Arbitration is a method of resolving disputes that provides an alternative to traditional litigation in a court. Instead of a judge, a panel of arbitrators hears and decides cases. Typically, there are one or three arbitrators whom the parties have chosen. Like a judge would, the arbitrators read the papers submitted by the parties, hear arguments, and review the evidence before they make their decision, which is usually called an award. The arbitrators' decision is final and binding on the parties and can be enforced by a court if necessary. The parties cannot appeal the arbitrators' award, but in very limited circumstances it can be challenged in court.
How are Arbitration and Litigation Different?
Both arbitration and litigation aim to resolve disputes fairly, and in broad strokes the processes are similar - both parties present their side of the controversy to a neutral decisionmaker who reaches a conclusion about the matter. Beyond the broad strokes, however, are several important differences. These differences include the following:
- Arbitration is typically faster and cheaper than litigation - although not always.
- Arbitration is a private process, while litigation is public. All of the materials submitted to the arbitrators, as well as the final decision, are typically confidential. Court proceedings and opinions, on the other hand, are public, although there are avenues in place to protect confidentiality when the court can be persuaded that confidentiality is appropriate.
- Because of their private nature, arbitration decisions cannot usually be relied on as precedent, unlike court opinions. This can be an advantage for a party who wants to avoid a previous ruling that might support the opposition, or who wants to guard their privacy. But it can also lend cover to one who has committed the same wrong against multiple claimants who aren't aware that others have been down the same road before them. After all, if all of the victims of a fraud, for example, don't know that a party has perpetrated the same scam over and over, they cannot join together and increase their leverage.
- As a general rule, the parties cannot appeal an arbitration award. This rule lends an immediate finality to an arbitration proceeding. On the other hand, court decisions can be appealed, and the appeals can add years to the life of a particular case, especially if the appellant is successful and the appellate court orders a new trial. This is one reason why arbitration tends to be cheaper than litigation. However, when a decision is truly incorrect or unjust, the difficulties in an appeal are a distinct disadvantage.
- Arbitration typically avoids the motion practice and discovery disputes (that is, disagreements about what evidence the parties have to give each other) that can plague litigation and be a sinkhole for time and money. This is a definite plus for arbitration.
- The arbitrators often have experience in the relevant industry for which they hear cases, unlike judges.
- The parties can choose the arbitrators and the forum where the case will be heard, while the freedom to make these choices is much more limited in the court system. While this can be an advantage for arbitration, it can be a disadvantage in the case of certain arbitration forums where the arbitrators may have a tendency to favor businesses over consumers.
- Arbitration is a more informal process than litigation, and rules of procedure and evidence are less strictly applied.
How Does a Case Get to Arbitration?
A case only goes to arbitration when both parties agree to it. However, parties sometimes learn the hard way that they have agreed to arbitrate disputes unawares. This result stems from the increasing practice of including arbitration clauses in many, many agreements that the average person signs. An arbitration clause is a paragraph in a contract stating that the parties to that contract agree to take their disagreements to arbitration. These clauses often appear in the sort of contracts that no one reads, in the fine print. Arbitration clauses are common in a variety of agreements, both between businesses and consumers, and between businesses and other businesses. They have become so ubiquitous that they are essentially boilerplate at this point - many include them and few know what they actually say.
Arbitration clauses are uniquely powerful. A carefully crafted arbitration clause allows a party to make significant decisions in its favor before any conflict ever arises. But this opportunity is wasted when an agreement to arbitrate is treated almost as an afterthought, or when the thought process is no more than to follow the herd. A well-written, precisely-drawn arbitration agreement can specify, for example:
- Who the arbitrators will be;
- What the forum and venue for arbitration will be;
- What state's law will apply;
- Which party will pay costs and attorneys' fees;
- What timeframes and rules will apply; and
- What disputes must be arbitrated.
Consider - the presumption is that each party will pay its own costs and attorneys' fees. But in an arbitration agreement, the party who prepares the agreement can sometimes shift those costs onto the other party. An arbitration agreement can also state that even disputes about whether the parties must proceed to arbitration are to be decided by the arbitrator, which can help get the case sent to arbitration if the other party attempts to litigate.
How Do Arbitration Outcomes Compare to Litigation?
Courts generally favor enforcing arbitration. For instance, if a consumer sues a bank for mishandling his money, if included, the bank is likely to file a motion to compel arbitration on the basis of an arbitration clause contained in paperwork the consumer signed when he opened his account. It is likely that the court will grant such a motion and order the parties to arbitrate the case. In fact, most consumer contracts now contain arbitration provisions. Consumer advocates fear that these provisions leave consumers without an effective remedy for corporate wrongdoing by forcing them into private arbitration forums where business win more frequently. In fact, there is little research on how arbitration outcomes for consumers compare to litigation outcomes. However, according to a recent paper
from George Mason University examining a Consumer Financial Protection Bureau arbitration study, the CFPB's report shows that in consumer credit arbitrations consumers often get settlements or awards.
Consult a Tyler Arbitration Lawyer
To succeed as a consumer in arbitration, it is important to consult an attorney who understands the different forums and procedures used in arbitration. Often, litigation attorneys shy away from handling arbitrations because they lack familiarity with the process. But arbitration is not something to be feared. Call my office at 903-944-7537 for a consultation about your situation.
If you are a business owner, I strongly recommend that you review your contracts for arbitration clauses, and examine those provisions to be sure that you are getting the most out of them. Contact my office at 903-944-7537 to discuss how I can assist with this process.