Arbitration

Arbitration is a legal technique for the resolution of disputes outside the courts, wherein the parties to a dispute refer it to one or more persons (the "arbitrators", "arbiters" or "arbitral tribunal"), by whose decision (the "award") they agree to be bound. Arbitration in the United States and in other countries often includes alternative dispute resolution (ADR), a category that more commonly refers to mediation (a form of settlement negotiation facilitated by a neutral third party). It is more helpful, however, simply to classify arbitration as a form of binding dispute resolution, equivalent to litigation in the courts, and entirely distinct from the various forms of non-binding dispute resolution, such as negotiation, mediation, or non-binding determinations by experts.

Arbitration is today most commonly used for the resolution of commercial disputes, particularly in the context of international commercial transactions and sometimes used to enforce credit obligations. It is also used in some countries to resolve other types of disputes, such as labour disputes, consumer disputes or family disputes, and for the resolution of certain disputes between states and between investors and states.

Arbitrability

By their nature, the subject matter of some disputes are not capable of arbitration. Matters relating to crimes, status and family law are generally not considered to be arbitrable. However, most other disputes that involve private rights between two parties can be resolved using arbitration. In some disputes, parts of claims may be arbitrable and other parts not. For example, in a dispute over patent infringement, a determination of whether a patent has been infringed could be adjudicated upon by an arbitration tribunal, but the validity of a patent could not (as patents are subject to a system of public registration, an arbitral panel would have no power to order the relevant body to rectify any patent registration based upon its determination).

Advantages

Parties often seek to resolve their disputes through arbitration because of a number of perceived potential advantages over judicial proceedings:

1. when the subject matter of the dispute is highly technical, arbitrators with an appropriate degree of expertise can be appointed
   arbitration is often faster than litigation in court;
2. arbitration can be cheaper;
3. arbitral proceedings and an arbitral award are generally private;
4. the arbitral process enjoys a greater degree of flexibility than the courts;
5. because of the provisions of the New York Convention 1958, arbitration awards are generally easier to enforce abroad than court judgments; and 
6. in most legal systems, there are limited avenues for appeal of an arbitral award, which can mean swifter enforcement and less scope for a party to delay matters.

Disadvantages

However, some of the disadvantages of arbitration can be that:

1. the parties need to pay for the arbitrators, which adds an additional layer of legal cost;
2. although usually thought to be speedier, when there are multiple arbitrators on the panel, juggling their schedules for hearing dates in long cases can lead to delays;
3. in some legal systems, arbitral awards have fewer enforcement remedies than judgments;
4. arbitrators are generally unable to order interlocutory measures against a party, making it easier for a party to take steps to avoid enforcement of an award, such as the relocation of assets offshore;
5. rule of applicable law is not binding, and arbitrators not subject to overturn on appeal may be more likely to rule according to their personal ideals; and
6. large corporations may exert inappropriate influence in consumer disputes, pressuring mediators to decide in their favor or lose future business.

Types of Arbitration

As methods of dispute resolution, arbitration procedure can be varied to suit the needs of the parties. Certain specific "types" of arbitration procedure have developed, particularly in North America.

1. Judicial Arbitration is, usually, not arbitration at all, but merely a court process which refers to itself as arbitration, such as small claims arbitration before the County Courts in the United Kingdom.
2. High-Low Arbitration, or Bracketed Arbitration, is an arbitration wherein the parties to the dispute agree in advance the limits within which the arbitral tribunal must render its award. It is only generally useful where liability is not in dispute, and the only issue between the party is the amount of compensation. If the award is lower than the agreed minimum, then the defendant only need pay the lower limit; if the award is higher than the agreed maximum, the claimant will receive the upper limit. If the award falls within the agreed range, then the parties are bound by the actual award amount. Practice varies as to whether the figures may or may not be revealed to the tribunal, or whether the tribunal is even advised of the parties' agreement.
3. Non-Binding Arbitration is a process which is conducted as if it were a conventional arbitration, except that the award issued by the tribunal is not binding on the parties, and they retain their rights to bring a claim before the courts or other arbitration tribunal; the award is in the form of an independent assessment of the merits of the case, designated to facilitate an out-of-court settlement.
4. Pendulum Arbitration refers to a determination in industrial disputes where an arbitrator has to resolve a claim between a trade union and management by making a determination of which of the two sides has the more reasonable position. The arbitrator must choose only between the two options, and cannot split the difference or select an alternative position. It was initiated in Chile in 1979 and has proved to be a very effective mechanism.
   • This form of arbitration is also known as Baseball Arbitration. It takes its name from a practice which arose in relation to salary arbitration in Major League Baseball.
   • Night Baseball Arbitration is a variation of baseball arbitration where the figures are not revealed to the arbitration tribunal. The arbitrator will determinate the quantum of the claim in the usual way, and the parties agree to accept and be bound by the figure which is closest to the tribunal's award.

