“An Arbitration clause is a judicial process and it is a form of ADR. The dispute referred by the third party who decides the ultimate decision” Discuss.

Introduction:

An   Arbitration clause is a judicial process and it is a form of ADR[1].The dispute referred by the third party who decides the ultimate decision. There should be some law of contract in this arbitration clause. The medication of the dispute brings out after the adoption of all the conditions embedded in the procedure. No one can get the result from this after exhausting the procedure. So all the parties who are directly involved in the clause should obey the rules of the arbitration clause. As the parties accept the contract conditions before accepting it so the parties need to obey all the conditions. Draining the conditions are negligible and punishment could take place for this.

Arbitration

Arbitration means the settlement of a dispute by referring the dispute to a third party and abiding by his decision. Arbitration is less costly than a suit in a court of law. It is also more expeditious. For that reason, commercial contracts frequently contain a clause proving for a reference to arbitration in case a dispute breaks out concerning any matter relating to the contract.[2]

Arbitration clause is the centerpiece of this assignment. . An arbitration clause is a commonly used clause in a contract that requires the parties to resolve their disputes through an arbitration process[3]. Although such a clause may or may not specify that arbitration occur within a specific jurisdiction, it always binds the parties to a type of resolution outside of the courts, and is therefore considered a kind of forum selection clause. [4][5]

 Arun kuman sen and Jetendra kumar mitra stated the definition of arbitration clause almost the same manner their book commercial and industrial law.

They said “An arbitration agreement means “a written agreement to submit present or future differences to arbitration, whether an arbitrator is named therein or not.

The arbitration agreement or the arbitration clause is an agreement is sometimes called “SUBMISSION”. This letter term was used in the acts relating to arbitration in India prior to the act of 1940.In the corresponding English act the term “Submission” is used. While arbitration agreements with consumers are only considered valid if they are signedand if the signed document does not bear any other content than the arbitration agreement. The restriction does not apply to notarized agreements, as it is presumed that the notary public will have well informed the consumer about the content and its implications.[6][7]

 Understanding of arbitration clause:

There are few prime elements of arbitration clause which are very important to understand the depth of the clause. They are given below:[8]

 1. An arbitration agreement, to be valid and binding, must be in writing. Such an agreement must satisfy all the essential elements of a valid contract.

2. Signatures of the parties are not necessary but it must be shown that they agreed to the statement of disputes by arbitration. It is not necessary that the agreement should be contained in a formal document. The record of such an agreement in a clause in the contract or in a letter or memorandum is enough.

3. It is not necessary that the name of the person who will act as the arbitrator should be mentioned in the agreement.

4. The agreement may be to refer present references or possible future differences to arbitration.

5. When there is an arbitration clause in a contract and the contract comes to an end owing to frustration or is avoided on the ground of fraud or misrepresentation, the arbitration clause may continue to be binding, but if the parties were not ad idem, if there was no contract at all, the arbitration clause is not binding.

6. The agreement to refer disputes to arbitration is not valid if it lacks the essential elements of a contract.

7. The construction of an arbitration agreement is not to be thwarted by narrow pedantic interpretation.

 Now I want to put a light in the policy of arbitration clause in United States. The federal government has expressed a policy of support of arbitration clauses, because they reduce the burden on court systems to resolve disputes. This support is found in the Federal Arbitration Act, which permits compulsory and binding arbitration, under which parties give up the right to appeal an arbitrator’s decision to a court. In Prima Paint Corp. v. Flood & Conklin Mfg. Co., the U.S. Supreme Court established the “reparability principle”, under which enforceability of a contract must be challenged in arbitration before any court action, unless the arbitration clause itself has been challenged.

Furthermore, arbitration clauses are often combined with geographic forum selection clauses, and choice-of-law clauses[9], both of which are also fully enforceable. The result is that a plaintiff may find himself or herself compelled to arbitrate in a strange private forum thousands of miles from home, and the arbitrators may decide the case on the basis of the law of a state or a nation which the plaintiff has never visited.

An arbitration clause may nevertheless be challenged and held invalid if it designates a biased party as the arbitrator. In Graham v. Scissor-Tail, Inc, 623 P.2d 165 (Cal. 1981), for example the Supreme Court of California found that an arbitration clause in a contract of adhesion which necessarily puts disputes before a body that would tend to be biased towards the defendant, is unduly oppressive, and therefore void as unconscionable. For this reason, many arbitration clauses designate widely recognized neutral organizations such as the American Arbitration Association.

