ARBITRATION essentials

Arbitration — a form of alternative dispute resolution (ADR) — is a streamlined way of resolving a dispute when the parties are unable to agree on a settlement. Instead of having a court of law decide the case, the parties agree to have a private arbitrator do so.

Arbitration is an alternative to court, but it is not an alternative to mediation. You can do both. Many cases that are headed for resolution through arbitration settle by mediation along the way.

Some arbitrators — including John Derrick — also handle mediations as part of their ADR practice. Sometimes, the same neutral acts as both mediator and arbitrator. But that can be problematic. For example, the parties may want to share certain things with a mediator they may not want to tell an arbitrator. So it generally makes sense to use a different neutral for the two roles.

Most arbitration is binding. The arbitrator’s decision can be converted to a judgment in a court. It can then be fully enforced just like any other judgment.

Arbitration cannot take place without the agreement of the parties. Usually, the agreement to arbitrate was made long before the dispute arose, where an underlying contract provided for arbitration of any dispute in the future. Sometimes, though, the parties opt to arbitrate when a dispute arises where there was no pre-existing commitment.

In some cases, there can be a dispute as to whether an agreement to arbitrate was actually made or is enforceable. Issues of “arbitrability” can be complex and are litigated both in the courts and arbitration forums. Usually, however, arbitrability is not a factor. 

There are a number of ADR organizations that provide an infrastructure for arbitrations with rules of procedure as well as panels of qualified and vetted neutrals. These are sometimes referred to as “arbitration forums.” The largest, by far, is the American Arbitration Association — “AAA” or “Triple A” — a not-for-profit, public service organization, which has administered more than eight million ADR cases since its founding in 1926. John Derrick is on the AAA national roster as well as on the arbitration panel of Alternative Resolution Centers (ARC), one of California's longest-established ADR providers. All of his arbitrations are administered either by AAA or ARC.

Contracts including an arbitration provision should — ideally — specify an arbitration forum and, moreover, a specific set of rules used by that forum. Merely committing to arbitration without specifying any details can lead to too much uncertainty as to exactly what has been agreed. But an arbitration clause in an underlying contract can include much more than that. It might, for example, include a requirement to mediate in the first instance, as well as specifying the amount of discovery and other procedural ground rules.

With some arbitrations, the proceeding involves only written evidence and argument. There is no “trial” with witnesses appearing in person. With others, however, there is a something similar to a trial, although it is generally referred to as an “evidentiary hearing.” This can take place in a conference room or — increasingly — by Zoom or some other videoconferencing system. There is preliminary hearing  beforehand to settle the timeline and overall ground rules, and there may also be one or more status conferences before the evidentiary hearing.

Arbitration hearings tend to be more formal than mediations. For example, lawyers who might wear “business casual” to a mediation generally dress as though for court when attending an arbitration. Use of first names — common in mediations — may be discouraged in arbitrations. But arbitrations nonetheless lack some of the formalities of a courtroom. There is no “all rise” or anything like that.

Arbitration can be significantly less expensive than litigating in trial courts. It’s true that the parties pay the arbitrator a fee — generally based on time spent — whereas they don’t pay for a judge’s time (beyond modest court filing fees). And they also pay fees to the forum. But these are offset by the fact that arbitration procedures are much more streamlined than those in courts. There is usually only limited discovery. And there is much less by way of motions. For example, summary judgment motions are not common and rarely successful. So the types of activity that can rack up traditional litigation costs — and drag out the process — are substantially reduced.

Another benefit of arbitration is that the streamlined procedures result in the whole process taking much less time than a lawsuit in court. It’s not just that there is less pre-trial litigation. It’s also much easier to set a firm date for the evidentiary hearing. And — barring clear necessity — those dates generally stick. The culture is not one of continuances. In trial courts, by contrast, there are often significant backlogs making it very hard for parties to actually get their day in court.

By opting into arbitration, parties are asking for an efficient, streamlined dispute resolution process. And it is the arbitrator’s job to ensure they get what they bargained for.

One of the main differences between a trial in a court and an evidentiary hearing in an arbitration is that, for the most part, the complex rules of evidence that apply in courts do not apply in arbitration. For example, an arbitrator will generally not exclude evidence based on hearsay or lack of foundation. That said, the arbitrator may give considerably less weight to such evidence. Generally, the only evidence that is excluded is that which violates a legally recognized privilege, such as attorney-client privilege.

One of the reasons why arbitrations involve liberal rules of evidence, and very limited — if any — scope for summary judgment or other forms of early dismissal, is to prevent courts from vacating an arbitration award. With arbitrations, there is generally no system of appealing a judgment on the basis of errors of law or lack of evidence. However, parties can petition a trial court to vacate an arbitration award on a narrow range of grounds, including the refusal by an arbitrator to hear material evidence relevant to the controversy. Therefore, to make awards robust to withstand judicial scrutiny, arbitrators want to ensure that parties cannot plausibly argue they were denied the opportunity to present pertinent and material evidence. And that means allowing them to put on the case they want.

After a case is submitted following an evidentiary hearing, or the last of the written evidence or argument, the arbitrator typically issues a decision within 30 days. This is generally referred to as an “award” (even if nothing is actually awarded).

Some people think arbitrators are prone to split the difference and come up with compromise awards, in order to try to play to both galleries. But that is not how the system is meant to work. An arbitrator is meant to reach the right decision, not a compromise.

As noted above, arbitrations do not generally allow the losing party to appeal (as opposed to seeking to vacate an award based on very narrow grounds, such as an arbitrator’s failure to disclose conflicts of interest or refusal to consider evidence). The only exception is that some arbitration forums have their own internal appeal system that the parties can opt into at the outset. But these are not very common. And parties can never challenge an arbitration award in an appellate court on grounds of legal error or insufficient evidence.

For some, that is a drawback of arbitration. But others see it as a benefit. Appeals in California typically take well over a year. And the vast majority do not result in any change in the outcome. So by cutting out the appeals process, arbitration forums deliver on their promise of efficient, expedited dispute resolution.

If the parties are worried about entrusting a decision to an arbitrator who might commit what — in a judicial setting — would be reversible error, there are safeguards. One is that parties can choose their arbitrator, assuming they can agree on one. In court, however, you don’t get to choose. Thus, litigants in court in a commercial case, for example, might get a judge who has little understanding of the subject matter, having only just gone on the bench after a career as a criminal prosecutor.

Another safeguard against judges making reversible error is that you can opt to have a panel of three arbitrators. That, obviously, increases costs and it generally only happens in larger, complex cases. But it does assuage the risk of putting too many eggs in one decision-making basket.