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What is Arbitration?

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Arbitration is a procedure used in resolving a dispute rather than resolving the dispute through litigation (filing of a lawsuit). Contracts frequently contain a provision requiring any dispute be submitted to arbitration and limiting or prohibiting the filing of a lawsuit.

Why do I want arbitration to resolve a dispute arising in a contract?

Some reasons frequently given for arbitrating a dispute rather than filing a lawsuit to resolve the dispute are: (1) it is less costly than a lawsuit; (2) the dispute will be resolved more quickly than going to trial; (3) the arbitration is less formal than a trial in a courtroom; and (4) the decision in an arbitration will be final and binding on the parties and not subject to appeal (except in very limited circumstances not discussed here). However, some of the stated reasons may not be valid or desirable given the specific nature of the dispute (see further discussion below).

Why do I not want an arbitration to resolve a dispute arising in a contract?

The decision in an arbitration is frequently made by one person ("arbitrator") and in certain cases by a panel of two or more arbitrators. There is no jury! In many disputes (but not all) it is desirable to have the benefit of a jury which, after hearing the evidence, receives instructions from the judge regarding the law applicable to the specific case, then deliberates and reaches the decision. There are specific rules as to what testimony, evidence and documents are "admissible" (can be considered) in reaching the decision. In arbitration, some evidence which would not be admissible in a trial will be available to and considered by the arbitrator in reaching the decision. Whether arbitration or litigation is the better option depends on the facts and law governing the specific dispute.

The decision in an arbitration is generally final and not subject to appeal. This can be an advantage because it brings to final conclusion the dispute. Conversely, it can be a disadvantage because if the arbitrator incorrectly interprets the law or fails to consider the applicable law or is otherwise in error, there are very limited circumstances where the arbitrator=s decision can be appealed to correct the error. In litigation, the decisions of the judge and jury are subject to appeal to a higher court where many errors can be corrected.

An arbitration may be more expensive than litigation. The fees charged by an arbitrator can be greater than the court costs in litigation. Persons serving as arbitrators frequently charge fees of several hundred dollars per hour. The hourly rates vary greatly depending on the arbitrator appointed or chosen. If there is more than one arbitrator, the fees are multiplied. Further, if the arbitration is arranged through an arbitration organization such as the American Arbitration Association, the filing fees can be quite expensive and will be in addition to the fees charged by the arbitrator or arbitrators.

Discovery in preparing for arbitration may be limited. In litigation, there are numerous enforceable rules directing how opposing parties can gather relevant information, evidence and documents for use at trial ("discovery"). Generally in litigation, discovery is permissible for anything that is or may be relevant or could lead to relevant information, evidence, etc. Further the court can enter orders directing information be provided should a party refuse to provide information. In arbitration, the rules on discovery do not exist or, are not as broad and extensive, and obtaining relevant information may be more difficult or impossible.

Compelling attendance at the arbitration by a witness is difficult, if possible. In trial, subpoenas can be issued directing a witness to appear. The court can issue orders directing law enforcement officials to bring the reluctant witness who refuses to appear in response to a subpoena. In arbitration, the arbitrator's ability to compel a reluctant witness to appear is limited.

Statutory Required Arbitration

In some jurisdictions some disputes involving smaller amounts of damages may be subject to mandatory arbitration by statute or court rule. The above discussion about arbitration in general will not be applicable to such arbitrations.

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