Other terms may void an arbitration clause. In Armendariz v. Foundation Health Psychcare Services, Inc., 24 Cal 4th 83 (2000), a California appellate court held that a one-sided arbitration clause in a contract of adhesion for employment (deemed a necessity) may also be voided as unconscionable because of the relative positions of the parties involved. In that case, the court found there to be procedural unconscionability where an employee was held to arbitration but the employer was not (in other words, the agreement lacks mutuality of obligation, although, in Federal Court, the United States Court of Appeals for the Eighth Circuit has ruled the exact opposite on mutuality of obligation), and substantive unconscionability where the contract limited the damages the employee could recover through arbitration.[10]

Some legal orders exclude or restrict the possibility of arbitration for reasons of the protection of weaker members of the public, e.g. consumers. E.g., German law excludes disputes over the rental of living space from any form of arbitration, while arbitration agreements with consumers are only considered valid if they are signed, and if the signed document does not bear any other content than the arbitration agreement. The restriction does not apply to notarized agreements, as it is presumed that the notary public will have well informed the consumer about the content and its implications.

Another important aspect of this assignment is law of contract to describe this complex issue.

Let’s explain what does a contract means in context of law. A contract is an agreement, based on consensus between legal subjects with contractual capacity, which is legal, physically possible and complies with the prescribed formalities and which is reached with the intention of creating a legal obligation with resultant rights and duties.

 Law of contract:

The Law of Contract has existed from the beginning; even Adam had a verbal contract with God, ‘watch over the Garden of Eden’.

It has existed since the beginning of organized society, and forms one of the oldest branches of law relating to transactions of all kinds. Just as the safety of persons and property depends upon Rules of civil and criminal law, security and stability of the business world depends upon the Law of Contracts.

With a philosophy of personal liberty in the United States, the Law of Contract becomes one of the main supports of the structure of the private enterprise system. The rights to secure acquire, and dispose of property is protected by the Law of Contract.

The Law of Contract[11] in modern terms could be defined as ‘an agreement containing a promise enforceable in law.

The four component parts of a contract are:

1) Agreement, offer and acceptance,

2) Mutuality and consideration,

3) Competent parties, and;

4) A legal objective.

In a contract, if no time is specified for the performance of an act, a reasonable time is allowed. The reasonable time may be longer than one of the parties contemplates, but under the conditions which do not specify time; it is still a viable contract.

If time to perform is really not a factor, one could include in the contract language the following. (‘Time is of the essence)

T here is a difference between ‘fact’ and ‘law’. ‘Fact’ is sometimes used in opposition to ‘Law’. We believe the following will help the reader to see these differences between ‘fact’ and ‘law’.

A) Questions of ‘fact’ are for a jury, and questions of ‘law’ are for courts.

B) ‘Fact’ is an event; ‘Law’ is a principle.

C) ‘Fact’ is actual , ‘Law’ is conceived.

D) ‘Fact’ is that which has been according to, or in contravention of the rule, ‘Law’ is a rule of duty.

Two classes of persons are limited in their capacities to make a contract, these are:

1) Those possessing mental capacity, and;

2) Those possessing mental capacity, but lacking legal capacity ie: minors, infants, different languages, etc.

Contracts provide that an agreement entered into must be between competent parties, meaning that all persons who are to be parties to a contract are presumed to be competent. Any person can contract without any restrictions except those mentioned.

 Characteristics of contracts:

Contracts are classified by characteristics[12] which they possess, and they consist of these characteristics/titles:

A) Formal or Simple (informal);

B) Express or Implied (Quasi);

C) Bilateral or Unilateral;

D) Valid, Voidable, Unenforceable.

The 4 types of contracts listed above are explained below on an individual ‘character’ basis.

A) Formal or Simple:

a) A Formal Contract is a promise enforceable in law, it is a contract in written form which is signed and sealed.

b) A Simple (informal) Contract is those contracts which do not require a seal. Simple (informal) contracts are called ‘parole’ contracts. ‘Parole’ as defined means ‘oral or verbal’, like (Adams’ was with God).

When we speak of Formal versus Simple (informal), we are distinguishing the difference between a Formal Contract which is written, signed, and sealed, and a Simple (informal) Contract which is verbal or oral.

B) Express or Implied (Quasi):

a) A Quasi Contract is an obligation to do something imposed upon someone by ‘law’, but bearing the force of a contract.

Therefore, one could then assume that a Quasi Contract acts as an obligation ‘as if’ it were a contract, or at least an obligation analogous to a contract.

Example: Not having all the ingredients of a contract, but treated by law as a contract, such as the Social Security Act.

C) Bilateral or Unilateral:

a) A bilateral contract is one which is to be performed by each party at some future time. A bilateral contract involves two promises, one by each party to the contract.

b) A unilateral contract consists of a promise for an act, the acceptance by each party to the performance of the act requested, rather than the promise to perform it.

