Chapter 3 - BADM 300

Arbitration: Court-Annexed Arbitration

Court-annexed arbitration—that is, arbitration mandated by the court—differs significantly from the voluntary arbitration process discussed above. There are some disputes that courts will not allow to go to arbitration. Most states, for instance, do not allow court-annexed arbitration in disputes involving title to real estate or in cases in which a court's equity powers are involved.

Arbitration: Different Standard of Court Review

A fundamental difference between voluntary arbitration and court-annexed arbitration is the finality and reviewability of the award. Because court-annexed arbitration is not voluntary, forcing an individual to accept the arbitrator's award would be the same as denying that person a right to have his or her "day in court." Therefore, either party may reject the award for any reason. In the event that one of the parties does reject the award, the case will proceed to trial, and the court will hear the case de novo (meaning "from the beginning"). In other words, the court will reconsider all the evidence and legal questions as though no arbitration had occurred. This is much different from the limited review that courts typically give to arbitration awards (discussed earlier). The party rejecting the award can be penalized, however. Many statutes that provide for court-annexed arbitration impose court costs and fees on a party who rejects an arbitration award but does not improve his or her position by going to trial.

Arbitration

A more formal method of ADR is arbitration, in which an arbitrator (a neutral third party or a panel of experts) hears a dispute and imposes a resolution on the parties. Arbitration differs from other forms of ADR in that the third party hearing the dispute makes a decision for the parties --> Biggest difference is that the decision is binding.

Mediation: Advantages of Mediation

Advantages of Mediation Few procedural rules are involved in the mediation process—far fewer than in a courtroom setting. The proceedings can be tailored to fit the needs of the parties—the mediator can be told to maintain a diplomatic role or be asked to express an opinion about the dispute, lawyers can be excluded from the proceedings, and the exchange of a few documents can replace the more expensive and time-consuming process of pretrial discovery. Disputes are often settled far more quickly in mediation than in formal litigation. Brings the Parties Together. One of the biggest advantages of mediation is that it is not as adversarial in nature as litigation. In mediation, the mediator takes an active role and attempts to bring the parties together so that they can come to a mutually satisfactory resolution. The mediation process tends to reduce the antagonism between the disputants, allowing them to resume their former relationship while minimizing hostility. For this reason, mediation is often the preferred form of ADR for disputes involving business partners, employers and employees, or other parties involved in long-term relationships. Parties Choose the Mediator. Another important benefit of mediation is that the mediator is selected by the parties. In litigation, the parties have no control over the selection of a judge. In mediation, the parties may select a mediator on the basis of expertise in a particular field as well as for fairness and impartiality. To the degree that the mediator has these attributes, he or she will more effectively aid the parties in reaching an agreement over their dispute.

Arbitration: Arbitrators Decision

After each side has had an opportunity to present evidence and to argue its case, the arbitrator reaches a decision. The arbitrator's decision is called an award. It is is usually the final word on the matter. Although the parties may appeal an arbitrator's decision, a court's review of the decision will be much more restricted in scope than an appellate court's review of a trial court's decision. The general view is that because the parties were free to frame the issues and set the powers of the arbitrator at the outset, they cannot complain about the results. A court will set aside an award only in limited situations, such as if the award violates an established public policy. A court may also set aside the award if the arbitrator's conduct or "bad faith" substantially prejudiced the rights of one of the parties.

Arbitration: Setting aside an Arbitration Award

After the arbitration has been concluded, the losing party may appeal the arbitrator's award to a court, or the winning party may seek a court order compelling the other party to comply with the award. As mentioned earlier, the scope of review in either situation is much more restricted than in an appellate court's review of a trial court decision. The court does not look at the merits of the underlying dispute, and the court will not add to or subtract from the remedies provided by the award. The court's role is limited to determining whether there exists a valid award. If so, the court will order the parties to comply with the terms. The general view is that because the parties were free to frame the issues and set the powers of the arbitrator at the outset, they cannot complain about the result.

Arbitration: Arbitration Clauses

Almost any commercial matter can be submitted to arbitration. Frequently, parties include an arbitration clause in a contract (a written agreement—see Chapter 9) specifying that any dispute arising under the contract will be resolved through arbitration rather than through the court system. Parties can also agree to arbitrate a dispute after it arises.

