Going to court can be costly, time consuming, and public – all things that can be harmful to any business. Arbitration doesn’t offer a guarantee to remedy those three things, but it can be a valuable option for those seeking faster results, cost-effectiveness, and a more discreet process.
Arbitration resembles a private court, where a third party decides an outcome that is generally binding. It’s important to note this is different than mediation, where a neutral third party helps parties fix issues amongst themselves with an outcome that’s generally not binding.
Arbitrators oversee arbitration hearings, where parties advocate their position and submit evidence. At the end of the hearing, arbitrators issue a decision with an award that resolves the dispute. These decisions are typically binding and will be upheld in state and federal courts.
Arbitration isn’t a given; it occurs because parties intentionally have an arbitration agreement in place or agree to arbitrate when a dispute occurs. You can find a stand-alone arbitration agreement or clause in many consumer contracts.
The agreement defines key elements of the arbitration process, including its own set of rules and procedures. Some examples of rules relate to the number of arbitrators, selection process, background requirements, evidence that may be introduced, inclusion of a class action waiver, and expenses the parties will pay.
Parties will usually share the cost of the arbitrator. Some additional costs could include room rentals for the hearing(s) and various administrative fees. Each party is responsible for fees related to their own lawyers. The parties are not expected to cover the legal expenses of the opposing side unless the agreement, the arbitration organization, and the law allows. Arbitration organizations may have additional rules to consider.
Arbitrators are typically retired judges, attorneys, or other people with experience resolving legal disputes. Some may have experience in business law, and consumer lending and transactions. One of the advantages of arbitration is that the parties have an active say in who decides these disputes. Therefore, parties will jointly agree to a single arbitrator or follow the rules of the arbitration organization when they can’t agree to one. This is crucial as arbitrators make important decisions throughout the dispute and its outcome.
During arbitration, parties will give opening statements and present evidence. The arbitrator assesses those statements and evidence to render a decision. Arbitration is typically faster than court trials by streamlining the entire process. For example, parties that arbitrate experience relaxed rules regarding what evidence can be introduced into the proceeding. This saves parties time, money, and energy in the discovery phase.
Once the hearing concludes, the arbitrator issues a decision that is rarely appealable to a court. Despite the limited rights to appeal in courts, arbitrator’s decisions are readily enforceable upon the issuance of the decision in those very same courts.
For companies, the private nature of arbitration helps ensure several objectives are met. Companies can protect valuable secrets that would be public record in a lawsuit. Arbitration helps avoid the negative publicity of major court trials by occurring out of the public eye. Finally, it lets companies protect their reputation and goodwill, while avoiding the higher costs of those headline-grabbing court trials.
Still, arbitration has drawbacks and limitations for companies to consider. Most awards are final and difficult to appeal. If a party is unhappy with the outcome of an award, they may have to accept awards that otherwise were appealable in litigation.
While arbitration can be cheaper than litigation, it’s not always less expensive – especially in complex cases. Arbitrator fees, which are paid by the parties, can be significant. The longer arbitration continues, the more the parties will need to pay the arbitrator. This stands in stark contrast to judges, who are publicly funded.
Finally, with limited discovery, it can also be harder for parties to fully investigate their case. Because the proceedings are private, no public records or legal precedents are established in prior arbitrations. This means a company would need to arbitrate every matter on a case-by-case basis, even if the company resolved an identical arbitration under identical facts before.
Dealers should consider the benefits and limitations of arbitration for use in their contracts. We encourage you to discuss these with your legal counsel and determine if arbitration is right for you and your unique business.
Reynolds and Reynolds understands arbitration isn’t suitable for all dealerships. Therefore, we offer forms with and without arbitration provisions to meet your needs.