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Arbitration – definition and meaning

Arbitration is a type of dispute resolution in which an independent third party arbitrates – like a referee. The term refers to either a private or judicial dispute. In an arbitration hearing, an arbitrator or a tribunal mediate the dispute. The parties in dispute hand over the power to decide the dispute.

Therefore, unlike a referee in a sports match, the arbitrator makes a final determination. The arbitrator’s decision determines the outcome of the dispute.

The role of the arbitrator is more similar to that of a judge than a referee. However, the process is less formal than the proceedings in court. In most cases, arbitrators are experts in their own right.

Arbitrator’s decision is binding

As opposed to mediation, conciliation, or negotiation, which are non-binding, arbitration is binding. In fact, it is usually just as final as court action. People often use this type of hearing as an alternative to court action.


Arbitration

Arbitration is often a better alternative to legislation (the courts) for many reasons. First, the arbitrator is usually an expert. Second, the arbitrator can often make decisions that a judge cannot. And finally, it is much cheaper and faster. Furthermore, the organizers can tailor the procedure to the needs of the disputing parties.


Arbitrations come in many sizes

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. The total number of arbitrators must be an odd number. Otherwise, there is a risk of the vote being a tie.

For the hearing to occur, both parties must agree to it. If a contract has a risk of future disputes, both parties insert a clause in the relevant contract.



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

According to London-based Chartered Institute of Arbitrators:

“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 arbitrationArbitration may consist of just one arbitrator and the two disputing parties. However, some are much larger and may comprise several arbitrators and counsels representing 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 on the resolutions of their disputes 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 following people appoint the arbitrators:

1. The opposing parties make the selection directly. The parties may do this either by agreement, or each party appointing an arbitrator.

2. The disputing parties choose an arbitrator, plus an additional arbitrator. In other words, the opposing parties appoint one independent arbitrator each, and then the two arbitrators appoint the third.

3. An external entity, such as an institution that the parties nominate, chooses the arbitrator.

Unlike mediation, neither party has permission to withdraw unilaterally from the hearing.



Advantages of arbitration

– It can be tailored to suit the specific needs of the parties.

– The arbitrators are usually experts in the field of the dispute.

– Everything people discuss during the hearing is confidential. Even the documents that the parties present, if they so wish, are also confidential.

– In most cases, the parties reach a final decision or resolution much faster than through a court. Arbitrations are also much cheaper than court proceedings.

– Grounds for appeal are very limited.

– Whatever the arbitrator decides is binding and enforceable through the courts.


Four common types of arbitration

This image portrays four 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 arbitrators should settle any disputes about their provisions. 4. Contractual: some 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) can control the procedural aspects of the process. They can even control the timing and location of the hearing.

Private & Confidential: in most cases, everything that proceeds in the hearing in private. If the parties wish, what they discuss and present in the hearing is confidential.

Informal: in most countries, there are no prescribed procedural or evidentiary rules regarding this type of hearing.

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

Binding: in most cases globally, the arbitrator’s decision is final and binding. It may be necessary, in very rare cases, to review the decision. This may happen if the award is in violation of national laws or public policy.

Adversarial: the process is adversarial, as in the courts. However, the parties, counsel, and arbitrator determine the nature and demeanor of the hearing.

Flexible: the parties can choose the arbitrator and what procedures to follow. This is does not happen in the courts.


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


Which cases go to arbitration?

There are many types of cases that an arbitrator hears 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, usually 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 Oregon, if you file a civil case for less than $50,000, you have to use an arbitrator. Many US states have similar laws.

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


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.

The arbitrator’s fee

Arbitrators in the United States earn between $50 and $125 per hour for their time. Typically, the parties need to send a deposit to the arbitrator when they select one. They have to pay the whole fee before the hearing begins.

Arbitrators cannot usually charge more than $500. However, in particularly complicated cases the fee may be higher.

Arbitration is probably the most popular dispute resolution process across the globe. It utilizes an adversarial approach in which a neutral party has to to render a decision. This adversarial style makes arbitration similar to the courts.


Attila the Hun arbitration quoteAttila the Hun (c. 406-453) 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. Nearly all 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. Furthermore, it 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. Historians say the Treaty averted a war between the US and Britain.

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

The 1899 Hague Peace Conference saw the world’s major powers agree to a system of arbitration. In that year they created the Permanent Court of Arbitration.

Arbitrators heard the Newfoundland fisheries dispute between the US and UK in 1910. In 1911, the US, UK, and France signed arbitration treaties.

The US and UK resolved a case over Venezuela in 1985 through arbitration without firing one shot.

Both the US and UK soon saw the value of arbitration. Both countries agreed that arbitration rapidly resolved disputes and prevented possible future conflicts.

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

Arbitrators, along with judges, magistrates, bailiffs, and lawyers are ‘officers of the court.’

Video – What is arbitration?

This US Law Essential video explains in very simple and easy-to-understand terms what arbitration is. It shows us a possible scenario where arbitration may resolve a dispute without litigation.