Arbitration: Waiver

Although a defect in the arbitration process is sufficient grounds for setting aside an award, a party sometimes forfeits the right to challenge an award by failing to object to the defect in a timely manner. The party must object when he or she learns of the problem. After making the objection, the party can proceed with the arbitration process and still challenge the award in court after the arbitration proceedings have concluded. If, however, a party makes no objection and proceeds with the arbitration process, then a later court challenge to the award may be denied on the ground that the party waived the right to challenge the award on the basis of the defect. Frequently, this occurs when a party fails to object that an arbitrator is exceeding his or her powers in resolving a dispute because the subject matter is not arbitrable or because the party did not agree to arbitrate the dispute. The question of arbitrability is one for the courts to decide. If a party does not object on this issue at the first demand for arbitration, however, a court may consider the objection waived.

Online Dispute Resolution

An increasing number of companies and organizations are offering dispute-resolution services using the Internet. The settlement of disputes in these online forums is known as online dispute resolution (ODR). The disputes resolved in these forums have most commonly involved rights to domain names (Web site addresses—see Chapter 15) or the quality of goods sold via the Internet, including goods sold through Internet auction sites. ODR may be best for resolving small- to medium-sized business liability claims, which may not be worth the expense of litigation or traditional ADR methods. Rules being developed in online forums may ultimately become a code of conduct for everyone who does business in cyberspace. Most online forums do not automatically apply the law of any specific jurisdiction. Instead, results are often based on general, more universal legal principles. As with offline methods of dispute resolution, any party may appeal to a court at any time if the ODR is nonbinding arbitration. Some cities use ODR as a means of resolving claims against them.

Summary Jury Trial

Another means by which the courts have integrated alternative dispute-resolution methods into the traditional court process is through the use of summary jury trials. A summary jury trial is a mock trial that occurs in a courtroom before a judge and jury. Evidence is presented in an abbreviated form, along with each side's major contentions. The jury then presents a verdict. The fundamental difference between a traditional trial and a summary jury trial is that in the latter, the jury's verdict is only advisory. A summary jury trial's goal is to give each side an idea of how it would fare in a full-blown jury trial with a more elaborate and detailed presentation of evidence and arguments. At the end of the summary jury trial, the presiding judge meets with the parties and may encourage them to settle their dispute without going through a standard jury trial.

International Dispute Resolution: Forum Selection and Choice-of-Law

As you will read in Chapter 11, parties to international transactions often include forum-selection and choice-of-law clauses in their contracts. These clauses designate the jurisdiction (court or country) where any dispute arising under the contract will be litigated and which nation's law will be applied. When an international contract does not include such clauses, any legal proceedings arising under the contract will be more complex and attended by much more uncertainty. For instance, litigation may take place in two or more countries, with each country applying its own national law to the particular transactions. Furthermore, even if a plaintiff wins a favorable judgment in a lawsuit litigated in the plaintiff's country, the defendant's country could refuse to enforce the court's judgment. As will be discussed in Chapter 8, the judgment may be enforced in the defendant's country for reasons of courtesy. The United States, for example, will generally enforce a foreign court's decision if it is consistent with U.S. national law and policy. Other nations, however, may not be as accommodating as the United States, and the plaintiff may be left empty-handed.

Arbitration: Hearing

Because the parties are free to construct the method by which they want their dispute resolved, they must specify the issues that will be submitted and the powers that the arbitrator will exercise. The arbitrator may be given power at the outset of the process to establish rules that will govern the proceedings. Regardless of who establishes the rules, the arbitrator will apply them during the course of the hearing. Restrictions on the kind of evidence and the manner in which it is presented may be less rigid in arbitration, partly because the arbitrator is likely to be an expert in the subject matter involved in the controversy. Restrictions may also be less stringent because there is less fear that the arbitrator will be swayed by improper evidence. In contrast, evidence in a jury trial must sometimes be presented twice: once to the judge, outside the presence of the jury, to determine if the evidence may be heard by the jury, and—depending on the judge's ruling—again, to the jury. In the typical hearing format, the parties begin as they would at trial by presenting opening arguments to the arbitrator and stating what remedies should or should not be granted. After the opening statements have been made, evidence is presented. Witnesses may be called and examined by both sides. After all the evidence has been presented, the parties give their closing arguments. On completion of the closing arguments, the arbitrator closes the hearing.

