What is arbitration?
Arbitration is an alternative forum for resolving a dispute whereby the parties either voluntarily, or are required by statute, to submit the dispute to an impartial third party for resolution instead of by a judicial tribunal such as a judge or a jury. Arbitration is required under two different circumstances:
- A party can contractually agree in advance to resolve a particular dispute by arbitration, i.e., contractual arbitration; or
- A party can be statutorily required to arbitrate his or her claim, i.e., judicial arbitration.
Arbitration can be binding or non-binding. Binding arbitration means the arbitrator’s decision is final, except for a very limited, narrow set of exceptions. That means the client normally does not have the opportunity for a reviewing court to take a second look at the arbitrator’s decision. Non-binding arbitration means the arbitrator’s decision is not final, and the plaintiff can proceed to a court of law to have his or her claims heard before a judge or a jury.
The most common type of arbitration is binding contractual arbitration. In that instance, the contract governing the parties’ relationships will contain some form of an arbitration clause. Many businesses offering consumer services, such as many medical insurance companies, require that the consumer agree to binding arbitration in advance. The arbitration agreement can be formed at virtually any stage of the relationship, e.g., when an insured signs an insurance application, when an employee signs an employment agreement or handbook, when the consumer purchases a car, or when a consumer is issued a credit card or opens a bank account. Large corporations offering a service such as insurance have superior bargaining strength, and can easily force a consumer to agree to arbitration. Unfortunately, consumers rarely pay attention to the fine print, and do not realize they may have walked away from their constitutional right to a jury trial until a problem arises.
Some practitioners believe arbitration benefits only the defendant, and enables the defendant to remain shielded from large jury verdicts, and even public scrutiny. The main reason insurers require arbitration is to protect against a large jury verdict and a punitive damages award when their egregious or unlawful conduct is exposed. Since arbitration means a third party arbitrator (as opposed to a jury of your peers) will hear and decide your case there is a greater likelihood the arbitrator will not be as sympathetic towards you as would a jury. Also, an arbitrator very rarely awards punitive damages. Hence, large defendants who engage in unlawful conduct are typically the ones who benefit from arbitration. Arbitration can also make litigation more expensive since the parties are not only paying administrative fees, but also an arbitrator’s hourly rate, all of which are in addition to the parties’ attorneys fees. Often, a litigant’s discovery rights in arbitration are limited. Finally, many arbitrators earn significant arbitration fees from large corporate defendants who require that one particular arbitration company handle all arbitrations, which may have an effect on the impartiality of the overall process.
Some practitioners believe there are some advantages to arbitration. Arbitration can be more streamlined so that the parties can reach an arbitration hearing much quicker than they can reach a trial. Some practitioners believe that arbitration is a more cost-effective way of handling a dispute due to the streamlined approach. From a defendant’s perspective, punitive damages are very rarely awarded and arbitrators tend not to be as sympathetic towards a plaintiff as would a jury. In some cases, an arbitration provision may even serve as a deterrent to a plaintiff taking any action in the first instance.