Arbitration – definition and meaning

Arbitration is a type of dispute resolution in which an independent third party arbitrates – like a referee – in a private or judicial dispute. In an arbitration hearing, the dispute will be mediated by an arbitrator or a tribunal. The parties in dispute hand over power to decide the dispute. So unlike a referee in a sports match, the arbitrator actually makes a final determination – decision – on the outcome of the dispute.

Some experts say that the role of the arbitrator is more similar to that of a judge. However, the process is usually less formal. In most cases arbitrators are experts in their own right.

As opposed to mediation, conciliation or negotiation, which are non-binding, arbitration is usually just as final and binding as court action. In fact, it is often used as an alternative to litigation (court action).


Arbitration

Arbitration is often a better alternative to legislation (the courts) for many reasons: the arbitrator is usually an expert in whatever is being disputed, the arbitrator can often make decisions that a judge can’t, it is much cheaper and faster, and the procedure can be tailored to the needs of the disputing parties.


Put simply, arbitration is the referral of a dispute to a third party. It can either be just one third party or a group of arbitrators. If it is a group, it usually consists of 3, 5, 7, etc. members – odd numbers – this prevents any vote from being a tie.

For arbitration to occur, typically both parties must agree to it. In the case of disputes arising in the future under a contract, both parties insert an arbitration clause in the relevant contract.



The arbitrator reaches a decision either by following hearings that take place at an agreed location, or on a documents-only basis.

The London-based Chartered Institute of Arbitrators, defines arbitration as follows:

“Arbitration is a non-judicial process for the settlement of disputes where an independent third party – an arbitrator – makes a decision that is binding.”


Types of arbitration

Arbitrations range from simple and straightforward ones with just one arbitrator and the two disputing parties, or two, three or more arbitrators and counsel representing the interests of either party.


The principles of arbitration

According to Mediate.com, the general principles of arbitration are:

– To obtain a fair resolution of disputes by a third party, without delay or unnecessary expense. The third party must be impartial.

– Parties must be free to agree how their disputes are resolved, but have to adhere to safeguards that are necessary in the public interest.

– The process and the final decision should be free of any court interference.

The arbitrators are generally appointed:

1. Directly by the opposing parties. This may be either by mutual agreement, or each party appointing an arbitrator.

2. By the disputing parties and then an additional arbitrator, i.e. opposing parties appoint one independent arbitrator each, then the two arbitrators appoint the third.

3. Externally, such as an institution nominated by the parties, or a court.

Unlike mediation, neither party is allowed to withdraw unilaterally from arbitration.



Advantages of arbitration

– it can be tailored to suit the specific needs of the parties

– arbitrators are usually experts in the field of the dispute

– everything that is discussed is confidential, as are any documents that are presented (if the parties so wish)

– in most cases, a final decision or resolution is reached much faster and cheaper than through a court

– grounds for appeal are very limited

– whatever is decided is binding and enforceable through the courts.


Four common types of arbitration

1. Ad-Hoc: the parties decide all aspects of the hearing. 2. International: the parties are in different countries. This type usually includes a provision for future disputes in a contract. 3. Statutory: these may arise out of statutory provisions – some Acts of parliament provide that any dispute about their provisions shall be settled by arbitrators. 4. Contractual: a number of commercial contracts divert certain disputes about their interpretation or performance to arbitration.


The Oregon Judicial Department makes the following comments, including some advantages to using an arbitrator rather than a judge:

“Arbitration is a fast way to get a decision when you are in a dispute. Arbitration is more flexible and less formal than court. Usually, an arbitration can be scheduled faster than a trial. Sometimes, if the parties want, arbitrators can decide things that judges are not allowed to decide.”

“Arbitration is like a trial but less formal. In arbitration, two sides present their evidence to an arbitrator. The arbitrator decides who wins and who loses. An arbitrator does the job that a judge or jury would normally do in court.”

Characteristics of arbitration

The Canadian Department of Justice lists the following arbitration features:

Voluntary: both disputing parties must agree to arbitrate, usually in writing.

Controlled: the parties and people who represent them (counsel) are able to control the procedural aspects of the process, including the timing and location of the hearing.

Private & Confidential: the hearing is typically conducted in private. If the parties select, everything that is discussed and presented in the hearing is confidential.

Informal: in most countries there are no prescribed procedural or evidentiary rules regarding arbitration.

Adjudicative: as in the courts, once a case has been presented by each party, the arbitrator makes a decision.