ADR: Providers of Services

Both government agencies and private organizations provide ADR services. A major provider of ADR services is the American Arbitration Association (AAA). Cases brought before the AAA are heard by an expert or a panel of experts in the area relating to the dispute and are usually settled quickly. Generally, about half of the panel members are lawyers. To cover its costs, the AAA charges a fee, paid by the party filing the claim. In addition, each party to the dispute pays a specified amount for each hearing day, as well as a special additional fee in cases involving personal injuries or property loss. Hundreds of for-profit firms around the country also provide dispute-resolution services. Typically, these firms hire retired judges to conduct arbitration hearings or otherwise assist parties in settling their disputes. The judges follow procedures similar to those of the federal courts and use similar rules. Usually, each party to the dispute pays a filing fee and a designated fee for a hearing session or conference.

International Dispute Resolution

Businesspersons who engage in international business transactions normally take special precautions to protect themselves in the event that a party with whom they are dealing in another country breaches an agreement. Often, parties to international contracts include special clauses in their contracts providing for how disputes arising under the contracts will be resolved.

Negotiation: Mini Trial

Form of assisted negotiation. A mini-trial is a private proceeding in which each party's attorney briefly argues the party's case before the other party. Typically, a neutral third party, who acts as an adviser and an expert in the area being disputed, is also present. If the parties fail to reach an agreement, the adviser renders an opinion as to how a court would likely decide the issue. The proceeding assists the parties in determining whether they should negotiate a settlement of the dispute or take it to court.

Negotiation: Facilitation

Form of assisted negotiation. Disputes may also be resolved in a friendly, non-adversarial manner through facilitation, in which a third party assists disputing parties in reconciling their differences. The facilitator helps to schedule negotiating sessions and carries offers back and forth between the parties when they refuse to face each other in direct negotiations. Technically, facilitators are not to recommend solutions. (In practice, however, they often do.) In contrast, a mediator is expected to propose solutions.

Negotiation: Early Neutral Case Evaluation

Form of assisted negotiation. The parties select a neutral third party (generally an expert in the subject matter of the dispute) to evaluate their respective positions. The parties explain their positions to the case evaluator however they wish. The evaluator then assesses the strengths and weaknesses of the parties' positions, and this evaluation forms the basis for negotiating a settlement.

Arbitration: Court Annexed Arbitration-- Discovery

In court-annexed arbitration, discovery of evidence occurs before the hearing. After the hearing has commenced, a party seeking to discover new evidence must usually secure approval from the court that mandated the arbitration. This is intended to prevent the parties from using arbitration as a means of previewing each other's cases and then rejecting the arbitrator's award.

Arbitration: Public Policy and Legality

In keeping with contract law principles, no award will be enforced if compliance with the award would result in the commission of a crime or would conflict with some greater social policy mandated by statute. A court will not overturn an award, however, simply because the arbitrator was called on to resolve a dispute involving a matter of significant public concern. For an award to be set aside, it must call for some action on the part of the parties that would conflict with or in some way undermine public policy.

Arbitration: Arbitration Process

In some respects, formal arbitration resembles a trial, although usually the procedural rules are much less restrictive than those governing litigation. In a typical arbitration, the parties present opening arguments and ask for specific remedies. Both sides present evidence and may call and examine witnesses. The arbitrator then renders a decision. 1. Submission 2. The Hearing 3. The Arbitrators decision (Award)

International Despite Resolution: Arbitration Clauses

International contracts also often include arbitration clauses that require a neutral third party to decide any contract disputes. In international arbitration proceedings, the third party may be a neutral entity (such as the International Chamber of Commerce), a panel of individuals representing both parties' interests, or some other group or organization. The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral AwardsFootnote has been implemented in more than 145 countries, including the United States. This convention assists in the enforcement of arbitration clauses, as do provisions in specific treaties among nations. The American Arbitration Association provides arbitration services for international as well as domestic disputes.

Mediation: Disadvantages of Mediation

Mediation is not without disadvantages. A mediator is likely to charge a fee. (This can be split between the parties, though, as mentioned, and thus may represent less expense than would both sides' hiring lawyers.) Informality and the absence of a third party referee can also be disadvantageous. (Remember that a mediator can only help the parties reach a decision, not make a decision for them.) Without a deadline hanging over the parties' heads, and without the threat of sanctions if they fail to negotiate in good faith, they may be less willing to make concessions or otherwise strive honestly and diligently to reach a settlement. This can slow the process or even cause it to fail.

