Arbitration - Another Contract - Another Chance to be Creative!
Arbitration is another form of Alternative Dispute Resolution (ADR.) Alternative means as an alternate to the judicial system. It can be faster and less expensive. It can also be more expensive and take longer. So be careful what you agree to, because once you've agreed you are probably stuck with it.
Arbitration is a trial without the rules of evidence, or the judge. I like arbitration when the parties can try their case before a person that has some knowledge of area of the law that governs the dispute. This is usually an advantage to all the parties, and many times much more economical. Today many of our judges are elected or appointed because they were successful prosecutors. Unfortunately, lawyers that are successful prosecutors don't necessary make good civil judges, or understand the basics of business or contract law.
So the trade off is that you have an opportunity to select an arbitrator that will hopefully understand the dispute, and you waive the right to appeal even if the arbitrator makes a serious mistake or ignores evidence. "Final and binding" means final and binding. Absent fraud, there is little the parties can do to overturn a decision of the arbitrator. The American Arbitration Association has excellent procedures and standard agreements to arbitrate. Although, I think that sometime they can be considered a little expensive if they do all the administrative work. (It all depends on the size of the matter to be arbitrated.)
However, the arbitrator's authority is limited by the arbitration agreement. (Please note that I did not say that the arbitrator's power is limited by the law, because as a practical matter the arbitrator can ignore the law and the decision is still final and binding.)
When drafting an arbitration agreement, the parties or the attorney can be creative if they want to be. I have drafted and negotiated arbitration agreements that: limited the amount of time each party would have to present their respective case; establish a range within which the arbitrator had to make an award; added or removed the applicability of the rules of evidence; limited the location of the hearings; limited the number of days that the arbitration could take place; and, otherwise contracted or expanded the remedies available.
What happens when a party signs an arbitration without understanding the ramifications of the decision. The Contracts Prof Blog reports on an interesting arbitration agreement signed by participants of a show called Judge Pirro. Apparently the parties agree to dismiss their respective claims or lawsuits and enter into final and binding arbitration before Jeaninne Pirro. The agreement signed by the participants is egregious in it's over reaching scope. Is such an agreement enforceable? Probably not to the extent the parties are required to waive non-waiverable rights in California. But otherwise, parties are generally free to contract for whatever terms they choose so long as the terms are not illegal. In the agreement in question, there is no governing law - the "Judge" is allowed to apply whatever law she wants - or no law at all. This is a very unusual agreement, but not necessarily unenforceable.
When the parties agree on final and binding arbitration, this agreement removes it from the court unless and until there is a dispute over the enforcement of the arbitration award, or one party tries to get the arbitration award overturned (which is very difficult to say the least.) Additionally, when one party has evidence that is not readily admissible in a court of law - arbitrators will usually at least listen to the evidence.
Most arbitrations, I would guess, occur as a result of pre-dispute arbitration agreements. When the parties contract for what ever their business purpose, they include an agreement to arbitrate any disputes. Frequently in the courts you will see decisions where one party or the other tries to either enforce an arbitration agreement, or defeat a demand to arbitrate. Arbitration is governed by the Uniform Arbitration Actas enacted in the states, and the courts have show a strong preference to enforce arbitration agreement.
Agreements to arbitrate should not be entered into blindly. Arbitration is a very good process in many cases, but tailor the agreement to meet the needs of the parties. You can even designate who will be the arbitrator.
