Is Arbitration Effective for U.S Business?

All You Need to Know about Arbitration Proceedings in USA

Article by Adhip Ray and Rahul Sodhi

Arbitration is an alternative to a court proceeding as the proceedings of the arbitration are less formal and more flexible than a court proceeding and it can provide fast and effective awards or results in a shorter span of time at a low cost with greater certainty and with a higher degree of privacy to the parties.

In the process of arbitrations, the parties submit the dispute to one or more impartial arbitrators who are asked to make a binding decision on the merits of the dispute. The parties can agree to the arbitration process before or after the dispute arises as they can choose the arbitration with the permission of the court in between the court proceeding if both the parties agree. 

For that, the parties need to create a contract between them.

Then, the Court can provide an arbitrator to them and the court will not interfere in the matters of the arbitration.

And if either party is not satisfied with the award or any decision that is declared by the arbitrator, the party can appeal to the Court.

In most of the arbitrations in the U.S, they involve a single arbitrator agreed upon by the parties and appointed by the arbitral institution or by the court. In the larger matters, the three members of the panel are appointed. The parties have control over the design of the arbitration procedure.

In the pre-hearing stage of the arbitration, the parties work with the Arbitrator to address details of the agreed procedure. The Arbitration Hearing can be as short as half a day for the most basic cases and it can last longer for complex cases. Arbitration Awards are final and do not require court review, although Awards are enforceable in court if needed.

Parties in larger cases may choose to include arbitrator review or appeal procedures in their arbitration agreement. 

In U.S arbitration proceedings, it is generally preferred that the arbitration proceeding should be held by a recognized institute such as American arbitration association as the recognized institute can guide parties on whether a matter is suitable for arbitration, assist with arbitration clauses and selection of appropriate arbitration methods and rules.

In arbitration proceedings, the Federal Arbitration Act is applied to any proceeding if there is some clause to that effect. Then the court can not interfere, as most of the uses of arbitration are commercial arbitration and in business to business matters.

Arbitration in the U.S businesses is done based on the agreement by the parties which are free to choose the substantive law that will apply and no one can interfere with it.

Related: How You Can Create Contracts like a Pro

Arbitration and Its Effectiveness

The commercial arbitration process is effectively used in the United States to resolve a variety of disputes that have been held up in the state. The disputes can be of any matter from ordinary contract disputes to more specialized disputes in construction, real estate, energy, as well as banking or financial matters.

New York is typically regarded as the center for arbitrational proceedings as most of the matters settled in New York are with the basic aim of settling the matter and not going towards litigation.

It has a well-settled jurisdictional and statutory framework for the adjudication for all sorts of arbitration-related disputes. If we see jurisprudence on the arbitration then most of the matters in the US are based on consumer-related matters. 

Supreme Court of USA held that class arbitration matters will only be held if the parties have reached the arbitration process or in simpler terms, both the parties have agreed upon the arbitral proceedings as this classification were on the specific class who were raising the class waivers.

But it has changed in later years as the Court said that class waivers can be raised in commercial contracts that are enforceable in certain circumstances to prevent class arbitrations – even those that are based on alleged violations of federal statutes.

arbitration and class waivers

Mandatory form of arbitration is a unique way of dealing with civil disputes. In several states of the US as in Oregon, mandatory arbitration is required in case of civil suits where the prayer of the award is less than fifty thousand dollars.

There are various chances where the parties can accept the arbitration award which is given by the arbitrator without going for appeal or going to the court. 

Some state laws require mandatory arbitration of various types of disputes in which the parties concerned are permitted to appeal because of the non-binding nature of arbitration.

Non-binding arbitration means that any party can refuse the arbitration award and can go through the litigation process for a better award. 

Some states have statutory frameworks in place which guide the appeal process after arbitration. For example in Washington, if the party want to go through the litigation process after rejecting the arbitral award, then there is a rule that if the court award is not better than the arbitral award, the party who is appealing to the court will have to pay the liability of the opposing party and the charges which the court will frame.

In the US the arbitration rules vary from state to state but we need to keep in mind that it does not mean that there is basic difference in the rules governing arbitration. The rules are mostly the same, but the procedure is different. 

In the non-binding form of arbitration, there is a powerful incentive to the parties to accept the award and not to go for a court review, as the awards may vary from state to state. In Washington the decision of arbitration will be binding until and unless the parties may go for a court review.

In binding arbitration, the announcement of the award and appealing to the arbitration procedure is final as in this process the party may not go through the litigation process if the award is not in their favour. Appealing in the judicial system against the arbitration award is not available to them.

