Chapter 8

• Jurisdiction: United States

Chapter 8 Arbitration

What Is Arbitration?

Arbitration is a form of alternative dispute resolution (ADR) conducted before an independent, neutral decision maker, frequently with subject matter expertise. Arbitration of commercial disputes results from an agreement to arbitrate typically stemming from a pre-dispute clause in a business contract, or less frequently from an agreement to arbitrate entered into after a dispute has arisen. Its appeal has been the fact that it provides savings in terms of time and cost, confidentiality, and finality as compared to courtroom litigation that may have two to three layers of appeal and take much longer. Also, as noted, in many cases there is a value to the fact that the arbitrator is likely to have subject matter expertise.

In the United States, arbitration came into its own in the 1920s. Until then, parties could agree to arbitrate but, if one of them did not like the result of the arbitration, it was difficult to get the result enforced by the courts. The passage of the New York Arbitration Act of 1920 and the Federal Arbitration Act (FAA) in 1925 greatly enhanced the enforceability of arbitration awards. The FAA in particular had an enormous impact on the use of arbitration in the United States, and has been repeatedly cited by the United States Supreme Court as establishing a national policy favoring arbitration.

In many simple cases, there may be only a single arbitrator. In more complex cases or in large-dollar cases, arbitrators may sit in panels of three. International commercial arbitration cases are heard worldwide. A very supportive treaty known as "The New York Convention"¹ with approximately 165 countries as parties recognizes arbitral results as if the award came from one's own country. So, an arbitration conducted in Paris is recognized as binding in San Francisco, Tokyo, or Buenos Aires.

Although the arbitration process is usually less costly than litigation, it is typically more costly than mediation (covered in the next chapter). In addition, arbitrators render a decision for the parties; in mediation, the parties come to their own agreement on how to resolve their dispute.

Another important aspect of arbitration is subject matter. Arbitration between two businesses on a dispute about a contract is common and appropriate. But many question whether arbitration is appropriate for a claim that one's civil rights were violated, given the broad significance of civil rights. Similar concerns can be raised about arbitration of antitrust suits that involve important public policy considerations. These two examples...