What is Arbitration and Why Should You Care?

By Cole Cribari.

The general public almost never hears the word arbitration unless they’re watching news that involves a dispute between businesses, or they find themselves embroiled in a dispute where arbitration has been suggested or required as a method of settling the dispute. Arbitration has become commonplace—particularly in the employment context—around the world and in the State of Arizona where 99.2% of legal disputes are settled prior to trial. In fact, anyone reading this article has likely agreed to arbitration of disputes multiple times—purchasing and using a cell phone or credit card subjects you to an arbitration clause associated with those contracts.

What is Arbitration?

So, you were involved in a dispute with your employer. You thought about filing a lawsuit to settle the issue, but your employer points to a mandatory arbitration clause that was included as a condition of employment when you signed your employment contract. You will now have to participate in arbitration to settle your dispute. What does this mean exactly? The American Bar Association defines arbitration as “a private process where disputing parties agree that one or several individuals can make a decision about the dispute after receiving evidence and hearing arguments.” The “one or several individuals” are called arbitrators and they usually are a third-party agreed upon by all parties to arbitrate the dispute. Unlike mediation, an arbitration stands in the place of a trial, and the decision that an arbitrator makes has the same effect as if the dispute had been settled through a trial. However, arbitration can be either binding or non-binding. If it is non-binding, the decision the arbitrator makes at the end of the arbitration must be accepted by all members of the arbitration in order to be binding. Overall, arbitration is subject to an agreement between two parties and they may design the process how they choose. 

"Board Room - Vihula Manor Country Club & Spa" by Unique Hotels Group is licensed under CC BY-SA 2.0.

As for the actual process, arbitration will typically take place in a conference room, with all parties seated around the table. Parties may or may not have lawyers representing them and witnesses may or may not be called during the arbitration. Usually the arbitrator will explain that this is an informal proceeding and that his or her role will be to hear the evidence offered by each side and make a decision.

How are arbitrators chosen?

Most simply, parties can confer and agree upon a single arbitrator to settle a particular dispute. However, there are a few other ways in which arbitrators may be chosen.

“Strike” Lists

In other cases, parties may request what is called a “strike” list from a well-respected organization like the American Arbitration Association. The organization will usually present a list of seven to nine arbitrators, and then the parties will “strike” the names from the list that they do not want to arbitrate the dispute and list the remaining selections in order of preference. The arbitrator with the highest rank from both parties will be selected as the arbitrator for the dispute.

Arbitration Panels

While the specifics are subject to an agreement between the two parties involved in a dispute, parties may select a panel of arbitrators to choose from to settle any issue that arises while the parties are involved in an ongoing relationship. Panels are often used because each arbitrator on the panel has an area of expertise within the law, and they will be selected to arbitrate certain types of disputes. These panels might be appointed on an open-ended basis or for the life of the parties doing business together. If the panel is appointed on an open-ended basis, the parties tend to have an agreement on how to remove an arbitrator from the panel if they so choose.

What if an arbitrator is biased?

If an arbitrator is biased within a particular situation where they’ve been appointed, it could result in unfair results in the arbitration dispute resolution method. A recent Ninth Circuit Court of Appeals case ended with the court abandoning a decision reached by an arbitrator from the chosen arbitration group, JAMS. In that case, Monster tried to end its business contract with City Beverages, and City Beverages believed that Monster could not end the relationship without a particular reason for termination as according to a Washington law. Monster invoked an arbitration clause in their contract to resolve the dispute and appointed an arbitrator from JAMS—the agreed upon arbitration provider in the contract. The arbitrator found in Monster’s favor. However, when Monster went to have the award confirmed, City Beverages sought to have the decision vacated because the arbitrator did not disclose that he had an ownership interest in JAMS. According to the Ninth Circuit, “the arbitrator’s failure to disclose his ownership interest in JAMS, coupled with the fact that JAMS has administered 97 arbitrations for Monster over the past five years” created a reasonable possibility that the arbitrator was acting in his own interest as an owner of JAMS (to continue getting business from Monster) rather than as a neutral judge of the dispute. This case has brought up a lot of questions about whether arbitration organizations (like JAMS) should allow their arbitrators to own any part of the organization. Other arbitration organizations like the American Arbitration Association (AAA) do not allow their arbitrators to own any interest in AAA, and AAA is a not-for-profit organization. As a result of this case, it is likely that courts will keep a close eye on the ownership interests involved in arbitration organizations and how they might potentially bias arbitration.

What should you take away? 

Overall, most of us will never have to deal with an arbitration situation. However, it is good to know how arbitration works in case you ever find yourself sitting in a boardroom with someone announcing they will be the arbitrator for your dispute. Asking questions about the arbitrator in your dispute and how they were chosen could help in making sure your dispute is judged fairly.

For more information on biased arbitrators, Staff Writer Iris Lim discusses that topic here.