In many other states, arbitration award is converted into a judgement by the court and it has to be created like a legal mechanism in which the judgement holder can pursue to all the collection activities and the process is known as the confirmation which is contemplated by Federal Arbitration Act and often included in the arbitration agreements which are signed by the parties or the agreement presented to the arbitrator.

However, the Federal Arbitration Act does not apply to most of the states and the states which have adopted the Uniform Arbitration Act or the revised form of the Act in which the state law allows the arbitration award into the judgement as well.

In such cases, the arbitration can be seen as more attractive than litigation. As arbitration is an adversarial process and the announcement of the award creates winners and losers, it can be considered as a trial that gives the result in a shorter time and without any emotionally driven judgements.

It is a more formal process than negotiation and mediation in many ways and it also resembles a trial. The parties present the evidence in front of the arbitrator and after the case is presented by both sides the arbitrator issues the award.

The rules of procedure that apply to litigation in a trial do not apply to that of an arbitration. Specifically, the rules are often less formal or less restrictive on the presentation of evidence and the arbitration procedure. Arbitrators decide which evidence to allow, and they are not required to follow precedents or to provide reasoning in the final award.

It does not mean that arbitrations do not adhere to rules, but those rules are not the same as rules for litigation. The rules that are followed in the arbitration are a set of external rules known to all parties involved in any given arbitration. 

Arbitration can be more expensive than negotiation or mediation, but it is often less expensive than litigation in the US.

Arbitration is not necessarily inexpensive, as the parties must bear the costs of the arbitrator, and they have to retain the counsel to represent them. 

Additionally, in mandatory arbitration cases, arbitration may be required to take place in a distant city from one of the other disputes.

This means that the party will have to pay for travel costs and associated expenses during the arbitration proceeding. The mandatory arbitration clauses avoids the difficult choices of law that litigants often face in the court as particularly in employment law cases they have to face a lot more difficulties in the filing process, presenting the evidence.

Arbitration is faster than litigation process, but it is not as private as negotiation or mediation. Unlike mediators, the arbitrators are often subject matter experts in the legal area of dispute.

This is true for arbitrators as the dependency of the award depends on their skill and experience in knowing the true facts and noticing the evidence.

Whether Mandatory Arbitration is Fair in Business?

Are you forced to refer your dispute to arbitration in USA?

Arbitration is only fair when both parties will be equally situated. If we see from the perspective of Business to Business arbitrations, they are perceived as fair, only when businesses are almost the same size or have equal bargaining power.

This is because they can devote approximately the same amount of resources to a dispute resolution, and they both understand the subject under dispute, whatever the commercial issues they will have to face or the difficulties that can affect their business.

If we see in business disputes, the subjects of disputes are commercial issues, which may not implicate the deeper social and ethical questions or any matter. 

For example, if there are contract disputes between businesses it might involve whether the goods are conforming goods or nonconforming goods under the Uniform Commercial Code.

In this dispute, no social or ethical questions are being raised. The issue of fairness often arises in business to employee and business to consumer situations. In these situations, particularly the parties with unequal bargaining power have entered into a contract that contains a mandatory arbitration clause.

In such cases, the weaker party has no real negotiating power to modify or to delete the mandatory arbitration clause, and therefore the unwilling party is required to agree to such a clause.

You can take the example of credit card contracts that contain mandatory arbitration clauses. This means that if a consumer wishes to have a credit card account, he will be agreeing to waive his constitutional rights to a trial by signing the credit card contract and the Federal Arbitration Act will require parties to adhere to the mandatory arbitration agreed to in such a contract, if a dispute arises with respect to that contract.

Due to this, a question was raised that whether the consent was legitimately acquired. U.S. Supreme Court has stated in the context of business to employee contract that unequal bargaining power alone is not a sufficient reason to hold that arbitration agreement is unenforceable.

Another issue was raised about the breach of arbitration. It refers to the instance when a party initiates court proceedings about a matter that is properly referable to arbitration. Here, an aggrieved party can apply to a court to stay or dismiss the litigation, and to compel the parties to arbitrate as per their agreement.

Similarly there is also a jurisdictional point of view when referring cases to arbitration. If a party starts an arbitration procedure and there is no valid arbitration clause or it is done via a violation of an agreement to court jurisdiction, the party opposing arbitration can ask the arbitrators to decline jurisdiction or they can also ask a court to stay the arbitration.

For instance, a party who has not participated in the arbitration and who has not made or been served with an application to compel him with the arbitration in certain instances, can apply to stay the process of arbitration, on the ground that a valid agreement was not made by the party and that there is no enforceability of the Act.

