RESOLVING CIVIL DISPUTES THROUGH ARBITRATION

By Mary Jo Shartsis

1. INTRODUCTION

Arbitration is an informal process by which a dispute between two or more parties is submitted to an impartial third-party (known as an “Arbitrator”), for resolution on the merits based on the evidence presented at a hearing. Arbitration is normally a matter of contract and is therefore consensual. However, arbitration is utilized more and more frequently by courts as an involuntary means of dispute resolution. Arbitrators are professional and business people who are selected to assist in the informal resolution of disputes because of their knowledge, expertise and reputation for fairness and impartiality. Lawyers frequently serve as arbitrators because of their legal and substantive knowledge in many different areas. Other professionals and business persons also serve as arbitrators, and sometimes a combination of lawyers and other professionals act as co-arbitrators depending upon the particular case.

Arbitration can be either binding or non-binding. Normally, where parties agree by contract to submit their disputes to arbitration, the decision of the arbitrator is binding, and the arbitration award can be filed in a court and enforced as any other judgment of the court. If the arbitration is a judicially ordered involuntary procedure, normally it is not binding and either party can elect to proceed with a formal court trial after the procedure has been completed.

2. ARBITRATION BY AGREEMENT OF THE PARTIES

When parties enter into a contract, they frequently provide that any dispute that may arise under the contract will be resolved by arbitration. Even in the absence of a pre-existing agreement to arbitrate, the parties may at any time agree to submit any dispute to arbitration. Normally, the parties select the rules that will govern the arbitration procedure as well as the organization that will administer the arbitration at the time of the initial contract. (A commonly used arbitration provision is included in the Appendix to these materials.)

There are several organizations that provide arbitration services. A commonly used organization is the American Arbitration Association (“AAA”). The AAA has developed specialized rules for the arbitration of disputes in particular subject matter areas. For example, there are rules governing the arbitration of “commercial” disputes, “construction” industry disputes, “securities” disputes and “employment” disputes. (Additional specialized rules are identified in the Appendix to these materials.) The rules for each of these subject matter areas have been tailored to address the issues that commonly arise in such disputes.

In addition to the AAA, there are other organizations offering specialized arbitration services, such as the New York Stock Exchange and the National Association of Securities Dealers. If the parties have not designated in their contract a particular organization or particular rules to govern the arbitration, the courts will designate an arbitrator at a party’s request, and the statutes or rules governing arbitrations conducted by that court will be applied.

The parties may agree to waive arbitration and proceed to have their dispute resolved in court. If, however, either party desires arbitration, the agreement to arbitrate is specifically enforceable. A court may not entertain a claim over the objection of a party to an agreement that provides for arbitration, and the court will enter an order commanding the parties to arbitrate their dispute in accordance with the agreement at either party’s request.

3. JUDICIALLY ORDERED ARBITRATION

Many courts have developed their own arbitration programs and automatically assign selected types of cases, or cases that have a specified dollar amount, to arbitration pursuant to the court’s arbitration rules as a preliminary to further court proceedings. The purpose of assigning a case to a preliminary judicial arbitration is to give the parties the benefit of a neutral third party’s view of the merits of their case and a supervised means of resolving the controversy quickly and at a substantially lower cost than a court trial. This kind of arbitration is not binding on the parties, and the outcome of the arbitration is not admissible in evidence if either of the parties refuses to be bound by the arbitration award. The rules governing the arbitration as well as the selection of arbitrators vary depending upon the particular court in which the arbitration is ordered. However, the procedures followed by the courts are, in general, very similar to the procedures discussed below.

4. THE ARBITRATION PROCESS

When a dispute arises, the party desiring a formal resolution of the dispute simply notifies the organization specified in the parties’ agreement, or, if none is specified, files a petition in court to have an arbitrator appointed. The process is formally commenced either by completing a printed form provided by the organization designated by the contract, by submitting to the organization a letter stating the nature of the claim, the relief sought and identifying the names and addresses of the adverse and other interested parties or by filing a petition for appointment of an arbitrator in court containing this information. The party initiating the arbitration is referred to as the “Claimant.” The designated organization then notifies the party against whom relief is sought (referred to as the “Respondent”) that a claim has been submitted for arbitration and provides a copy of the statement of claim. If an organization has not been designated in the agreement, local court rules will govern the balance of the procedures to be used.

Upon receipt of the notice of a claim, the Respondent may deny or otherwise respond to the claim and may assert any counterclaims it might have against the Claimant. A copy of the response and any counterclaim is then provided to the Claimant, and the organization or court thereafter administers the process of selecting an arbitrator or, in some cases a panel of three arbitrators, who will hear and decide the controversy. The organization or court also establishes dates and procedures for hearing the dispute that meet the needs of the parties. In more complex cases, preliminary hearings may be conducted by the arbitrator or arbitrators in order to expedite the final hearing and narrow the issues to be resolved.

The selection of the arbitrator is administered by the designated organization or the court, and the procedure that is followed varies with the organization or court. Each organization and each court maintains a list of qualified arbitrators. In an arbitration conducted by the AAA, the administrative staff normally provides the parties with a list of potential arbitrators who have expertise in the subject area involved in the dispute. The parties then have an opportunity to assert any objections they may have to any person on the list and to indicate which arbitrators are acceptable to them. If the parties are unable to agree, the AAA appoints the arbitrator.

Once the arbitrator is selected, the arbitrator sets a mutually agreeable hearing date. ON the date set for the arbitration each of the parties appears with or without an attorney and presents its side of the dispute to the arbitrator. Each party has an opportunity to present its witnesses, to cross-examine the other party’s witnesses and to submit documentary evidence. A transcript of the proceedings may be made at the parties’ request. The rules of evidence are generally not applicable, and the arbitrator has discretion to admit or exclude any evidence. The parties are usually permitted to submit written arguments before or after the hearing. The extent to which pre-hearing and post-hearing briefing is permitted, however, is at the sole discretion of the arbitrator.

Because the principal purpose of arbitration is to provide an expeditious and inexpensive means of resolving disputes, pre-trial procedures that would be available if the claim were asserted in court generally are not available. Thus, the testimony of witnesses is not taken in advance of the hearing. While it is not unusual for there to be an exchange of documents or other information prior to the hearing, any exchange of documents or information is generally controlled by the arbitrator.

At the conclusion of the hearing the arbitrator formally closes the proceeding and takes the dispute under submission. Under the rules of arbitration adopted by most organizations, the award of the arbitrator is subsequently submitted to the parties in writing within a set period of time, usually 30 days. The award of the arbitrator is rarely, if ever, given at the hearing with the parties present. In making an award, the arbitrator is not bound to follow the law unless the arbitration agreement specifically requires the application of a particular law or laws. The arbitrator may therefor consider substantive law and principles of equity as well as rules of trade, custom or usage. The arbitrator is not required to, and usually does not, give a reason or explanation for the award.

5. FINALIZING THE ARBITRATION AWARD

In a binding arbitration, once the decision of the arbitrator has been submitted to the parties, any party may petition the court for an order approving, correcting or vacating the award. The court may vacate or correct the award under very limited circumstances. Otherwise, the court must approve the award, and once approved, the award has the force of a judgment of the court in which it is entered. The grounds for appeal of the judgment are extremely narrow. For all intents and purposes, once an award has been made by an arbitrator and a judgment on the award entered by the court, the decision is final and binding.

In a non-binding arbitration, such as an involuntary, judicially ordered arbitration, any party may reject the arbitrator’s award and proceed with formal judicial process. However, if both parties accept the award, it may be entered as a judgment of the court in the same manner as in binding arbitration.