How Arbitration Works

Arbitration works when two parties who are experiencing legal conflict select a neutral third party to represent them. The impartial representative is called an arbitrator. Both parties present their case and evidence before one or more of these impartial arbitrators. After they present their evidence, those presiding make a ruling. Unless otherwise decided before the hearing, the ruling is final and upheld in a court. It is unlikely that a court would reexamine the case once they've come to a decision.

Example of Arbitration

An example of arbitration would be if Jessica and Jane were in a fender bender. Both parties had insurance, and both went through the process of filing claims. Once they filed claims, Jessica's insurance company decided that the accident was Jane's fault and would not pay for damages. However, Jane's insurance company decided not to pay damages as well.

This left Jessica and Jane to pay for damages personally. Both thinking that the other was at fault, neither party would pay to repair the other's vehicle. After some time, they still had not reached a resolution nor made repairs to either vehicle. As a result, Jessica and Jane decided they needed help settling this dispute.

They hired Sam, a local arbitrator. Sam instructed them to bring any evidence to help prove their cases and set a date to hear the case. Once at the hearing, both Jessica and Jane had a chance to tell their stories. After a short deliberation, Sam decided that Jessica was 75% responsible for the damages. Therefore she would be required to pay that percentage of all repairs to Jane's vehicle.

Significance of Arbitration

Historically, people have used arbitration for labor and business. However, it has become a more commonly used practice in the last several decades. Because of this, arbitration now settles a wider range of disputes, from car insurance to international business.

Most arbitration cases are voluntary. Arbitration is typically seen as more beneficial for all parties than litigation. This is typically because arbitration cases are resolved quickly and with less expense than a litigation case. While in recent years arbitration is becoming more formal, often following similar practices to litigation, arbitrators have much less regulation in rulings.

While the flexibility in rulings is a benefit for some, it can also be a hindrance. Because arbitrators are not required to hold to certain ethical standards, they are free to make any ruling they choose. Arbitrators are also more likely to give rulings that are evenly split between the two parties. This means that a ruling is rarely totally in favor of a singular party. These rulings are binding, with very few opportunities for a court to overturn that ruling. There are four instances a court would overturn a ruling that an arbitrator made.

  1. If the arbitrator was found to be blatantly partial in their handling of a case, resulting in a ruling favoring one party.
  2. If the arbitrator was found to have been corrupt in some way, resulting in a fraudulent ruling.
  3. An arbitrator may also be found to have been guilty of misconduct or of overstepping their own power.
  4. If the hearing is not held to legal standards, or the ruling is outside of the arbitrator's powers to give, the case may then be heard by a court.