Arbitration Essentials, Advantages, and Disadvantages
Many employers include an arbitration agreement in their employee contracts, stating that disputes would be handled through the process of arbitration rather than through the court system. In arbitration, the complaint is heard by an arbitrator (a neutral third party who is often a retired judge or attorney) instead of by a court or jury. The arbitrator hears both sides of the case out of court and forms a decision, which is usually binding and not able to be appealed. This process tends to be faster and less expensive than going through the court system, which is why so many employers incorporate arbitration clauses into their contracts.
Arbitration agreements vary, ranging from simple statements that claims will be settled through arbitration and enforced by a local court, to complex clauses detailing many specific aspects of the arbitration process.
Below are some clauses I highly recommend placing in all arbitration agreements:
- How arbitrators will be selected - Agreements can require that only certain arbitration associations can be used, the arbitrator must have a certain specialty, or the parties can decide on an arbitrator. Some of the common arbitration agencies used are the American Arbitration Association, Forum, and JAMS.
- That arbitration is mandatory - Any dispute must be handled through arbitration rather than in court.
- What matters are covered - Examples of specific disputes, claims, and controversies that will be handled by arbitration should be provided.
- Who will pay for attorneys’ fees - The agreement can dictate that both parties pay an equal share of the fees, one party pays all of them (I highly recommend the employer in an employer-employee arbitration agreement), each party pays their own fees and then splits the other direct expenses, the losing party pays the fees, etc.
- Where the arbitration will be held - A set location can be specified in the agreement, or it can say that the parties must decide on a location.
- Whether the final decision must be confidential or not - The clause can state that the decision must be confidential and can’t be publicly accessible.
- If the arbitration is binding or nonbinding - If it’s binding, then the arbitrator’s decision is final and cannot be reviewed by a court. If the arbitration is nonbinding, then either party can reject the decision and opt for a trial instead. The arbitration clause can specify that the nonbinding decision may become binding after a set amount of time without being taken to court, or if both parties agree to it.
While many employers choose to make arbitration mandatory for dispute resolution, there are advantages to handling conflicts in court as well. Below are some of the advantages and disadvantages of arbitrating:
Benefits of Arbitrating:
- Less hostile - Both parties are encouraged to work together and participate in the resolution, so they are less likely to increase their anger at each other compared to litigation.
- Simplified rules - Complicated evidence and procedure rules do not apply. Discovery does not take place, when parties give and answer interrogatories, requests for documentation, and depositions. Instead, parties can gather this information in more straightforward ways that are less drawn out.
- Speed - Resolving a case through arbitration takes less time. According to a recent study by the Federal Mediation and Conciliation Service, the average time from filing to decision was about 475 days in an arbitrated case versus 18 months to 3 years in the court.
- Usually less expensive - Since the process is faster than and typically not as complicated as a court proceeding, arbitration tends to be much cheaper than litigation.
- Private - Hearings are usually held in private, and the proceedings and decisions are often confidential. This is useful when the case is embarrassing or involves sensitive information such as client lists or patent details.
- More flexible - Arbitration hearings can be worked into the schedules of the parties, whereas trials are dependent on court calendars. Meetings can also take place in more casual locations than courtrooms.
Benefits of Not Arbitrating:
- Public - The courtroom has more transparency than private, confidential arbitration hearings do, so the process is less likely to be biased. In addition, since the findings and decision are made public, they can be used in future cases that are similar.
- Jury - The case can be heard by a jury of peers, so some people feel that juries are more sympathetic than arbitrators who might be biased toward one party.
- Cost - For complicated cases, it might be less expensive to go to court rather than initiate arbitration. Arbitrator’s fees can be very high, and some cases require a panel of expensive arbitrators for a long period of time.
- More evidence - While having simplified evidence procedures can be seen as a benefit that speeds the decision up in arbitration, sometimes the additional evidence is needed. In a trial, parties can request more evidence and documents from the other side. This can increase fairness, as both parties have access to the evidence and documents they need, while one party might have more access than the other in arbitration.
- Decision can be appealed - Court decisions can be appealed to higher courts to possibly receive a different decision. In arbitration, decisions usually cannot be appealed or reconsidered.