Arbitration is one method of dispute resolution that is available in the private sector and employed by some courts throughout the world. In Lake County, arbitration is mandatory on all civil cases seeking money damages between $10,000-$50,000. Small Claims cases where a jury demand has been filed are also subject to mandatory arbitration. Only lawsuits filed in the Lake County Circuit Court can be heard in the Lake County arbitration program. Arbitrators are not always lawyers, and are usually not judges. While the parties can request arbitrators with certain qualifications, there are no guarantees about the training and experience of the person who will preside over case. If anyone seeks arbitration through a reputable organization like the American Arbitration Association, prospective arbitrators are sent to the parties in a panel list with an opportunity to strike those who are objectionable.
So, when two parties are tied with the arbitration process to solve any sort of problem and in the middle of resolving it if any party wants to change the condition then both the parties have to work through it and that’s how the arbitration process works.
What is arbitration?
Arbitration is a means to resolve a civil dispute without the need to go to trial. In arbitration, a neutral third person (called an “Arbitrator”) will hear the testimony and review the evidence presented and then render an unbiased decision. Arbitration is less formal than a trial, and the rules of evidence are not as strict.
“An arbitration is the reference of a dispute or difference between not less than two parties for determination, after hearing both sides in a judicial manner, by a person or persons other than a court of competent jurisdiction” (Aiyer, P. Ramnatha, 2006).
“Arbitration” has been defined as -”Arbitration is a reference to the decision of one or more persons, either with or without an umpire, of a particular matter in difference between the parties” (Jhunjhunuwal, S. M., 2006).
Arbitration and Conciliation Act, 1996 provides for judicial intervention in the following cases:-
-Making reference in a pending suit [Section 8].
-Passing interim orders [Section 9].
-Appointment of arbitrators [Section 11].
-Terminating mandate of arbitrator [Section 14(2)].
-Court assistance in taking evidence [Section 27].
-Setting aside an award [Section 34].
-Enforcement of an award by way of decree [Section 36].
-Entertaining appeals against certain orders [Section 37].
-Directing delivery of award [Section 39(2)].
-Reference of a dispute to arbitration in insolvency proceedings [Section 41].
Types of arbitration:
There are two main types of arbitration: compulsory and voluntary.
- Compulsory arbitration, opposing parties submit their dispute to one or more impartial persons, called arbitrators, for a final and nonbinding decision. Either party may reject the ruling and request a trial in court.
- Voluntary arbitration is a process in which opposing parties choose one or more arbitrators to hear their dispute and submit a final, binding decision.
Arbitrations can be either “binding” or “non-binding,” and are generally referred to as “Judicial” or “Contractual.”
- Judicial Arbitration is an Alternative Dispute Resolution (“ADR”) mechanism utilized by the California state courts whereby cases that fit a certain criteria are court-ordered to complete. Additionally, parties can elect or stipulate to proceed with binding or non-binding judicial arbitration (California Rules of Court Rules 3.810 – 3.830, 2012).
- In contrast, Contractual Arbitration is required by a pre-dispute contract whereby the parties agree that in the event of a dispute, resolution will be controlled through binding arbitration rather than litigation (California Rules of Court Rules 3.810 – 3.830, 2012).
Laws regarding arbitration:
- Arbitration, a form of alternative dispute resolution (ADR), is a legal technique for the resolution of disputes outside the courts, where the parties to a dispute refer it to one or more persons (the “arbitrators”, “arbiters” or “arbitral tribunal”); by whose decision (the “award”) they agree to be bound. It is a settlement technique in which a third party reviews the case and imposes a decision that is legally binding for both sides (Sullivan, arthur; Steven M. Sheffrin, 2003).
- Internationally accepted principles of law governing contractual relations (Sullivan, arthur; Steven M. Sheffrin, 2003).
- Parties shall be legal subjects, according to both the civil law and the public law (Sullivan, arthur; Steven M. Sheffrin, 2003).
- State Court shall be the state court whose jurisdiction covers domiciles of defendants (Sullivan, arthur; Steven M. Sheffrin, 2003).
What are some of the benefits of arbitration?
The number-one benefit of arbitration is that it serves as a forum to resolve disputes outside of the judicial system. Arbitration can be fast, quick and easy, whereas lawsuits can drag on for years and years. Since the rules of evidence and procedure are usually relaxed in arbitration proceedings, the parties are also in a better position to represent them without having to get lawyers involved.