The local courts also have the power to grant anti-suit injunctions to restrain the party subject to their jurisdiction so that they can not pursue the litigation when they are part of a breach of agreement. As the anti-suit injunctions interfere with the proceedings of the foreign committee, therefore the US courts also take the concerns of the international committees in issuing the injunctions.

If the party fails to comply with the injunction, they can be held liable for contempt of court.

The concerns about fairness do not end with the contract as if a dispute arises and a mandatory arbitration is commenced, the unequal power between the parties will continue to be an important issue and may even tip the scales.

If we see the case between a credit card company and an average consumer, the credit card company would be in a more powerful position than a consumer because of the company’s financial strength and all that comes with it.

If the consumer is the aggrieved party, he may very well decide to drop the matter, especially if the arbitration clause requires arbitration proceedings to occur in a distant city. The credit card company will have vast financial resources as compared to the consumer.

The credit card company’s legal counsel will know how to navigate the arbitration process and will have a ton of experience in dispute resolution and may create processes that often confuse those people who are not trained in law.

Additionally, the list of arbitrators may include people who are dependent on business from the credit card company, thereby creating or at least suggesting the inherent conflict of interest. Many mandatory arbitration clauses create binding awards on one party while reserving the right to bring a claim in court for the other party.

In a mandatory arbitration clause, they may allow the credit card company to appeal an arbitrator’s award but not to render an award binding on the consumer. This would allow the credit card company to appeal a favorable ruling while requiring the consumer to abide by an arbitrator’s unfavorable ruling.

However, we do not mean to say that arbitration awards are always unfair and is sided to the powerful. It has its flaws and defects but is surely a powerful way to get compensation fast.

In a case of business to employee disputes, there was a claim relating to sexual assault that was subjected to mandatory arbitration when the employee signed an employment contract with a mandatory arbitration clause.

When the employee tried to bring the case in court, the judge dismissed the case due to her employment contract but when she bought the case in the arbitration process, she won the case and she was awarded by the hefty compensation as the arbitration process is truly neutral and works in the best interest of the parties involved.

Enforcement of the Awards

How long does it take to enforce arbitration awards

The enforcement of the award of arbitration is done in various categories. 

If we talk about the domestic category in this all the arbitral awards that are based in New York are enforceable in the local courts. Once an award is announced as a judgment of the applicable local court, through a petition for confirmation of the award, it is enforceable to the same extent as a judgment of the court.

In the Foreign arbitration awards, the US has made two recognitions – the first one is reciprocity reservation, in which they are agreeing to recognition and enforcement of only those awards which are made in the territory of another contracting state. 

The other is to apply “the New York Convention” concerning commercial disputes.

The Foreign arbitration awards are generally enforceable to the same extent as domestic arbitration awards. Where the foreign award that has been announced in a country that has ratified the New York Convention or the Panama Convention, the enforcement of the foreign awards can only be refused based on the limited grounds that is been defined under the New York Convention and the Panama convention as well as the grounds of the non-recognition in these conventions. 

They are similar to the FAA as these conventions do permit the non-recognition of the award which violate the basic public policy of the state where it was mentioned. However non-recognition of the awards by FAA are narrowly construed by the US courts.

As for the time frame it takes for the local court to settle disputes, it should be mentioned that there is no time frame specified as the filing work in a court usually takes a lot of time.

While the arbitral enforcement actions are intended to be summary in nature, the actual length of such proceedings will vary, as it is based on the demands of the individual court and the degree to which an opposing party resists the confirmation and enforcement.

If an opposing party provides a proper argument that one of the grounds for non-confirmation under the statute or in the Conventions that have been met, or if a party gives the credible challenge to the US court’s jurisdiction, enforcement applications can take longer. Without these challenges, the enforcement of the award proceeds quickly.

Wrapping it Up

As such, it can be seen there are both pros and cons of arbitration procedures.

However, it can not be denied that long-pending legal disputes can put a business off-track, disturb the work culture as well as demotivate employees and the business executives.

It is therefore imperative that you get yourself a lawyer, create a power of attorney and create a arbitration contract with all your business partners and/or customers.

  For any queries or help with your startup, feel free to book a free consultation with usYou may also check out our list of services if you need any help with your business efforts.  

Author Bio: Rahul Sodhi is a BBA,LLB student at The Northcap University and an intern at WinSavvy. Connect with him on LinkedIn.

Editor Bio: Chinmay Jain is a B.A.LL.B (hons.) student from Institute of Law, Nirma University and an intern at WinSavvy. Connect with him on LinkedIn.  

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