Binding: in the vast majority of cases across the world, the arbitrator’s decision is final and binding. In very rare cases, such as when the award is in violation of national laws or public policy, it might be reviewed.

Adversarial: even though the process is based on the adversarial style used in the courts, the nature and demeanor of the hearing are determined by the disputing parties, the arbitrator and the counsel.

Flexible: the parties are able to choose the arbitrator and what procedures are to be followed. This is not possible in the courts.


Benjamin Franklin arbitration quoteBenjamin Franklin (1706-1790), one of the Founding Fathers of the United States, a renowned polymath, leading author, political theorist, inventor and scientist, once said: “When will mankind be convinced and agree to settle their difficulties by arbitration?” (Image: Wikipedia)


Kinds of cases that go into arbitration

Many types of cases are heard by an arbitrator rather than a judge in a court. Under Oregon State law, for example, there are two kinds: 1. Some civil actions involving claims for money or damages, 2. Some family law matters.

In a civil case, one party sues another, in most cases for money damages. Parties may be individuals or businesses. The case may be about injuries and costs from an accident, or a disagreement regarding a contract.

In many US states, including Oregon, all civil cases filed in state court involving less than $50,000 must be resolved by an arbitrator, except small claims cases.

In Oregon, state law says any dispute regarding domestic relations or family law where the parties only disagree on what to do with their debts and property, must be heard by an arbitrator.


Bertrand Russell arbitration quoteBertrand Russell (1872-1970), a British philosopher, mathematician, historian, social critic and logician, once said: “When two great powers disagree about anything – it doesn’t matter what – they must find a way to settle it somehow by arbitration or by negotiation, not by war or threat of war. (Image: bertrandrussell.org)


Sometimes parties might agree to arbitrate in cases of child or spousal support.

Criminal cases always go to the courts – they are never heard by an arbitrator.

An arbitrator in the United States is paid between $50 and $125 per hour for his or her time. Typically, the parties need to send a deposit to the arbitrator when one is selected, and must pay the whole fee before the hearing begins. In most cases, the arbitrator’s fee is limited to $500, unless it is a particularly complicated case.

Arbitration is probably the most popular and widely-known dispute resolution process across the globe. It utilizes an adversarial approach in which a neutral party is required to render a decision – in this sense it is similar to the courts.


Attila the Hun arbitration quoteAttila the Hun (c. 406-453), the ruler of the Huns in Central and Eastern Europe, was suspicious of arbitration. He once made the following comment: “Never arbitrate. Arbitration allows a third party to determine your destiny. It is a resort of the weak.” (Image: biography.com)


International arbitration

Sometimes the disputing parties are from different nations, without recourse to the courts of a particular country. The vast majority of international disputes are commercial.

According to the Australian Centre for International Commercial Arbitration (ACICA), the resulting award in international commercial arbitration cases is final and binding on the parties, and is readily enforceable across the world.

In our current global economy, the ability to settle international disputes is a vital part of doing business effectively.

ACICA writes on its websites:

“International arbitration is no longer just an alternative to litigation but an important tool in safeguarding commercial relationships and managing risks. The several advantages of international arbitration have made it the preferred method for resolving cross-border disputes in the world today.”

Brief history of arbitration

The United States and United Kingdom were pioneers in the use of arbitration to resolve disputes. Historians say it was first used in the Jay Treaty of 1795, which is credited with averting a war between the US and Britain.

It also played a major role in the Alabama Claims case of 1872, a series of demands that the US government sought from the UK.

In 1899, the Hague Peace Conference saw the world’s major powers agree to a system of arbitration – the Permanent Court of Arbitration was created.

Arbitrators were used in the Newfoundland fisheries dispute between the US and UK in 1910. Arbitration treaties were signed between the US, France and the UK in 1911.

Diplomats and elites widely discussed using arbitrators in the 1980-1914 era. A dispute in 1985 between the US and UK over Venezuela was resolved through arbitration without one shot being fired.

Both the US and UK soon saw the value of arbitration in rapidly resolving disputes and avoiding possible future conflicts.

According to the Online Etymology Dictionary, which specializes in the origin of words, the term first emerged in the English language in Britain in the late 14th century with the meaning ‘absolute decision’. It came from Old French Arbitracion, which originated from Latin Arbitrationem (nominative: arbitratio), meaning ‘judment, will’.

Video – What is arbitration?

This US Law Essential video explains in very simple and easy-to-understand terms and examples what arbitration is. It shows us a possible scenario where a dispute might be resolved without litigation (going to court).