Mediation: Court-related Mediation

Mediation is proving to be more popular than arbitration as a court-related method of ADR, and mediation programs continue to increase in number in both federal and state courts. Today, more court systems offer or require mediation, rather than arbitration, as an alternative to litigation. Mediation is often used in disputes relating to employment law, environmental law, product liability, or franchises. One of the most important business advantages of mediation is its lower cost, which can be 25 percent (or less) of the expense of litigation. Another advantage is the speed with which a dispute can go through mediation (possibly one or two days) compared with arbitration (possibly months) or litigation (possibly years). Part of the popularity of mediation is that its goal, unlike that of litigation and some other forms of ADR, is for opponents to work out a resolution that benefits both sides. The rate of participants' satisfaction with the outcomes in mediated disputes is high.

Alternative Dispute Resolution

Methods of ADR range from the parties sitting down together and attempting to work out their differences to multinational corporations agreeing to resolve a dispute through a formal hearing before a panel of experts. Normally with ADR, the parties themselves can control how they will attempt to settle their dispute. They can decide what procedures will be used, whether a neutral third party will be present or make a decision, and whether that decision will be legally binding or nonbinding. ADR also offers more privacy than court proceedings and allows disputes to be resolved relatively quickly.

Arbitration: State arbitration Status

Nearly all states follow the federal approach to voluntary arbitration. Most of the states and the District of Columbia have adopted the Uniform Arbitration Act, which was drafted by the National Conference of Commissioners on Uniform State Laws in 1955. Those states that have not adopted the uniform act nonetheless follow many of the practices specified in it. Under the uniform act, the basic approach is to give full effect to voluntary agreements to arbitrate disputes between private parties. The act supplements private arbitration agreements by providing explicit procedures and remedies for enforcing arbitration agreements. The uniform act does not, however, dictate the terms of the agreement. Moreover, under both federal and state statutes, the parties are afforded considerable latitude in deciding the subject matter of the arbitration and the methods for conducting the arbitration process. In the absence of a controlling statute, the rights and duties of the parties are established and limited by their agreement. In the following case, the parties had agreed to arbitrate disputes involving their contract, but a state law allowed one party to void a contractual provision that required arbitration outside the state. The court had to decide if the FAA preempted (took priority over, or blocked—

Arbitration: Choice of Law

Notwithstanding federal preemption of conflicting state laws, the FAA has been interpreted as allowing the parties to choose a particular state law to govern their arbitration agreement. The parties may choose to have the laws of a specific state govern their agreement by including in the agreement a choice-of-law clause. The FAA does not mandate any particular set of rules that parties must follow in arbitration. The parties are free to agree on the manner best suited to their needs. Consistent with this view that arbitration is at heart a contractual matter between private parties, the United States Supreme Court has upheld arbitration agreements containing choice-of-law provisions.

Arbitration: Court Annexed Arbitration-- Role of the arbitrator:

Notwithstanding the differences between voluntary and court-annexed arbitration, the role of the arbitrator is essentially the same in both types of proceedings. The arbitrator determines issues of both fact and law. The arbitrator also makes all decisions concerning applications of the rules of procedure and evidence during the hearing.

Arbitration: Court Annexed Arbitration-- Waiver

Once a court directs that a dispute is to be submitted to court-annexed arbitration, the parties must proceed to arbitration. As noted above, either side may reject the award that results from the arbitration for any reason. If a party fails to appear at, or participate in, the arbitration proceeding as directed by the court, however, that failure constitutes a waiver of the right to reject the award.

Mediation: Mediation: Form of ADR

One of the oldest forms of ADR is mediation. In mediation, a neutral 3rd party acts as a mediator and works with both sides in the dispute to facilitate a resolution. The mediator normally talks with the parties separately as well as jointly, emphasizes points of agreement, and helps the parties to evaluate their options. Although the mediator may propose a solution (called a mediator's proposal), he or she does not make a decision resolving the matter. The mediator, who need not be a lawyer, usually charges a fee for his or her services (which can be split between the parties). States that require parties to undergo ADR before trial often offer mediation as one of the ADR options or (as in Florida) the only option.