 Advantages and disadvantages of arbitration clause:

Parties often seek to resolve their disputes through arbitration because of a number of perceived potential advantages[13] over judicial proceedings:

• when the subject matter of the dispute is highly technical, arbitrators with an appropriate degree of expertise can be appointed (as one cannot “choose the judge” in litigation)
• arbitration is often faster than litigation in court
• arbitration can be cheaper and more flexible for businesses
• arbitral proceedings and an arbitral award are generally non-public, and can be made confidential
• in arbitral proceedings the language of arbitration may be chosen, whereas in judicial proceedings the official language of the country of the competent court will be automatically applied
• because of the provisions of the New York Convention 1958, arbitration awards are generally easier to enforce in other nations than court judgments
• In most legal systems there are very limited avenues for appeal of an arbitral award, which is sometimes an advantage because it limits the duration of the dispute and any associated liability.
• There are no public records of the proceedings. Confidentiality is required of the arbitrator and by agreement the whole dispute and the resolution of it can be subject to confidentiality imposed on the parties, their experts and attorneys by so providing in the arbitration agreement.[14]

 Some of the disadvantages[15] of this clause include:

• arbitration may become highly complex
• arbitration may be subject to pressures from powerful law firms representing the stronger and wealthier party
• arbitration agreements are sometimes contained in ancillary agreements, or in small print in other agreements, and consumers and employees often do not know in advance that they have agreed to mandatory binding pre-dispute arbitration by purchasing a product or taking a job
• if the arbitration is mandatory and binding, the parties waive their rights to access the courts and to have a judge or jury decide the case
• In some arbitration agreements, the parties are required to pay for the arbitrators, which add an additional layer of legal cost that can be prohibitive, especially in small consumer disputes^.
• in some arbitration agreements and systems, the recovery of attorneys’ fees is unavailable, making it difficult or impossible for consumers or employees to get legal representation^, however most arbitration codes and agreements provide for the same relief that could be granted in court
• if the arbitrator or the arbitration forum depends on the corporation for repeat business, there may be an inherent incentive to rule against the consumer or employee
• there are very limited avenues for appeal, which means that an erroneous decision cannot be easily overturned
• although usually thought to be speedier, when there are multiple arbitrators on the panel, juggling their schedules for hearing dates in long cases can lead to delays
• in some legal systems, arbitrary awards have fewer enforcement options than judgments; although in the United States arbitration awards are enforced in the same manner as court judgments and have the same effect
• arbitrators are generally unable to enforce interlocutory measures against a party, making it easier for a party to take steps to avoid enforcement of member or a small group of members in arbitration due to increasing legal fees, without explaining to the members the adverse consequences of an unfavorable ruling
• Rule of applicable law is not necessarily binding on the arbitrators, although they cannot disregard the law^.
• discovery may be more limited in arbitration or entirely nonexistent
• the potential to generate billings by attorneys may be less than pursuing the dispute through trial
• Unlike court judgments, arbitration awards themselves are not directly enforceable. A party seeking to enforce an arbitration award must resort to judicial remedies, called an action to “confirm” an award
• Although grounds for attacking an arbitration award in court are limited, efforts to confirm the award can be fiercely foughtthus necessitating huge legal expenses that negate the perceived economic incentive to arbitrate the dispute in the first place.

Conclusion:

After having a wide analysis of arbitration clause we can say that the conditions under any contract are one of the major parts of the clause. So the rules should abide by the parties. Conditions are needed to be fulfilled by the parties to get the result of the dispute. Otherwise the result or remedy of the dispute wouldn’t come out as the conditions embedded in the contract were agreed by the parties..

Bibliography

• Sen.K.A.,Mitra.J.K.(1966)) Commercial law and industrial law (7^th ed.) The World Press Private Limited.
• http://en.wikipedia.org/wiki/Arbitration_clause.
• K.Arun.,Mukherjee.S. Commercial Law (ed.).The World Press Private Limited.
• http://www.ca8.uscourts.gov/opndir/09/12/083448P.pdf
• To be correct: A certain form, as defined by statute, of an electronic signature using a chip card and a PIN code is also sufficient
• Section 1031 subesction 5 of the Zivilprozessordnung.
• Sen.K.A.,Mitra.J.K.(1966)) Commercial law and industrial law (7^th ed.) The World Press Private Limited.(Pg-500)
• http://en.wikipedia.org/wiki/Arbitration_clause
• Lawofcontracts,http://www.ira-wg.com/library/contract.html http://www.ibblaw.co.uk/downloads/brochures/2010-05-27-13-47-20-the_benefits_of_an_arbitration_clause.pdf
• http://alternative-dispute-resolution.lawyers.com/arbitration/Arbitration.html[1]http://www.cre.org/images/MY08/presentations/The_Advantages_And_Disadvantages_of_Arbitration_As_Compared_to_Litigation_2_Mazirow.pdf