
• An ongoing bankruptcy proceeding or that a bankruptcy court has discharged the award.

If the party does not pay the award assessed against it in a timely manner, FINRA may suspend or cancel the registration of the broker or brokerage firm.

What is FINRA?

The Financial Industry Regulatory Authority (FINRA) is a non-profit organization authorized by the US government to keep an eye on over 600,000 US broker-dealers and to protect investors. The organization seeks to ensure market integrity by its daily analysis of market transactions.

FINRA also provides a dispute resolution service for arbitration awards in accordance with rules set out by the Securities and Exchange Commission. FINRA makes an arbitration forum available but takes no part in the arbitration process.

The parties choose independent arbitrators to render the final decision and determine the award in any particular case. A three-arbitrator panel reviews the evidence, listens to the arguments, deliberates together, and renders its majority-based decision on whether the claimant is entitled to an award to settle his grievance.

Under FINRA’s arbitration rules, the arbitrator must set down the arbitration award in writing.  The arbitrator does not, however, have to include a reasoned opinion for the award. The FINRA rules permit parties to request a reasoned award if they desire, which then affects the arbitrator’s time frame to issue the award.

The arbitration award determines whether any party will suffer the assessment of costs and fees and how to allocate costs/fees among the parties. Awards are published and available for free on Arbitration Awards Online.

All FINRA awards are final and are not subject to appeal except in limited circumstances permitted by state or federal law.

What about arbitration clauses in employment agreements?

The law changed recently concerning arbitration clauses in employment agreements. On May 21, 2018, the US Supreme Court decided a case called Epic Systems Corp Vs. Lewis., No. 16-285.  That case stands for the idea that employment contracts requiring employees to arbitrate disputes as individuals do not violate the National Labor Relations Act.

For practical purposes, this means that employers can insert clauses in their employment contracts that, in essence, waive the employee’s rights to participate in a class action or other collective-type actions in court against the employer. Rather, the arbitration clause forces the employees to submit to individual arbitration.

The advantages to employers of the Epic Systems case may seem obvious.  Employers may want to consider all sides of the issue, however, as there are cons for employers on the employee contract issue presented by Epic Systems. For instance, the employer will have no right to appeal an arbitrator’s decision except in limited circumstances. Mistake of law or fact is not grounds for appeal as they are in a court proceeding.

It may sound grand to limit discovery, but limited discovery also means less information about the opponent’s case. Limited pre-trial motions in arbitration also mean the parties have two choices: move forward with the arbitration hearing or settle the dispute. In court, pre-trial motions sometimes mean the judge dismisses the case entirely before the trial even starts.

Arbitration, even mandatory binding arbitration, does not mean the employer escapes liability in all instances. Government agencies, such as the Equal Employment Opportunity Commission (EEOC) or the Department of Labor (DOL), are not prevented from instituting an investigation of an employee’s discrimination complaint. Neither are they prevented from imposing administrative charges or actions against an employer it finds in violation of the laws over which the agencies have jurisdiction.

If you’ve already signed a contract with an arbitration clause or want to know whether such a clause might be appropriate to include in contracts of your own, finding an arbitration attorney experienced in contract and business law may be essential. Use our free legal tool to find an experienced arbitration attorney in your area who can help.

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