– A more formal method of ADR
– An arbitrator hears a dispute and imposes a resolution on the parties
– It differs from other in that the third party hearing the dispute makes a decision for the parties
– Decision may be legally binding on the parties (or parties can also agree to non-binding arbitration)
– For legally binding, parties are obligate to abide by the arbitrator’s decision regardless of whether they agree with it.
– Almost any commercial matter can be submitted to arbitration
– Frequently, parties include an arbitration clause in a contract specifying that any dispute arising under the contract will be resolved through arbitration rather than through the court system
– The federal government and many state governments favor arbitration over litigation
– Federal Arbitration Act (FAA – 1925): federal policy favoring arbitration
– FAA does not establish a set arbitration procedure.
– FAA provides the means for enforcing the arbitration procedure that the parties have established for themselves
-Section 4 of FAA, allows a party to petition a federal district court for an order compelling (forcing) arbitration under an agreement to arbitrate a dispute
-Section 9 of FAA, the parties to the arbitration may agree to have the arbitrator’s decision confirmed in a federal district court. One party obtains a court order directing another party to comply with the terms
– FAA enforces arbitration clauses in contracts involving maritime activity and interstate commerce. Arbitration agreements involving transaction only slightly connected to the flow of interstate commerce may fall under the FAA
– Nearly all states follow the federal approach to voluntary arbitration.
– Adopted Uniform Arbitration Act (drafted by NCCUSL -1955)
– Under the uniform act, it gives full effect to voluntary agreement to arbitrate disputes between private parties. The act supplements private arbitration agreements by providing explicit procedures and remedies for enforcing arbitration agreements (however, does not dictate the terms of agreement). In the absence of a controlling statute, the rights and duties of the parties are established and limited by their agreement
– FAA preempted the state law (Cleveland Construction, Inc v. Levco Construction, Inc. – 2012)
The Arbitration Process
– In a typical arbitration, the parties present opening arguments and ask for specific remedies. Both sides present evidence and may call and examine witness. The arbitrator then renders a decision.
– Submission – The act of referring a dispute to an arbitrator.
– Questions of fact, questions of law, or both to the arbitrator
– 5 things stated in the submission: the identities of the parties, the nature of the dispute to be resolved, the monetary amounts involved in the controversy, the location at which the arbitration is to take place, and the intention of the parties to be bound by the arbitrator’s award
– Must be in writing and require the matters be submitted within a definite period of time
– The hearing – must specify the issues that will be submitted and the powers that the arbitrator will exercise. Regardless of who establishes the rules, the arbitrator will apply them during the course of the hearing.
– Restrictions on the evidence and the manner may be less rigid and restrictions may also be less stringent
– The parties begin as they would at trial by presenting opening arguments to the arbitrator and stating what remedies should or should not be granted à evidence is presented à Witness may be called and examined by both sides à closing arguments àthe arbitrator closes the hearing
– The Arbitrator’s Decision
– The arbitrator’s decision is called an award, final word on the matter
– When an appeal has been made by either side of parties, a court’s review on the decision will be much more restricted in scope than an appellate court;s review of a trial court’s decision.
– More freedoms given through the process of arbitration, less reasons to complain
– Limited situation only: award violates an established public policy, “bad faith” of the arbitrator’s conduct (prejudiced the rights of one of the parties)
Enforcement of Agreements to Submit to Arbitration
– The role of the courts in the arbitration is limited
– One important role is played at the prearbitration stage
– A court may be called on to order one party to an arbitration agreement to submit arbitration under the terms of the agreement.
