Alternative Dispute Resolution Series: Arbitration
In our last post in the Alternative Dispute Resolution Series, we discussed the growing ADR industry and the basics of mediation. In this post, we’ll discuss the other very popular ADR method, arbitration.
In arbitration, a third-party neutral (arbitrator) hears both sides of a dispute and decides on a specific issue or award. Often, an arbitration is very similar to a trial, because the parties will present opening statements, evidence, witnesses, and closing statements. Witnesses are also generally subject to direct and cross examination. However, the biggest difference is that the arbitrator takes the place of the decision maker in a trial. After the arbitrator reviews the evidence and hears the case from both sides, he or she will issue a decision.
Arbitration is a method commonly used in international commercial disputes, consumer disputes, and employment law. It is also a method that courts use to try and resolve cases before resorting to trial. But the process of arbitration, including how parties come to arbitrate an issue, can vary.
Arbitration is either voluntary or mandatory. Mandatory arbitration is where parties must go to arbitration instead of going to court, because it is either required by a statute or the parties have previously agreed to it in a contract (and gave up their right to sue the party in court). In King County for example, civil, non-domestic suits in Superior Court that seek monetary relief in an amount less than $50,000 must go through mandatory arbitration before going to trial.
Binding v. Nonbinding
Arbitration can be either binding or nonbinding. A binding decision is where the parties are required to adhere to it and the courts can enforce it. In binding arbitration, the losing party has no recourse after the decision has been made (as opposed to a trial where a losing party can appeal the decision to a higher court). A nonbinding decision is where the parties can choose to continue the dispute in court and proceed to trial. Nonbinding arbitration usually occurs when courts try to resolve disputes without going to trial by requiring that parties go to arbitration. In King County Superior Court, mandatory arbitration is nonbinding, thus, the losing party in an arbitration can proceed to trial; however, that party may be on the hook for attorney fees and court costs if the it does not improve its position at trial.
Arbitration Clauses in Contracts
Many commercial contracts will include an arbitration clause. Parties include an arbitration clause in contracts to manage risk in the transaction and manage expectations if a dispute arises. For example, Microsoft does business in all fifty states and all over the world. In their Master Services Agreement, Microsoft has a binding arbitration clause. Without a binding arbitration clause in their agreement, they could be caught in costly trials and never-ending appeals in all states. But with a binding arbitration clause, they can reasonably expect that disputes will be resolved in a cost-effective, time-efficient manner. Most businesses will have an arbitration clause or a similar ADR clause to manage their risks in doing business.
Simple arbitration clauses state that parties give up the right to sue in court and agree to arbitrate in a specific venue under the laws of a specific state. More comprehensive arbitration clauses will include terms to determine how to select the arbitrator and might govern the process of arbitration in detail (such as which rules of evidence and procedure will apply).
Pros and Cons of Arbitration
Arbitration can be a cheaper and faster way to resolve a dispute. The process can also be simpler and less costly than a trial. Even though parties may give up the right to a trial (if they agree to mandatory, binding arbitration) and will be stuck with whatever decision an arbitrator makes, many lawyers advise their clients that the advantages outweigh the disadvantages and include binding arbitration clauses in their contracts.
If you would like for us to review your contracts or if you have questions on how to resolve your dispute, please contact us or schedule a consultation today. You may reach us at (206) 745-5229 or to send us an email at email@example.com.
Photo: Santhosh Rajangam | Flickr