Arbitration

Arbitration refers to the hearing and adjudication of a dispute by an impartial third party or parties (referred to as neutrals or “arbitrators”) selected and authorized by the parties to resolve their dispute. An arbitrator’s authority to decide a dispute depends entirely on the agreement of the parties. Thus, in selecting arbitration as a means for resolving disputes, the parties not only select the arbitrator (or agree upon a method for choosing an arbitrator), but also determine the scope of the disputes the arbitrator will be authorized to decide and the rules or procedures to be followed by the arbitrator in deciding a matter.

As a practical matter, the parties seldom spell out the rules to be followed by the arbitrator themselves, but instead rely upon rules developed over the years by either dispute resolution organizations, such as the American Arbitration Association, the Center for Dispute Resolution, the International Chamber of Commerce, etc., or model rules for such disputes, such as UNCITRAL. Further, businesses often decide upon an organization to administer the arbitration (i.e., to assist with the selection and management of the arbitrator and dispute process), rather than to submit a matter for ad hoc arbitration by an individual arbitrator operating independently.

The basic elements of arbitration are: (1) a third-party decision-maker chosen by the parties (2) a mechanism to ensure neutrality in the decision (3) an opportunity for the parties to be heard. and (4) a binding decision. In most arbitration cases, an agreement to arbitrate is included in a clause in the contract governing the parties. Generally, mandatory arbitration clauses are held to be enforceable.

Historically, arbitration has been considered to be faster and less expensive than litigation. Further, by permitting the parties to select the arbitrator, arbitration can provide some assurance that the decision-maker will have knowledge and/or experience related to the subject matter of the dispute and avoid the risk of an unfavorable or unsuitable judicial assignment and/or jury.