– Role is to interpreting a contract
– The court must determine what the parties have committed themselves to before ordering that they submit to arbitration
The Issue of Arbitrability
– Courts decide whether the matter is one that must be resolved through arbitration
– If the court agrees, then a party may be compelled to arbitrate the dispute
– Usually allowed by courts when there are no excluded such claims by the relevant statute (the state arbitration or the FAA)
– No party will be ordered to submit a particular dispute to arbitration unless the court is convinced
– The courts will not compel arbitration if it is clear that the arbitration rules and procedures are inherently unfair to one of the parties
– The terms of an arbitration agreement can limit the types of disputes that the parties agree to arbitrate (“arbitration is a matter of contract between the parties, and one cannot be required to submit to arbitration a dispute which it has not agreed to submit to arbitration” – NCR Corp. v. Korala Associates, Ltd. -2008)
Mandatory Arbitration in the Employment Context
– U.S. Supreme Court has held that mandatory arbitration clauses in employment contracts are generally enforceable
Mandatory Arbitration and Class Action Waivers in Credit-Card Contracts
– A class action occurs when a large group of plaintiffs files a lawsuit collectively for a larger amount of damages that they could claim individually
– A class action waiver requires all disputes to be arbitrated on an individual basis, which provides an advantage to the credit card company (American Express Co. v. Italian Colors Restaurant – 2013 – Supreme Court stood by the FAA over the class action waiver)
Consumer Arbitration Agreements
– Unequal bargaining power (take-it-or-leave-it basis = adhesion contact)
– Lhotka v. Geographic Expeditions, Inc. -2010 – potent disincentive for an aggrieved client to pursue any claim by GeoEx, therefore, the arbitration clause is so one-sided
– The order denying GeoEx’s motion to compel arbitration is affirmed
Setting Aside an Arbitration Award
– After conclusion, the losing party may appeal the arbitrator’s award to a court, or the winning party may seek a court order compelling the one party to comply with the award
– The court’s rule is limited to determining whether there exists a valid award
Fact Finding and Legal Conclusions
– The arbitrator’s fact findings and legal conclusions are normally final
– No matter how obviously the arbitrator was mistaken in a conclusion of law, the award is normally nonetheless binding
– A court will not look at the merits of the dispute, the sufficiency of the evidence presented, or the arbitrator’s reasoning in reaching a particular decision
Public Policy and Illegality
– In keeping with contract law principles, no award will be given if it will result in the commission of a crime or would conflict with greater social policy mandated by statute
– For an award to be set aside, it must call for some action on the part of the parties that would conflict with or in some way undermine public policy
Defects in the Arbitration Process
-Setting aside an award when there is defect in the arbitration process
-Typified by FAA section 10
- The award was the result of corruption, fraud, or other “undue means.”
- The arbitrator exhibited bias or corruption.
- The arbitrator refused to postpone the hearing despite sufficient cause, refuses to hear evidence pertinent and material to the dispute, or otherwise acted to substantially prejudice the rights of one of the parties.
- The arbitrator exceeded his or her powers or failed to use them to make a mutual, final and definite award.
– A party sometimes forfeits the right to challenge an award by failing to object to the defect in a timely manner
– If a party does not object on number 4 above at the first demand for arbitration, a court may consider the objection waived
– After making the objection, the party can proceed with the arbitration process and still challenge the award in court after the arbitration proceedings have concluded. If, however, a party makes no objection and proceeds with the arbitration process, then a later court challenge to the award may be denied on the ground that the party waived the right to challenge the award on the basis of the defect (???)
Conflicts of Law
– Interstate conflicts regard of transaction and each of their own arbitration acts
– Federal law preeminence – Strong federal policy favoring arbitration can override a state’s law that might be more favorable to normal litigation
Choice of Law
– The FAA has been interpreted as allowing the parties to choose a particular state law to govern their arbitration agreement – Choice-of-law clause
– U.S. Supreme Court has upheld arbitration agreements containing choice-of-law provisions
Disadvantages of Arbitration
– Unpredictable due to: do not need to follow any previous cases, arbitrators do not have to issue written opinions or facilitate a participant’s appeal to a court
– In some, arbitration can be nearly as expensive as litigation
– Discovery usually is not available in arbitration
– During the hearing the parties must take the time to question witnesses whom they would not need to call (???)