Alternative Dispute Resolution -- Part II: Arbitration
In this second installment1
of our series discussing alternative dispute resolution, we discuss a
forum frequently required in form contracts including construction
projects and insurance agreements, among others.
Arbitration is the private, judicial resolution of a dispute. In
an arbitration, rather than litigating their dispute in a court of law,
the disputing parties delegate their power to decide the dispute to one
or more arbitrators. Dissimilar to voluntary settlement agreements
reached in mediation or after negotiations, the arbitrator(s) decision
is, generally, final and binding.
independent third-party (“the arbitrator”) reviews and presides over an
abbreviated presentation of the parties’ positions. The independent
third-party in an arbitration hearing may be simply one arbitrator or a
panel of arbitrators. An arbitration panel typically consists of
three arbitrators but any number of arbitrators may be utilized as set
forth in the arbitration agreement ‒ usually, there is an odd number of
arbitrators on the panel in the interest of avoiding a tie.
Commencement of Proceedings
Arbitration is usually initiated by the request of one
party (the “claimant”). Although the process of arbitration
differs among cases, the following is a summary of the main events or
steps one can expect to occur in an arbitration proceeding:
Arbitrators are appointed in one of three ways: (1)
directly by the disputing parties; (2) by other existing Arbitrator
panel members (e.g. each side appoints one arbitrator and then the two
arbitrators jointly appoint a third arbitrator); or (3) by an external
party or association (e.g., the court, the Better Business Bureau or the
American Arbitration Association).
Once selected, the arbitrator(s) will typically conduct a
pre-arbitration meeting with the parties and legal counsel, to identify
the issues and discuss the process, rules and timetable for the
arbitration hearing. The claimant sets out a summary of the matters in
dispute and the remedy sought in a “statement of claim.” The statement
of claim informs the responding party (the respondent) what needs to be
resolved or answered. It summarizes the claimant’s allegations, but does
not include the evidence through which the allegations may be proven.
The “statement of response” from the other party (the “respondent”) is
to admit or deny the claimant’s allegations. The respondent may also
assert a counterclaim, which in turn requires a reply from the claimant.
The arbitrator(s) may allow the parties to conduct
discovery through interrogatories and/or depositions, but discovery is
usually limited in scope and breadth as compared to litigation. At
a minimum, each party will identify and list all relevant documents in
their control. The parties may then ‘inspect’ the discovered documents
and agree upon a selection of documents for the arbitrator(s). The
documents are exchanged and given to the arbitrator(s) to review prior
to the hearing.
Generally speaking, an arbitration typically involves a
hearing at which the parties put forward their respective cases while
the arbitrator listens and considers any oral statements by the parties
or their counsel, physical evidence, and witness testimony, asking for
clarification of certain allegations or positions.
A hearing may be avoided if the parties agree that the
issues can be dealt with entirely from the evidentiary documents.
In that case Counsel for the respective parties will submit to the
arbitrator a summary of their evidence, the applicable laws, and what
they request to be the ruling. These submissions may be made orally, in
writing, or both.
Subsequent to the hearing, the arbitrator is charged with
reviewing all of the relevant documents, statements, testimony and other
information, and then making the decision (called the “award”).
The arbitrator will write the award which may include a summary of
the proceedings and basis for the decision (a “reasoned” award) or
simply state the final ruling without rationale (a “summary” award).
Pros and Cons
As is the case with any forum utilized to resolve conflict,
there are pros and cons to arbitration. Proponents of arbitration point
to a number of advantages it may offer over trials and court
hearings. By agreeing to the general procedure and tending to
substantially participate in the presentation of their position, the
parties may find themselves working together peaceably rather than
litigating with increasing hostility as often arises in formal court
Generally, arbitration tends to be faster than a court
proceeding: it typically takes between 12 to 15 months to resolve a
dispute in arbitration compared to taking 18 months to three years to
resolve the dispute by trial before a judge and a jury.
Additionally, unlike court proceedings, which must be calendared and
structured into the court’s trial and work-day schedules, arbitrators
can work with the parties to be flexible in scheduling and the
presentation of the evidence.
Another “pro” is that arbitration proceedings are generally
held in private. And parties sometimes agree to keep the proceedings
and terms of the final resolution confidential. Both of these safeguards
can be a boon if the subject matter of the dispute might cause some
embarrassment or reveal private information, such as a company's client
Being aware of the possible “cons” of arbitration may help
you make an informed decision regarding whether to arbitrate a dispute.
For example, a binding arbitration decision is extremely hard to
overturn on appeal. If the arbitrator's decision is unfair or illogical,
the losing party may well be stuck with it and barred forever from
airing the underlying claim in court.
Another concern is that the process of choosing the
arbitrator(s) is not an objective one. One side or the other may
advocate for a certain arbitrator, especially where the possible
arbitrators are drawn from a discrete pool of potential decision-makers.
Additionally, an arbitrator chosen by a party within an industry may be
less objective, and more likely to be biased in favor of the commercial
As mentioned, the fact that arbitration hearings are
generally held in private ‒ although typically considered a benefit ‒ in
some situations this very lack of transparency may render the process
more likely to be tainted or biased.
Finally, while there is general agreement that arbitration
is less costly than litigation, its costs are increasing. According to a
recent survey by Public Citizen, a consumer watchdog group, the cost of
initiating an arbitration is significantly higher than the
cost of filing a lawsuit: $6,650 to $11,625 to initiate a consumer
claim worth $80,000 in arbitration versus $221 to file that same action
in a particular county court. Add to that the arbitrator's fees --
multiplied by three if a panel is involved -- and the process appears to
be less of a bargain.
Arbitration now appears to be the method of choice in form
contracts signed by consumers and merchants, internet providers and
e-merchants, as well as construction contracts and employment/labor
disputes. In North Carolina, matters before the superior court are
required to undergo mediation; however, arbitration may be substituted
for mediation by the agreement of the parties.
You should contact an attorney of your choice before
determining if arbitration is suitable for your dispute or if you find
yourself in an arbitration proceeding. Our seasoned attorneys at
Marshall, Roth & Gregory have substantial experience in arbitration
and have also served as arbitrators in certain matters.
Other Recent Articles