It naturally follows that arbitration also tends to be less expensive than pursuing a lawsuit. While the parties will usually end up having to pay the arbitrator, his or her fees will inevitably be less than the attorneys’ fees that they may have to pay to take the same case to trial.
Even in non-binding arbitration, a benefit can be that it serves to bridge the gap in an adversarial proceeding so that the parties can get a better glimpse of where things are headed if they are unable to resolve their differences. Most cases settle, but many times it is not until the parties are “on the courthouse steps.” Non-binding arbitration may help to facilitate a settlement sooner rather than later.
Another good thing about arbitration is that an arbitrator is typically not bound by the strict rules of procedure in reaching a decision. He or she can consider a lot more facts and circumstances than a judge or jury. Arbitrators typically try to be practical and oftentimes look at compromise as being inherently fair. Thus, the likelihood is that an arbitrator’s decision will award something to at least one of the parties. However, you would not expect that damages would be awarded that were anywhere near what a jury might have awarded if (and that is a big if) the matter were to have been tried before a jury.
Arbitration can also bring finality. Sometimes for the better, a decision on a binding arbitration cannot be appealed or overturned in the absence of a showing of extraordinary circumstances (for example, fraud, bias or other inappropriate actions on the part of the arbitrator). Thus, once a decision is rendered, the case is over. The losing party will typically not be able to appeal (which can make the matter drag on for years and years) (Lawyers.com, 2011).
What are some of the drawbacks of arbitration?
There are no guarantees that arbitration will be a fair process. As noted, once a decision is rendered in a binding arbitration, the parties are generally stuck with that decision. Without the right to appeal, there is always the risk of being subject to the whims and prejudices of the arbitrator. Overall, this is probably the biggest drawback to the arbitration process.
Identifying other drawbacks will typically depend upon which side of the fence you are on. For example, if a party were concerned about a large jury verdict in the event a dispute ever arose, that party would negotiate for an arbitration clause so as to keep things out of court if a dispute happens to arise. For example, in view of the potential for a large jury verdict on a wrongful termination case, this might explain why an employer would want an arbitration clause in an employment contract. Given the potential for a large jury award on a malpractice action, this would also help to explain why a medical provider would want a patient to sign an arbitration clause.
Ironically enough, the rationale for having an arbitration clause in the first place may actually encourage parties to fight about something where a dispute otherwise could have been avoided. In the absence of an arbitration clause, the parties may be more inclined to compromise rather than pursue an expensive lawsuit. If arbitration is an option, though, there may not be the same deterrents and the parties may simply elect to fight about something rather than try to work out their differences more informally (Lawyers.com, 2011).
An arbitration clause is a commonly used clause in a contract that requires the parties to resolve their disputes through an arbitration process. 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 (Wikipedia, 2012).
In the 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 “separability 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, 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 (Wikipedia, 2012) and substantive unconscionability where the contract limited the damages the employee could recover through arbitration.
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 (Wikipedia, 2012), while arbitration agreements with consumers are only considered valid if they are signed (Wikipedia, 2012), and if the signed document does not bear any other content than the arbitration agreement (Wikipedia, 2012). 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.
The New Arbitration Act
The new Arbitration Act was enacted on 29 April 2002 and came into force on 30 April 2002. The new Act replaced the Arbitration Act B.E. 2530 (1987), which was criticized because it did not accord with the principles of international arbitration law and the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration, which has been widely accepted and recognized as a prototype for international arbitration law. Therefore, a significant consideration behind the new Act was to adopt the UNCITRAL Model Law as a basis for the core development of the arbitration system in Thailand in order to keep pace with other developed economies.
The new law was also drafted for the explicit purpose of encouraging the settlement of disputes in international civil and commercial matters through the arbitration process. In this regard, the new Arbitration Act sets the same standard for enforcement of both domestic and international arbitrations, in order to promote investment at both domestic and international levels. As such, under the new Act, when an award is enforced in Thai courts, parties and judges do not have to apply a double standard differentiating between domestic and international arbitral awards (Thailand Law Forum, 2012)
Why is an arbitration clause being proposed?
If you are being asked to sign a contract, always look to see if there is an arbitration clause. If there is enough at stake in the contract, you should question why it makes sense to have such a clause in there. If the potential benefits outweigh the potential drawbacks, it would make sense to agree to arbitration. Otherwise, you may want to propose that it be taken out (Lawyers.com, 2011).
Are personal rights involved?