Non-Binding Arbitration

Non-binding arbitration is a type of arbitration where the arbitrator makes a determination of the rights of the parties to the dispute, but this determination is not binding upon them, and no enforceable arbitration award is issued. The "award" is in effect an advisory opinion of the arbitrator's view of the respective merits of the parties cases. Non-binding arbitration is used in connection with attempts to reach a negotiated settlement. The role of an arbitrator in non-binding arbitration is, on the surface, similar to that of a mediator in a mediation. However, the principal distinction is that whereas a mediator will try to help the parties find a middle ground to compromise at, the arbitrator remains totally removed from the settlement process and will only give a determination of liability and, if appropriate, an indication of the quantum of damages payable.

Subsequent to a non-binding arbitration, the parties remain free to pursue their claims either through the courts, or by way of a binding arbitration, although in practice a settlement is the most common outcome. The award and reasoning in a non-binding arbitration is almost invariably inadmissible in any subsequent action in the courts or in another arbitration tribunal.

Non-binding arbitration is utilized mostly in the United States and Canada. It is largely unknown in Europe, although in the United Kingdom there is a practice of parties who are seeking a settlement to jointly instruct a Queen's Counsel for an opinion on the merits and likely quantum of a claim, and then to negotiate on the basis of the views expressed in that opinion.

Arbitration Clause

An arbitration clause is a commonly used clause in a contract that requires the parties to resolve their disputes through an arbitration process. Although such a clause may or may not specify that arbitration occur within a specific jurisdiction, it always binds the parties to a type of resolution outside of the courts, and is therefore considered a kind of forum selection clause.

In the United States, the federal government has expressed a policy of support of arbitration clauses, because they reduce the burden on court systems to resolve disputes. This support is found in the Federal Arbitration Act, which permits compulsory and binding arbitration, under which parties give up the right to appeal an arbitrator's decision to a court.

Furthermore, arbitration clauses are often combined with geographic forum selection clauses, and choice-of-law clauses, both of which are also fully enforceable. The result is that a plaintiff may find himself or herself compelled to arbitrate in a strange private forum thousands of miles from home, and the arbitrators may decide the case on the basis of the law of a state or a nation which the plaintiff has never visited.

An arbitration clause may nevertheless be challenged and held invalid if it designates a biased party as the arbitrator. In Graham v. Scissor-Tail, Inc, 623 P.2d 165 (Cal. 1981), for example the Supreme Court of California found that an arbitration clause in a contract of adhesion which necessarily puts disputes before a body that would tend to be biased towards the defendant, is unduly oppressive, and therefore void as unconscionable. For this reason, many arbitration clauses designate widely recognized neutral organizations such as the American Arbitration Association.

Other terms may void an arbitration clause. In Armendariz v. Foundation Health Psychcare Services, Inc, 24 Cal 4th 83 (2000), a California appellate court held that a one-sided arbitration clause in a contract of adhesion for employment (deemed a necessity) may also be voided as unconscionable because of the relative positions of the parties involved. In that case, the court found there to be procedural unconscionability where an employee was held to arbitration but the employer was not, and substantive unconscionability where the contract limited the damages the employee could recover through arbitration.

Informal Clauses

In keeping with the informality of the arbitration process, the law is generally keen to uphold the validity of arbitration clauses even when they lack the normal formal language associated with legal contracts. Clauses which have been upheld include:

• "arbitration in London - English law to apply"
• "suitable arbitration clause"
• "arbitration, if any, by ICC Rules in London"

The courts have also upheld clauses which specify resolution of disputes other than in accordance with a specific legal system. These include provision indicating:

• that the arbitrators "must not necessarily judge according to the strict law but as a general rule ought chiefly to consider the principles of practical business"
• "internationally accepted principles of law governing contractual relations"