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What is Arbitration and How Does It Work?

Due to the rising costs in litigation, there has been a large increase in the use of alternative dispute resolution. By utilizing the methods of alternative dispute resolution, parties are able to often save time and money when resolving their disputes. Arbitration is one method of alternative dispute resolution that is the most frequently used by the litigants.

Is Arbitration Binding?

Arbitration can be binding or nonbinding. A binding arbitration means that the participants to the arbitration must follow the arbitrator’s decision and that the court can enforce the decision. A nonbinding arbitration means that either party may decide not to follow the arbitrator’s decision and instead take the dispute to court. Although, both types of arbitration do exist, binding arbitration is much more common in the judicial system.

How Do Parties Agree to Use Arbitration?

One of the most common ways that parties opt into arbitration is through the use of an arbitration clause in the contract before a dispute arises. In general, the arbitration agreement will list how the arbitrator will be selected by the parties.  If the agreement does not specify it, then after a dispute has arisen, the parties can speak to agencies that manage arbitration in order to receive help with selecting the arbitrator. This contract can also include what the controlling law will be that the arbitrator will follow. For example, this means that the contract can provide if the arbitrator will follow California or Nevada laws. The parties can also decide that they want to use arbitration after a dispute has already arisen and courts can also force the parties into arbitration.  If the courts force the parties to arbitrate, then it may not be a binding arbitration and the parties have the right to go to trial if either party is not satisfied with the arbitrator’s decision.

Positives of Arbitration

There are many different benefits to using arbitration instead of the traditional court system. One of the main benefits to using arbitration is that it is often much cheaper than litigation. The main reason that arbitration can be cheaper is because the process usually happens much faster than litigation, which helps to save money. A study was done and found that from the time of filing to a final decision, the average arbitration took 475 days to reach a decision where a similar case using the traditional court system would take 1.5-3 years to reach a final decision. Arbitration can also be more flexible than the traditional court system because with arbitration you don’t need to be worked into an overcrowded court calendar. Instead, you should be able to schedule events based on the interested parties’ schedules.

Negatives of Arbitration

Although, there are many positives to arbitration there are also some negatives. One potential negative is that if there is a decision in a binding arbitration and a person is not happy with that decision, it is very difficult to vacate, modify, or appeal that decision. There are also concerns with arbitration that the arbitrator was not acting as a neutral third party and was biased towards the other side.  Another negative that comes with arbitration is that by choosing arbitration, a party may be giving up the right to a jury trial.

At our firm, we assist clients with legal issues related to electronic discovery and arbitration. You may contact us to set up an initial consultation.