In a strictly business or consumer situation, arbitration may make a lot of sense. However, it may be a different situation where other rights are involved that could potentially have a devastating effect on you personally in the event of a dispute. Examples would include anything having to do with your job or with professional services that might be rendered to you (Lawyers.com, 2011).
Am I in the position to negotiate with respect to the arbitration clause?
In theory, all contracts are negotiable. However, the practical ability to do so depends on the bargaining position of the parties. If you are a consumer, for example, you may not have much choice other than to “take it or leave it” in many contracts that you are being asked to sign. In other situations, such as buying a house or negotiating an employment contract, you may have a large say in the matter (Lawyers.com, 2011).
Would you benefit from arbitration?
This is where you have to pull out your crystal ball. Try to anticipate the nature of any disputes that would arise. Would you want to resolve them quickly and easily through arbitration with the associated risks (for example, the potential for limited damages, no right to appeal, the difficulty of assessing the fairness of the process)? (Lawyers.com, 2011).
Would I be in a better position to fight a court battle than the other side?
This is sort of a ruthless way to look at the situation. In a business deal, though, you may not want to give the other side a right to arbitrate if you would be in a better position to stick it out in a court battle. The flip side, of course, is that you may very well want to agree to arbitration if your best chance at resolving any disputes that arise is going to be through getting to arbitration as quickly and inexpensively as possible (Lawyers.com, 2011).
What do I have to lose by agreeing to arbitration?
The answer to this question depends upon the nature of the dispute that might arise and what your remedy might be. If you are giving up an opportunity to go to court on an injury where a large jury verdict might result in your favor, you may not want to agree to arbitration. Even though the cost of going to court would be tremendous, attorneys are more inclined to take cases on a contingency-fee basis where jury verdicts can be obtained. Primary examples would include personal injury and employment law matters (Lawyers.com, 2011).
What does the arbitration clause cover?
Arbitration clauses have evolved to be rather sophisticated and complex. You should read each sentence carefully and try to understand it. Sometimes the concept of arbitration may make sense but the clause itself can be too overbearing. The opposite may likewise be true. If the clause does not make sense to you, you may want to hire a lawyer to go over it with you prior to your signing the contract (Lawyers.com, 2011).
What is excluded from the arbitration clause?
Many arbitration clauses will exclude certain things, such as a request for an injunction. In such cases, either party would be entitled to go to court to seek relief from the behavior that they would like stopped. These exclusions may make sense in a lot of situations, but you should still be sure to try to read and understand them before agreeing to arbitration (Lawyers.com, 2011).
What would I do in the event of a dispute?
This is a good final question to ask you during the course of reviewing the clause. If you cannot perceive what you would be required to do now, it is not going to make any more sense down the road when a dispute actually arises. If, for example, a clause provides for arbitration through the American Arbitration Association, you could call the nearest office and find out more of what would be involved (Lawyers.com, 2011).
So, it is clear that a contract bearing ‘arbitration clause’ binds the parties to arbitrate with each other in case of any dispute out of the contract and no party can seek remedy without exhausting the Arbitration Procedure embedded in the contract. And we should also remember that Arbitration can be a good thing, but this is not always the case. Asking the right questions will help us decide if you should agree to an arbitration clause or if you should try to negotiate our way out of it. Keep in mind that we are potentially giving up the very important rights to a trial before a judge and jury so there should be good reasons for us to want to agree to arbitrate.
A Redfern and M Hunter, Law and Practice of International Commercial Arbitration 4th Edition (2004)
Aiyer, P. Ramnatha, The Law Lexicon- The Encyclopedic Law Dictionary, Wadhwa, Nagpur, 2nd Edition, Reprint 2006.
American Arbitration Association, 1633 Broadway, Floor 10, New York, NY 10019. Internet http://www.adr.org (visited on Feb 20, 2012)
Jhunjhunuwal, S. M., Justice; Saraf Dr. B. P., Justice, Law of Arbitration And Conciliation,show White, Fourth Edition, 2006.Publications Pvt. Ltd.
http://alternative-dispute-resolution.lawyers.com/arbitration/Arbitration.html (visited on Feb 20012)
http://en.wikipedia.org/wiki/Arbitration_clause (visited on Feb 22, 2012)
http://www.thailawforum.com/articles/newarbitration.html (visited on Feb 21, 2012)
http://www.pwc.com/arbitrationstudy (visited on Feb 19, 2012)