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Arbitration

Paralegal Guide: Fundamentals of Arbitration

Arbitration is a method of dispute resolution or conflict resolution which can be faster and more economical than court-based adjudication. An intermediary, or panel of intermediaries, looks at the evidence from both sides and makes what can be a binding decision. As with a court case, and unlike mediation, the results of arbitration are typically win-lose and not an attempt to find a working solution for both parties. Arbitration is most often used for commercial and business disputes, labor conflicts and consumer issues. In some cases, the two parties have entered into a prior contract whereby they agree to subject any dispute that should arise to arbitration. This is mandatory arbitration and the results are binding. There is little recourse to challenge a binding decision unless one of the adjudicators can be shown to be biased, or if one party can show that the initial contract was signed under duress.

When Arbitration Should Be Used

Arbitration is often used in disputes that require expert knowledge in some area that a judge wouldn’t have. An expert or panel of experts can make decisions based on technical, scientific, or other specialized information. It also serves to protect the dispute from public knowledge and to help protect trade secrets. Because arbitration is an adversarial process, like regular court proceedings, it is a worse alternative to mediation for instances in which the parties do not want to escalate the contention, want to be provided with a fair compromise, or wish to learn how to resolve future problems on their own. Also, when two parties enter into an arbitration agreement, they are essentially giving up the right to a trial in a court of law, which can make sense for commercial interests but if entering into a contract where personal liability is concerned, it is wise to think twice about accepting an arbitration clause.

The Process

In order to qualify for the settlement of a dispute by way of arbitration, some requirements usually need to be met. Both parties typically have a signed contract with an arbitration clause. That clause or other arbitration agreement must apply to the issue at hand. In order to be considered a fair process, an expert must be appointed who is skilled and qualified to settle the dispute. Both parties must be represented fairly and classification of the jurisdiction of the arbiter as well as applicable laws must be made. Procedure and rules of conduct must be laid out in advance and adhered to throughout the arbitration process. The step-by-step procedure is as follows:

  • A request to resolve a dispute via arbitration is submitted.
  • An arbiter or tribunal is decided upon by the two parties or appointed by a third party.
  • Arbiter or tribunal accepts the duty appointed.
  • Joint preliminary meeting to decide on logistics.
  • Preparations are made including finding a venue, making travel arrangements, etc.
  • Directions are issued by the arbiter.
  • Preliminary hearings take place.
  • Submission of pleadings is made, including claims, counter-claims, reactions to counter-claims
  • Preparation of documents and documentation, including expert reports, agreed upon and requested by arbiter.
  • Hearing is held including parties to the arbitration, the arbiter/tribunal, witnesses, experts.
  • A decision is made and an award granted.
  • If the losing party fails to comply in giving the award, binding arbitration can be upheld in a court of law.

Background and Foundation of the Arbitration Process

One of the most internationally important documents on arbitration is the Convention on the Recognition and Enforcement of Foreign Arbitral Awards – the “New York” Convention of 1958. Overseen by the U.N. Commission on International Trade Law (UNCITRAL), this convention aims to recognize the need for international arbitration for settling commercial disputes and lays the legislative groundwork for the recognition and enforcement of arbitral decisions and awards..

UNCITRAL also provides a Model Law for International Commercial Arbitration and a set of Arbitration Rules. These are the foundation of binding arbitrations, by virtue of Article 4 of the Model Law, which is a waiver of the right to object. Modern international arbitration is said to have begun with the Treaty of Amity, Commerce and Navigation between the U.S. and Great Britain in 1794. Under the Treaty of Washington, the U.S. and Great Britain agreed to undergo arbitration in 1872 after Britain was challenged of a breach of neutrality during the American Civil War. A tribunal was appointed and the U.S. was awarded compensation, which Britain then paid. This was an early example of the successful use of arbitration to resolve a dispute peacefully.  Explore these links to learn more.

Arbiters and Arbitral Tribunals

Arbitration can either be ad hoc or administered. In the case of an ad hoc arbitration, the parties designate the arbiter or tribunal or designate a third party to appoint the arbiter or tribunal. UNCITRAL’s Arbitration Rules entrust the Permanent Court of Arbitration with this role whenever requested by the parties. In the case of administered arbitrations, an institution created to provide professional arbitration services, such as the International Chamber of Commerce, the American Arbitration Association or the London Court of International Arbitration, will handle the case from beginning to close. These institutions, and others like them, have their own rules that the parties entering into arbitration must abide by. The acting arbiter or tribunal has some degree of autonomy in regards to how they wish to proceed, but at least two things must be maintained: impartiality between the two parties and a reasonable opportunity to present their arguments; and  the adoption of procedures appropriate to the case at hand.

Examples of Arbitration