Arbitration is a process that can be used by parties to resolve a legal conflict or dispute between them. In certain cases, the parties may voluntarily agree amongst themselves to submit to arbitration.
In other cases, however, arbitration is mandatory. There are specific agreements that may contain language that requires a dispute to be arbitrated.
The most common example of this type of agreement is an employment agreement. In general, the process of arbitration is conducted by an individual who is called an arbitrator.
An arbitrator is a neutral third party responsible for hearing each party’s claims. The arbitrator then uses that information to decide on the claim.
The decision of an arbitrator takes the form of an arbitration award. It is important to note that certain types of disputes cannot be arbitrated because state or federal law requires certain issues to be litigated.
One example would be how a dispute over whether a crime was committed must be addressed using the court system. Most civil disputes between private pirates, however, may be arbitrated.
Examples of disputes that cannot be arbitrated include contract disputes, commercial disputes, or disputes between businesses. On the other hand, certain types of disputes must be submitted to arbitration.
This is because the parties’ agreement may require arbitration to resolve disputes. Common examples of these are contracts and, as noted above, employment agreements.
The terms of the mandatory arbitration will be outlined in a provision in the agreements called the mandatory arbitration clause. A mandatory arbitration clause typically requires that the party seeking to resolve the dispute must first try to resolve it through arbitration.
What is an Arbitration Agreement?
Arbitration is a dispute resolution process that takes place outside of a courtroom. An arbitration agreement may arise in one of two ways including:
- A clause in a contract that states that the parties will resolve legal disputes by arbitration rather than a lawsuit; or
- The final conclusion and ruling from the arbitration sessions themselves.
In many cases, arbitration agreements arise from a contract. These may be referred to as arbitration clauses and are typically included as part of a larger contract.
Arbitration agreements are formed when two parties agree not to sue one another over a legal dispute. Instead, the parties agreed to resolve their disputes through arbitration.
Depending on whether the arbitration is mandatory or non-mandatory, the arbitration results may or may not be binding under the law. Typically, more formal arbitrations resembling trials will be binding under law.
What is the Difference between a Binding and Nonbinding Arbitration Clause?
Arbitration clauses may be binding or nonbinding. Binding arbitration clauses mean that the arbitrator’s decision regarding a specific dispute will be final.
A court will enforce the arbitrator’s decision, and neither party can appeal or fail to act according to the decision. In contrast, a nonbinding arbitration clause allows the disputing parties to reject the arbitrator’s decision.
The parties may then take their dispute to court to obtain a final determination. Generally, parties will use a binding arbitration clause because they are more decisive and will require less time.
When is an Arbitration Agreement Used?
Arbitration agreements are used mainly in the context of different types of contracts. As noted above, these agreements are typically embedded in arbitration clauses within existing contracts.
An arbitration clause may require the parties to engage in arbitration rather than a future lawsuit. Arbitration agreements are commonly used in the following ways:
- Lending and distribution contracts;
- Employment contracts;
- Business agreements;
- Various loan documents; and
- Shipping contracts.
An arbitration agreement may also be formed separately as its own agreement. This may occur if a specialized project requires the parties to work together.
Can an Arbitration Agreement be Modified?
In many situations, an arbitration agreement and the award granted are final, especially if it is part of a valid contract. Contracts may be contested if they were not properly formed or if they were formed based on coercion or fraud.
Most contracts will contain specific language that states whether or not any contract terms, including the arbitration agreement, may be modified.
Who Can be an Arbitrator?
In general, any individual may refer to themselves as an arbitrator. This is because there are no qualifications or certifications an individual must obtain to provide arbitration services.
It is common for former or retired judges to represent themselves as arbitrators. The only general requirement is that the parties agree on the individual they choose to arbitrate their dispute.
However, the arbitrators that are traditionally chosen are experts in the business or the field of law involved in the case. Under labor and employment law, some professional arbitrators have practiced as arbitrators for many years.
Because of this experience, they have gained the confidence of other professionals. Arbitration clauses may also specify the qualifications of a potential arbitrator.
For example, a reinsurance arbitration clause typically requires that the arbitrator be selected from among current or former officers of insurance companies. One excellent source for arbitrators would be an attorney who has used arbitration and can recommend specific arbitrators.
In addition, alternative dispute resolution directories are provided by many bar associations. The American Arbitration Association provides lists of arbitrators for various types of disputes and procedures, for a fee.
When Will a Court Enforce the Results of an Arbitration Agreement?
When a court enforces the results of an arbitration depends on the type of arbitration. Nonbinding arbitration means that the agreement reached may not be legally enforceable.
The arbitration efforts in these cases are typically very informal and may not serve an actual goal in the legal sense of the term. For example, the parties may need to air out certain issues and need a third-party arbitrator to intervene.
Binding arbitration, however, is enforceable under the law. Binding arbitration is somewhat more formal and may involve procedures that are more similar to a trial, including:
- Oath swearing;
- Formalized recording of depositions; and
- The use of a court-sponsored mediator.
In certain cases, binding arbitration is also referred to as mandatory arbitration, which means that the parties must attend the arbitration sessions or face the consequences. A court typically indicates whether an arbitration meeting will lead to legally enforceable agreements.
In addition, any contracts or written agreements written during a binding arbitration may become enforceable under law as long as the document meets the requirements for a valid contract.
What if an Arbitration Agreement is Violated?
Informal or non-enforceable arbitration agreements can serve as mere guidelines for other, more formal decisions. A violation of these agreements may not lead to a legal penalty.
Violations of binding arbitration agreements, however, may lead to legal consequences. The legal consequences may include the following:
- Contempt orders;
- Injunctions; or
- Monetary damages.
In addition, a violation may result in a lawsuit if the violation is severe enough.
Do I Need a Lawyer for Help with an Arbitration Agreement?
An arbitration agreement may severely limit your legal options. Because of this, you should be wary of the consequences of these clauses before signing a contract that contains an arbitration agreement or signing a separate arbitration agreement.
It may be helpful to consult with a contract lawyer if you need to enter into an agreement that contains an arbitration clause. Your lawyer can advise you on how the agreement may affect you and will represent you if you need to take legal action.
Your lawyer can also be present at the arbitration meeting to represent you and protect your interests.
