ARBITRATION
The submission of a dispute to an unbiased third person designated by the parties to the controversy, who agree in advance to comply with the award—a decision to be issued after a hearing at which both parties have an opportunity to be heard.
Arbitration is a well-established and widely used means to end disputes. It is one of several
kinds of ALTERNATIVE DISPUTE RESOLUTION, which provide parties to a controversy with a choice other than litigation. Unlike litigation, arbitration takes place out of court: the two sides select an impartial third party, known as an
arbitrator; agree in advance to comply with the
arbitrator’s award; and then participate in a
hearing at which both sides can present evidence
and testimony. The arbitrator’s decision is usu-
ally final, and courts rarely reexamine it.
Traditionally, labor and commerce were the
two largest areas of arbitration. However, since
the mid-1970s, the technique has seen great
expansion. Some states have mandated arbitra-
tion for certain disputes such as auto insurance
claims, and court decisions have broadened into
areas such as SECURITIES, antitrust, and even
employment discrimination. International busi-
ness issues are also frequently resolved using
arbitration.
Arbitration in the United States dates to the
eighteenth century. Courts frowned on it,
though, until attitudes started to change in 1920
with the passage of the first state arbitration law,
in New York. This statute served as a model for
other state and federal laws, including, in 1925,
the U.S. Arbitration Act, later known as the Fed-
eral Arbitration Act (FAA) (9 U.S.C.A. § 1 et
seq.). The FAA was intended to give arbitration
equal status with litigation, and, in effect, cre-
ated a body of federal law. After WORLD WAR II,
arbitration grew increasingly important to
labor-management relations. Congress helped
this growth with passage of the TAFT-HARTLEY
ACT (29 U.S.C.A. § 141 et seq.) in 1947, and over
the next decade, the U.S. Supreme Court firmly
cemented arbitration as the favored means for
resolving labor issues, by limiting the judiciary’s
role. In the 1970s, arbitration began expanding
into a wide range of issues that eventually
included PRISONERS’ RIGHTS, MEDICAL MAL-
PRACTICE, and consumer rights. In 2003, all 50
states had modern arbitration statutes.
Arbitration can be voluntary or required.
The traditional model is voluntary, and closely
linked to contract law: parties often stipulate in
contracts that they will arbitrate, rather than lit-
igate, when disputes arise. For example, unions
and employers almost always put an arbitration
clause in their formal negotiations, known as
collective bargaining agreements. By doing so,
they agree to arbitrate any future employee
grievances over wages, hours, working condi-
tions, or job security—in essence, they agree not
to sue if disagreements occur. Similarly, a pur-
chaser and a provider of services who disagree
over the result of a business deal may submit the
problem to an arbitrator instead of a court.
Mandatory arbitration is a more recent phe-
nomenon. States such as Minnesota, New York,
and New Jersey have enacted statutes that force
disputes over automobile insurance claims into
this forum. In addition, courts sometimes order
disputants into arbitration.
In theory, arbitration has many advantages
over litigation. Efficiency is perhaps the greatest.
Proponents say arbitration is easier, cheaper, and
faster. Proponents also point to the greater flex-
ibility with which parties in arbitration can fash-
ion the terms and rules of the process.
Furthermore, although arbitrators can be
lawyers, they do not need to be. They are often
selected for their expertise in a particular area of
business, and may be drawn from private prac-
tice or from organizations such as the American
Arbitration Association (AAA), a national non-
profit group founded in 1926. Significantly,
arbitrators are freer than judges to make deci-
sions, because they do not have to abide by the
principle of stare decisis (the policy of courts to
follow principles established by legal precedent)
and do not have to give reasons to support their
awards (although they are expected to adhere to
the Code of Ethics for Arbitrators in Commer-
cial Disputes, established in 1977 by the AAA
and the AMERICAN BAR ASSOCIATION).
