What is an arbitration? Arbitration is the process of trying to solve a business dispute using a neutral third party without involving the courts. The third party will make a decision after hearing both sides, and the decision may be legally binding.

Why You Need to Consider Arbitration

The concept of arbitration gained traction in the business world because of expenses and delays involved in formal court processes. The idea is to settle disputes quickly without incurring a lot of costs.

Arbitration typically begins when the disputing parties agree to the process. This agreement may have been made before the dispute arises through a clause in the contract that requires any dispute to be settled by arbitration and not court action.

Federal and State Laws on Arbitration

The Federal Arbitration Act (FAA) sets the standards for arbitration in the U.S. Although some states have laws that may in some cases conflict with the FAA, most states have streamlined their laws to mirror the act.

For arbitration to be valid, the following conditions must be met:

Arbitration has become common in the business world, with many companies — including manufacturers, credit card companies, and other companies — offering standard contracts that contain a compulsory arbitration clause to all their customers or clients.

How Arbitration Is Done

A person or body that presides over the arbitration process is called the arbitrator. Usually, the arbitrator consists of a tribunal of members. The tribunal or arbitrator can be appointed by any of the three methods:

  • Directly. The disputing parties may directly choose the arbitrator. In this case, both parties must consent to the choice of arbitrator.
  • By Tribunal Members. Each side appoints one arbitrator and then the two arbitrators appoint a third member.
  • By an External Authority. In some cases, the arbitrator is appointed by a court or a body nominated by the disputing parties.

During the arbitration process, the arbitrator normally hears from the disputing parties. The parties may present witnesses and share relevant documents. When everything is concluded, the arbitrator will issue a ruling that may or may not be final depending on the rules of the initial contract between the two parties.

Forms of Arbitration

  • Commerical arbitration is normally for enterprise disputes.
  • Consumer arbitration is for disputes between a goods supplier and a consumer.
  • Labor arbitration is done in disputes arising from employment. Labor arbitration may be about employee grievances or interests.

Arbitration can also be classified into two categories depending on the arbitration authority: ad hoc arbitration and arbitration organized by dedicated arbitration institutions.

  • Ad Hoc Arbitration. Ad hoc arbitration involves the use of arbitrators who are appointed for that particular situation. Normally in this type of arbitration, the disputing parties have a say on who will arbitrate. The arbitrator will follow rules that are set by the disputing parties.
  • Arbitration By a Dedicated Authority. In this type of arbitration, a dedicated body is the arbitrator. Normally, this type of arbitration follows standard rules set by the arbitration body. Many businesses rely on the American Arbitration Association. The association has standard rules called the Commercial Arbitration Rules.

Advantages of Arbitration

  • It can be tailored to the needs of the disputing parties. The parties can choose a technical expert for technical disputes, which courts cannot do.
  • It is fast and saves the disputing parties a lot of time. The arbitration process is normally completed in a fraction of the time it would take courts to finish hearings and deliver a verdict.
  • Normally, decisions reached through arbitration are binding and they are no lengthy appeal processes.
  • It is confidential and will help protect the privacy of the disputing parties.

Disadvantages of Arbitration

  • The costs involved in arbitration are normally covered by the disputing parties. Although arbitration is meant to save costs, settling some cases through arbitration may cost more than through a court. Arbitration fees can reach 10 percent of the claim amount.
  • Unlike courts, some decisions made by arbitrators are intended to please both sides, which means justice is sometimes not served.
  • Some states do not enforce arbitration clauses in contracts. This may mean that a disgruntled party to a contract can reject the decision of the arbitration panel and still take the issue to court.

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