Business Arbitration Agreements

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 What Is Arbitration? When Is Arbitration Used?

Arbitration is a specific type of Alternative Dispute Resolution (“ADR”). To put it simply, dispute resolution is the process of resolving a dispute between parties. Dispute resolution is also often referred to as conflict resolution. There are a number of different processes that can be utilized to resolve conflicts, claims, and disputes. ADR, refers to ways of addressing and settling disputes outside of court and its traditional, adversarial atmosphere.

Arbitration is a legal resolution process used by disputing parties. In some cases, the disputing parties may voluntarily agree between themselves to submit to arbitration. In other cases, arbitration is actually mandatory whether or not the disputing parties agree to the process. Certain agreements, such as employment agreements, contain language which requires that disputes be arbitrated. 

Generally speaking, arbitration is conducted by a person known as an arbitrator. This person is a neutral third party who listens to the parties’ claims and makes a decision based on those claims. Their decision takes the form of an arbitration award

If the disputing parties voluntarily agree to arbitration, they will select a mutually-agreed-upon arbitrator from an arbitration organization. One such organization would be the American Arbitration Association. The arbitration organization provides rules regarding how various matters are to be arbitrated. It is common for the credentials of arbitrators, as well as fees, to be listed on the organization’s website. 

In situations involving mandatory arbitration, the arbitration clause generally names the arbitration organization to be used. The clause also describes the required procedure to initiate arbitration proceedings. This generally consists of the party who wishes to arbitrate, serving a notice to arbitrate to the other party, who then responds. Once that has occurred, the arbitrator is chosen and the arbitration hearing is held.

There are certain disputes that cannot be arbitrated because state or federal law requires litigation of those matters. An example of this would be how disputes over whether a crime was committed must be addressed through litigation. However, most disputes between private parties can be arbitrated. Common examples of disputes that can be arbitrated include contract disputes and commercial disputes.

Alternatively, there are certain disputes that must be submitted to arbitration. This would be because the agreement the parties entered into mandates the use of arbitration. Two examples of this would be a contract, or an employment agreement.

What Is an Arbitration Agreement In a Contract?

Arbitration agreements are an alternative means of resolving any disputes which arise from a contract between two parties. There are a number of things about this type of resolution process which make it different from settling a matter in court. Some examples include

  • Less Formal: While there are complex rules guiding a lawsuit and courtroom procedures, arbitration can bypass all of these aspects;
  • Less Time Consuming: Arbitration tends to resolve disputes in less time than litigation. This is because traditional legal procedures, which generally take several months, need not apply;
  • Greater Privacy: Unlike litigation in a court of law, arbitration does not require that a public record of the dispute be created. As such, arbitration may be the better option for those who wish for a greater degree of privacy; and/or
  • Less Expensive: Because arbitration is generally a less formal and quicker process than litigation, not as much money must go into the process.

The possibility of using a specialized arbitrator is another reason why disputing parties may prefer arbitration to litigation. The parties have the option of selecting a specific expert in the area of the dispute to act as the arbitrator. Additionally, arbitration allows for the sustaining of business relationships. Because arbitration does not necessarily contribute to the negative adverse party system, the disputing parties are able to continue doing business with each other even during the arbitration process.

Finally, there is no expensive appeals process. The decision at the end of the arbitration process generally cannot be appealed. As such, the decision may be considered final and cannot be appealed.

What Should Be Covered by an Arbitration Agreement?

An arbitration agreement is generally intended to provide a quicker and less costly way forward than traditional litigation in a courtroom. In order to accomplish these goals, the parties to the contract should lay out a set of procedures for arbitration within the agreement. This should include the following:

  • What kind of disputes will be resolved by arbitration;
  • Will all disputes be resolved by arbitration;
  • Will certain disputes still be taken to court; and
  • Are there any limits on damages that can be rewarded?

Most importantly, an arbitration agreement should include the detailed procedures that govern the arbitration process. This could include:

  • Where the arbitration will be held;
  • How the arbitrator will be selected;
  • How the cost of arbitration will shared; and
  • Other procedures for governing the arbitration process.

What Else Should I Know About Arbitration In General?

It is important to understand how arbitration differs from litigation. As previously discussed, arbitration is generally a less expensive process for the disputing parties. Arbitration disputes are commonly resolved more rapidly than disputes that are litigated. Additionally, the process of formal discovery is generally relaxed in arbitration proceedings. 

Arbitration proceedings commonly offer a simplified discovery process. And, the rules of evidence are often more relaxed than those in litigation. An example of this would be how in many arbitration proceedings, evidence that is not admissible in litigation may be used. This relaxation of the rules is intended to promote a faster and more efficient process.

It is common for the arbitrator to find in favor of just one party. The resulting arbitration award will provide only that party with relief. However, there are some instances in which the arbitrator will find that both parties’ claims have merit. In such cases, the arbitrator will render an award that grants each party some measure of relief.

Generally speaking, a lawfully rendered arbitration decision cannot be appealed. However, there are some very specific circumstances in which an arbitration award can be appealed to a court. An arbitration award may be set aside when:

  • The arbitrator lacked the necessary jurisdiction to render the award. An example of when a  court may find jurisdiction is absent would be when the subject matter of the dispute is not something that can be arbitrated;
  • The dispute is not covered by a valid arbitration agreement. An example of when a dispute is not covered by a valid arbitration agreement would be when the arbitrator rules on an issue that the parties did not agree to have arbitrated; 
  • The arbitration proceeding involved fraud or deceit; or
  • The arbitrator engaged in misconduct that affected the arbitrator’s decision.

Do I Need an Attorney When Negotiating an Arbitration Agreement?

It may prove to be a complex process when attempting to create an enforceable and effective arbitration agreement. You may wish to consult with a local contract attorney who specializes in contract drafting and reviewing. Because state laws may vary greatly in terms of arbitration and arbitration agreements, an experienced and local business attorney would be best suited for understanding how your state’s specific laws may affect your case.

An attorney can also help you draft an agreement that represents your best interests, and ensure that all laws are adhered to. Finally, an attorney can also represent you in court or during an arbitration, as needed. Having an attorney present throughout the arbitration process, or while negotiating an arbitration agreement, will ensure that you have the best legal outcome for your specific case.

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