Arbitration: Conflicts of Law

Parties are afforded wide latitude in establishing the manner in which their disputes will be resolved. Nevertheless, an agreement to arbitrate may be governed by the Federal Arbitration Act (FAA) or one of the many state arbitration acts, even though the parties do not refer to a statute in their agreement. Recall that the FAA covers any arbitration clause in a contract that involves interstate commerce. Frequently, however, transactions involving interstate commerce also have substantial connections to particular states, which may in turn have their own arbitration acts. In such situations, unless the FAA and state arbitration law are nearly identical, the acts may conflict. How are these conflicts to be resolved? As a general principle, the supremacy clause and the commerce clause of the U.S. Constitution are the bases for giving federal law preeminence. When there is a conflict, state law is preempted by federal law. Thus, in cases of arbitration, the strong federal policy favoring arbitration can override a state's laws that might be more favorable to normal litigation.

Arbitration: Court Annexed Arbitration-- Which rules apply?

Regarding the rules of evidence, there are differences among the states. Most states impose the same rules of evidence on an arbitration hearing as on a trial. Other states allow all evidence relevant to the dispute regardless of whether the evidence would be admissible at trial. Still other jurisdictions leave it to the arbitrator to decide what evidence is admissible.

ARD: ADR Forum and Services

Services facilitating dispute resolution outside the courtroom are provided by both government agencies and private organizations, as well as by companies conducting business online.

Arbitration: Submission

The arbitration process begins with a submission. Submission is the act of referring a dispute to an arbitrator. The parties may agree to submit questions of fact, questions of law, or both to the arbitrator. The parties may even agree to leave the interpretation of the arbitration agreement to the arbitrator. In the case of an existing agreement to arbitrate, the clause itself is the submission to arbitration. The submission typically states the identities of the parties, the nature of the dispute to be resolved, the monetary amounts involved in the controversy, the location at which the arbitration is to take place, and the intention of the parties to be bound by the arbitrator's award.

Arbitration: Fact finding and Legal conclusions

The arbitrator's fact findings and legal conclusions are normally hnal. That the arbitrator may have erred in a ruling during the hearing or made an erroneous fact finding is normally no basis for setting aside an award: the parties agreed that the arbitrator would be the judge of the facts. Similarly, no matter how obviously the arbitrator was mistaken in a conclusion of law, the award is normally nonetheless binding: the parties agreed to accept the arbitrator's interpretation of the law. A court will not look at the merits of the dispute, the sufficiency of the evidence presented, or the arbitrator's reasoning in reaching a particular decision. This approach is consistent with the underlying view of all voluntary arbitration—that its basis is really contract law. If the parties freely contract with one another, courts will not interfere simply because one side feels that it received a bad bargain. Any party challenging an award must face the presumption that a final award is valid.

Arbitration: Arbitration Status

The federal government and many state governments favor arbitration over litigation. The federal policy favoring arbitration is embodied in the Federal Arbitration Act (FAA),Footnote enacted in 1925.

Litigation

The process of resolving a dispute through the court system—is expensive and time consuming. Litigating even the simplest complaint is costly, and because of the backlog of cases pending in many courts, several years may pass before a case is actually tried

Arbitration: Disadvantages of Arbitration

The result in any particular dispute can be unpredictable, in part because arbitrators do not need to follow any previous cases in rendering their decisions. Unlike judges, arbitrators do not have to issue written opinions or facilitate a participant's appeal to a court. Arbitrators must decide disputes according to whatever rules have been provided by the parties, regardless of how unfair those rules may be. In some disputes, arbitration can be nearly as expensive as litigation. In part, this is because both sides must prepare their cases for presentation before a third party decision maker, just as they would have to do to appear in court. Discovery usually is not available in arbitration, however, which means that during the hearing the parties must take the time to question witnesses whom, in a lawsuit, they would not need to call.

Negotiation: Negotiation

The simplest form of ADR is negotiation, a process in which the parties attempt to settle their dispute informally with or without attorneys to represent them. Attorneys frequently advise their clients to negotiate a settlement voluntarily before they proceed to trial. Parties may even try to negotiate a settlement during a trial or after the trial but before an appeal.

Arbitration: Defects in the Arbitration Process

There are some bases for setting aside an award when there is a defect in the arbitration process. These bases are typified by those set forth in the Federal Arbitration Act. Section 10 of the FAA provides four grounds on which an arbitration award may be set aside. --The award was the result of corruption, fraud, or other "undue means." --The arbitrator exhibited bias or corruption. --The arbitrator refused to postpone the hearing despite sufficient cause, refused to hear evidence pertinent and material to the dispute, or otherwise acted to substantially prejudice the rights of one of the parties. --The arbitrator exceeded his or her powers or failed to use them to make a mutual, final, and definite award.