These theoretical advantages do not always
hold up in practice. Even when efficiency is
achieved, some critics argue, the price is a lower
quality of justice, and it can be made worse by
the difficulty of appealing an award. The charge
is frequently made that arbitration only results
in “splitting the baby”—dividing awards evenly
among the parties. The AAA roundly rejects this
claim. Yet even arbitrators agree that as arbitra-
tion has become increasingly formal, it some-
times resembles litigation in its complexity. This
may not be an inherent problem with the
process as much as a result of flawed use of it.
Parties may undermine arbitration by acting as
lawyers do in a lawsuit: excessively demanding
discovery (evidence from the other side), calling
witnesses, and filing motions.
Ultimately, the decision to use arbitration
cannot be made lightly.Most arbitration is con-
sidered binding: parties who agree to arbitration
are bound to that agreement and also bound to
satisfy any award determined by the arbitrator.
Courts in most jurisdictions enforce awards.
Moreover, they allow little or no option for
appeal, expecting parties who arbitrate to
assume the risks of the process. In addition,
arbitration is subject to the legal doctrines of RES
JUDICATA and COLLATERAL ESTOPPEL, which
together strictly curtail the option of bringing
suits based on issues that were or could have
been raised initially.
Res judicata means that a final judgment on
the merits is conclusive as to the rights of the
parties and their privies, and, as to them, oper-
ates as an absolute bar to a subsequent action
involving the same claim, demand, or CAUSE OF
ACTION. Collateral estoppel means that when an
issue of ultimate fact has been determined by a
valid judgment, that issue cannot be relitigated
between the same parties in future litigation.
Thus, often the end is truly in sight at the con-
clusion of an arbitration hearing and the grant-
ing of an award.
The FAA gives only four grounds on which a
court may vacate, or overturn, an award: (1)
where the award is the result of corruption,
FRAUD, or undue means; (2) where the arbitra-
tors were evidently partial or corrupt; (3) where
the arbitrators were guilty of misconduct in
refusing to postpone the hearing or hear perti-
nent evidence, or where their misbehavior prej-
udiced the rights of any party; and (4) where the
arbitrators exceeded their powers or imperfectly
executed them so that a mutual, final, and defi-
nite award was not made. In the 1953 case Wilko
v. Swan, 346 U.S. 427, 74 S. Ct. 182, 98 L. Ed. 168,
the U.S. Supreme Court suggested, in passing,
that an award may be set aside if it is in “mani-
fest disregard of the law,” and federal courts have
sometimes followed this principle. Public policy
can also be grounds for vacating, but this
recourse is severely limited to well-defined pol-
icy based on legal precedent, a rule emphasized
by the Supreme Court in the 1987 case United
Paperworkers International Union v. Misco, 484
U.S. 29, 108 S. Ct. 364, 98 L. Ed. 2d 286.
The growth of arbitration is taken as a
healthy sign by many legal commentators. It
eases the load on a constantly overworked judi-
cial system, while providing disputants with a
relatively informal, inexpensive means to solve
their problems. One major boost to arbitration
came from the U.S. Supreme Court, which held
in 1991 that AGE DISCRIMINATION claims in
employment are arbitrable (Gilmer v. Inter-
state/Johnson Lane Corp., 500 U.S. 20, 111 S. Ct.
1647, 114 L. Ed. 2d 26).Writing for the majority,
Justice BYRON R. WHITE concluded that arbitra-
tion is as effective as a trial for resolving employ-
Arbitration Clause
Contractual Arbitration Clause
Standard Business
ARBITRATION. The Parties agree that any claim or dispute between them or against any agent, employee, successor, or assign of the other, whether related to this agreement or otherwise, and any claim or dispute related to this agreement or the relationship or duties contemplated under this contract, including the validity of this arbitration clause, shall be resolved by binding arbitration by the American Arbitration Association (or name other firm providing arbitration services, i.e., National Arbitration Forum), under the Arbitration Rules then in effect. Any award of the arbitrator(s) may be entered as a judgment in any court of competent jurisdiction.
