What is Arbitration?

Alternative Dispute Resolution via Arbitration

arbitrationArbitration is a form of alternative dispute resolution (ADR) in which an arbitrator or a panel of arbitrators renders a decision to resolve a dispute between parties. The arbitrator is a neutral third party who plays a role similar to that of a judge. However, the arbitration process is more relaxed and informal. Arbitration is generally a more efficient and less costly process than taking a dispute to trial.

Types of Arbitration

In Texas, arbitration may be binding or non-binding. Binding arbitration means that the arbitrator’s decision, with limited exceptions, is final. The arbitrator basically acts as judge and jury and the parties must abide by the decision. In non-binding arbitration, the parties may abide by the arbitrator’s decision. However, the parties are not bound by the decision, and a party who is dissatisfied with the arbitrator’s ruling can pursue other remedies, such as filing or proceeding with a lawsuit. Due to the lack of finality, non-binding arbitration is rarely used.

The Arbitration Process

Whether arbitration is binding or non-binding, the process is the same. The arbitrator will be selected in the manner agreed to by the parties, and will preside over and provide the rules and procedures for the arbitration process.

An arbitration hearing is similar to a trial, in that the arbitrator or panel listens to statements from the parties, reviews evidence, hears witness testimony, considers reports or testimony from experts, and renders a decision based on that evidence. However, it often takes place in a conference room vs a courtroom. Usually, the party who bears the burden of proof presents their arguments first. If the arbitration is binding, the arbitrator or panel will issue a ruling which is enforceable in court.

The key difference between this process and a courtroom trial is that the rules are relaxed. For example, evidence may be submitted to the arbitrator that might not be admissible in court, because the party lacked a technical foundation for the evidence or faced some other procedural obstacle. While a judge might rule the evidence inadmissible and not consider it or submit it to the jury, the arbitrator receives the evidence and makes a decision about how much weight to afford it.

The Difference Between Arbitration and Mediation

Mediation is another type of ADR, and it is not unusual for the terms “mediation” and “arbitration” to be confused, or the lines between the two processes blurred. Mediation differs significantly from arbitration, in that a mediator does not consider evidence and make a ruling, or even recommendation. Instead, a mediator attempts to facilitate an agreement between the parties. Any resolution that arises out of mediation is strictly voluntary, and is the result of a compromise between the parties.

Mandatory Arbitration Clauses

Arbitration has received some attention from the press over the past few years, as individuals and watchdog organizations alike have sought to bar or invalidate mandatory arbitration clauses in a variety of contexts. Earlier this year, the Consumer Financial Protection Bureau (CFPB) issued a rule that would block major corporations such as large credit card issuers from using mandatory arbitration clauses to prevent consumers from joining together to bring class action lawsuits against the companies. Many consumer protection organizations have argued that mandatory arbitration clauses make it difficult or impossible for consumers to effectively assert their rights.

So, Is Arbitration Good or Bad?

Arbitration offers several advantages when parties choose to make use of the process. For example:

  • When the issue to be resolved is technical or requires specialized knowledge, the parties can choose a qualified arbitrator, rather than relying on a judge who may not have the appropriate expertise.
  • Because of the relaxed rules of presentation and evidence, arbitration may be less time consuming and less expensive than trying a matter before a court.
  • The parties may choose to have the arbitration proceeding closed, and the evidence and testimony submitted during an arbitration hearing is not a matter of public record.

Problems with arbitration are more likely to arise when one party has far less bargaining power than the other, as in the case of consumer contracts which not only mandate arbitration, but may limit the options for choosing an arbitrator to services that regularly do business with and have a financial stake in maintaining good relations with the company.

Do I Need an Attorney for Arbitration?

The more relaxed nature of the arbitration proceeding makes it easier and more inviting for a party to proceed without an attorney. However, there are several reasons that a party—particularly an individual or small business owner—might want to consider hiring an attorney to represent him or her in arbitration:

  • A party who is unfamiliar with the legal process may overlook important evidence, inadvertently weakening his case.
  • Although the arbitrator will gather and consider all evidence, the clarity and organization with which it is presented will impact his or her perception of the case.
  • If the other party is represented by an attorney or is a corporate representative accustomed to arbitration, the individual may find himself at a disadvantage in the proceeding.
  • Arbitration involving employment contracts tends to be very complex and require compliance with strict rules. Failure to adhere to the rules can result in a waiver of rights.

If you are considering arbitration or are facing mandatory arbitration of a dispute, consulting with an experienced attorney in advance will better equip you to make good decisions about how to proceed, including whether you may need legal representation at the arbitration hearing.