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When to Arbitrate

By
Chris Honeyman

Updated April 2013

 

Definition:

The decision as to whether to use arbitration, rather than some other dispute resolution process.

Users:

Parties, attorneys, and other representatives who are either in a dispute that does not have a specified dispute resolution procedure which they must follow, or who are negotiating a contract and designing a system, with specified methods for resolving disputes which may arise in the future.

Description:

Arbitration is most useful where the parties need a process that is private, relatively quick and economical compared to a trial, and which offers finality. Because the process is flexible in its design, parties are free to choose a version of arbitration which looks similar in its formality to a court setting and which uses — at considerable expense — an extremely experienced arbitrator, in order to get a competent decision on the most complex of factual situations. But they can also choose an informal process, in which a volunteer hears and makes an unwritten decision quickly on a routine consumer or small claims case — or an enormous number of variations in between. In any arbitration, the parties are more likely than under any other dispute resolution process to reach finality in a single proceeding, because most arbitration agreements specify that the decision of the arbitrator may not be appealed except on very narrow grounds (such as undisclosed conflicts of interest). The parties also have the ability to choose an arbitrator, or at least an arbitrator selection procedure, that is tailored to the level of expense they are willing to undergo and the type of expertise they think is appropriate.

Note, however, that increasingly, consumers and employees are being held to "contracts of adhesion," which are standard provisions, written into the fine print in a contract, that require the arbitration of disputes following pre-set rules which suit the interests of the party which drew up the contract in the first place. Examples would be the now-common requirements to arbitrate conflicts with credit card companies, health insurance providers, or brokerage houses. When purchasing goods or services from such businesses (and many others) the individual may have little or no control over the setting or mechanics of the arbitration, as they agreed to the procedure designed by the business and stipulated in the contract. Sometimes businesses want to be perceived as fair, so that the arbitration procedure called for in the standard contract is reasonably even-handed. But that is not always the case. The consequence is that for many one-time users of arbitration, the question of "when to arbitrate" has been decided, for practical purposes, without significant input by them, and they have no practical alternative.

Example:

A Detroit consumer with a taste for fancy shirts bought half a dozen, with ruffles, from a Hong Kong custom shirtmaker. But after a few uses, all of them came back from the dry cleaner one day with the ruffles sagging. The dry cleaner denied any improper handling, and the customer and the dry cleaner agreed to arbitrate the dispute, using a volunteer panel of three arbitrators at the local Better Business Bureau. The customer offered evidence that he had had shirts of this type before from the same supplier, and had also used the same dry cleaner for years, with no previous problem. The dry cleaner described his practices for handling fancy shirts and offered evidence that nothing had changed from any other day in handling these particular shirts. After a half-hour hearing and another half hour's discussion in private, the arbitration panel found that something was clearly wrong — but that it was impossible to determine whether this batch of shirts was defective from the maker or whether something had gone wrong that day at the dry cleaner's, and therefore it would be unfair to blame the dry cleaner merely because he was handy. So the arbitrators dismissed the case. The customer did not get paid back for the shirts; but on the other hand, he did get a fair opportunity to make his case, without spending much time or money on a relatively minor matter. Taking the issue to court would probably have been more expensive in both costs and time, and would likely have had the same result.

Application:

This concept is applicable to any situation in which a client, attorney, or other representative has the capacity to decide what process will be used to resolve a given dispute, or what process should be written into a contract in which the parties anticipate the possibility of disputes in future.

Links to Related Articles:

Arbitration

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