The ABCs of Arbitration

arbitrationIn the event of unsuccessful challenges to the arbitration award or failure to comply with 
the award, the prevailing party is ordinarily entitled to costs, including a reasonable 
attorneys’ fee for having to compel arbitration or defend or enforce the award.

In the event a dispute shall arise between the parties to this contract, it is hereby agreed 
that the dispute shall be referred to the American Arbitration Association for arbitration 
in accordance with American Arbitration Association Rules of Arbitrations. The 
arbitrator’s decision shall be final and binding and judgment shall be entered thereon.

WHEN IS ARBITRATION USED? Arbitration is used in many different 
fields, and its use continues to 
increase. Some contexts in which 
parties commonly use arbitration 
include:

Consumer disputes, to resolve 
disputes between consumers 
and companies. Commercial contexts, to 
resolve disputes between 
companies. Employment and labor 
disputes, to resolve disputes 
between workers, or between 
employers and employees.

Professional sports leagues, to 
resolve disputes.

THE ABCS OF 
ARBITRATION

Arbitration is a form of dispute resolution in which an arbitrator hears a dispute in a 
private, court-like setting and then makes a final decision that binds the parties. The 
parties select the arbitrator, who is often an 
expert in the subject areas of the dispute. The 
emphasis is on the equity of the situation and 
not on the technicalities of the law. For these, 
and many other reasons, arbitration can be a useful tool for resolving disputes. However, it 
can also pose traps for the unwary.

First, it is important to understand the 
difference between arbitration and other types 
of alternative dispute resolution such as simple 
negotiations and mediation. In negotiations, the 
parties are in control of the process as well as the 
outcome. In mediation, the mediator controls 
the process, but the parties control the outcome. 
Arbitration is a more formal process. The parties can set the parameters of the arbitration 
before the hearing, but in the hearing it is the 
arbitrator-not the parties-who controls both 
the process and the outcome. Unlike negotiation 
and mediation, in which the parties agree on a 
solution in their mutual interest (or are free not 
to reach agreement), an arbitrator’s decision is 
valid regardless of whether or not it satisfies the parties. As a result, arbitration may be a 
more adversarial process than mediation or 
negotiation.

Disputes can end up in arbitration through a number of routes, some voluntary and some 
required by a court order or previous agreement. 
Arbitration is voluntary when two willing parties 
agree to the process as a means of resolving their 
dispute. This sometimes happens if the parties 
have already tried negotiation and! or mediation 
without success but are still looking for an 
alternative to litigation. If you are thinking about 
voluntarily going to arbitration, it can be helpful 
to consider whether the dispute is primarily 
about interests or about rights. If parties can 
resolve their dispute by reaching a compromise 
relating to their interests, then negotiation or 
mediation probably is a more desirable option 
than arbitration. However, if the parties believe 
their legal rights are at stake in the dispute, then 
arbitration is probably preferable.

Sometimes, a court may order parties to 
participate in nonbinding arbitration prior to trial. This means that the parties are not legally bound to comply with the arbitrator’s 
decision and may continue with litigation if they wish. Judges sometimes order parties 
to arbitration because it will give each side a sense of the strength of its case.

Some disputes are required to go to arbitration based on an arbitration clause. These clauses, which are found in contracts, state that disputes over the contracted 
matters must be resolved through arbitration. An arbitration clause might look 
something like this:

Arbitrations arising under an arbitration agreement are usually binding, unless 
otherwise provided in the arbitration clause. This means that the parties are legally 
obliged to comply with the arbitrator’s decision and have very limited rights to appeal 
the decision to a court.

If you have agreed to the terms of a credit 
card, insurance policy, or bank loan, it is likely 
that you have agreed to an arbitration clause. 
Often the arbitration clause is included in the 
fine print of an agreement. However, arbitration 
clauses do not have to be part of your initial 
agreement with a company. For example, credit 
card companies may include in your monthly 
statement an arbitration clause providing that 
continued used of the credit card constitutes 
agreement to the arbitration provisions. 
Arbitration clauses can even be retroactive, 
applying to disputes that arose before you 
agreed to the arbitration clause.

Although you are generally bound by any 
arbitration clause to which you agree, there 
may be some ways to negotiate such an agreement. For example, you may be able to argue 
that your case is not the type of dispute covered 
by the arbitration clause. Or, you may be able to 
argue that, because an arbitration clause gives one side a large advantage over the other, it is 
so unfair (usually referred to as “unconscionable” in legal terms) as to be invalid. If 
you think this is the case with an arbitration agreement you have entered into, talk 
to your lawyer, who will be able to help you understand the agreement and your 
options going forward.