Chapter 35

The Art of Arbitration

In the previous chapter, I told you how the mediation process works. Arbitration is similar to mediation in some respects but also very different in others. The similarities are that they are both much faster and less expensive than litigation. The big difference is that with arbitration, there will be a winner and there will be a loser. The parties don’t expect to go through arbitration and have the arbitrator suggest that they split their differences and settle. The arbitrator may work to have one or both sides modify their positions but eventually he or she must pick one side’s position over the other. Let me walk you through an arbitration so that you can see how it differs from mediation, which is simpler; and litigation, which is more complex.

Setting Up the Arbitration

Each side tries to agree on an arbitrator whom they both trust and respect. I recommend that you select a member of the American Arbitration Association to assure that he adheres to the highest ethical standards. The association has strict rules for the way their members can arbitrate and produce an award that will stand up in court. The arbitrator should have experience in the area of the dispute. You may need three arbitrators if:

Both parties cannot agree on an arbitrator whom they would both trust and respect. When that happens, each side would select an arbitrator and those arbitrators would select a third.

It is a complicated dispute where arbitrators in several areas of expertise are required.

When you have more than one arbitrator, there should be an odd number, to avoid deadlocks. Three is usual. They will select one to be the chairperson. This person will administer the process and run the hearing. With the concurrence of the other arbitrators, he will have the authority to handle procedural matters for the panel, such as the scheduling of meetings and the issuance of subpoenas.

Neutrality of the Arbitrators

The arbitrators must be neutral, be seen as neutral, and be accepted as neutral by the claimant, the respondent, and everyone else involved. This is even more important in arbitration than it is in mediation because of the combative nature of the arbitration process. At the end, one of the parties is going to be unhappy, because the arbitrator chose to make an award to the other side. There is no point in going through this whole process only to have the award overturned on appeal because the losing side claimed that the arbitrator was not neutral.

The arbitrator must reveal any past contact with the parties. He must reveal any information that might even suggest bias. He must avoid any contact with one side when the other is not present (called ex parte contact). To avoid ex parte contact, an administrative assistant should handle any administrative details, such as questions about the location and the timing of the meeting.

Preliminary Meeting

The claimant, who is the person filing the arbitration demand and seeking relief, and the respondent are called to a preliminary meeting. This serves several purposes. It allows the parties to vent their feelings. It explores the possibility of mediating the dispute, rather than arbitrating it, which is a much more hostile process.

After the parties have vented, they may both see the advantage of seeking a win-win solution through mediation, rather than exposing themselves to an award that is basically winner-take-all. If they seek mediation at this point, the arbitrator must point out that while he could act as their mediator, it would preclude him from arbitrating the case later if they cannot agree through mediation. The information that he would gather at the mediation, such as suggested settlements by either side would compromise his ability to arbitrate effectively. If the parties now want to attempt to settle the issue themselves, the arbitrator must excuse himself.

The amount of the claim and any counterclaims made so far is made clear to all sides. (The arbitrator will ask the respondent if he plans to counterclaim. This avoids a last minute counterclaim being used as a delaying tactic.) By now they may both have come to realize how much time, effort and expense will go into arbitration and will be more amenable to mediation.

Both sides agree on the amount of discovery that each side will require. The arbitrator does not have the power to order discovery the way that a judge does. This may be one of the reasons why the parties chose arbitration over litigation. Hopefully both sides will agree to turn over all relevant documentation. If they won’t agree to that, the preliminary meeting is a good place to agree on ground rules for discovery and put a time limit on it, so this issue cannot be used later to delay the procedure.

The parties agree to a time schedule for the exchange of expert reports, depositions, and responses to interrogatories. The parties agree to a hearing date. So the preliminary meeting serves many purposes, not the least of which is that the parties may then decide to mediate rather than arbitrate.

Exchange of Information Prior to the First Hearing

Each side should be encouraged to prepare and submit, to the other side and to the arbitrator, an Exhibit Book containing all of the relevant documentation. Each side should submit a list of expert witnesses they plan to call, and a list of documents and witnesses that they want the arbitrator to subpoena. They should also decide whether they want to have the hearing transcribed, which is an optional procedure that would be at the party’s expense.

The Arbitration Hearing

The hearing is similar to the trials that you see on television except that there is no audience and no jury. There may be only three people in the room—the arbitrator, the claimant, and the respondent. They may have an attorney present and the attorney may speak for them if they wish.

Each side makes an opening statement. Then witnesses are called and sworn in. Witnesses are cross-examined. Rebuttal witnesses may be called. The closing arguments are given. Each side may object to a question if it is leading, irrelevant, or opinion without foundation.

Conduct of the Arbitrator

The arbitrator will ask clarifying questions of the witnesses or parties. He will ask any questions that he feels are important even if the subject of his inquiry has not been introduced in evidence. He will listen carefully to the evidence but be careful not to react to the evidence. He should not nod his head, for example, because this might imply bias. He is constantly examining the evidence for its relevance to the arbitration and the credibility of the speaker.

An Important Difference Between Arbitration and Litigation

The most significant difference between arbitration and litigation is that with arbitration there is no jury. The arbitrator plays the role of both judge and jury. The arbitrator cannot ask the jury to leave the courtroom while he listens to the arguments of the parties, as a judge can. He cannot call a sidebar to hear the issue beyond the jury’s hearing, as a judge can.

So an arbitrator will often hear information that a jury would not be permitted to hear, simply because he or she has to rule on its relevance. It is better for the arbitrator to admit the evidence and consider its relevance later when he or she makes his award, than refuse to admit the evidence and have his award vacated on appeal. Hearsay, for example, which is inadmissible in court, is admissible in arbitrator. The arbitration simply decides if he should consider it when rendering an award.

Rendering an Award

Within 30 days of the final hearing, the arbitrator will render a decision in writing to both parties. In a brief document, he states the amount that the parties will recover on their claims and counterclaims, or he can deny the claims. He may disallow part of the claim for a particular reason. For example, he may find that the respondent owes the claimant $200,000 for the cost of a new sailboat. He does not owe the claimant the $20,000 he spent traveling around the Caribbean looking for a new sailboat. What the arbitrator should not do is make a partial award with the hope that it will appease both parties. That could have been handled by mediation.

Most arbitration is binding arbitration. Both sides agree up front that they will go along with what the arbitrator decides. In binding arbitration the prevailing party can take the arbitrator’s award into court and have it recorded, as though it were a judgment. There is the possibility that the parties will not agree to binding arbitration.

The next step would be a lawsuit, unless they agree to nonbinding arbitration. Here they are saying, “I agree to go through the process and get the opinion of the arbitrator. When he sides with me against you, perhaps you’ll see the weakness of your case. But if he sides against me, I still reserve the right to sue you.” Oh boy! I would hope that they would have been good enough negotiators to avoid that kind of deadlock, but it happens.

Typically, both sides bear their own legal expenses regardless of who wins, unless there was an agreement in advance that stated that the loser would pay the winner’s expenses. The arbitrator will ignore requests that one side pays the other side’s legal expenses. He or she does not give a reason for his award. Juries don’t have to give a reason for their decisions, and arbitrators don’t either.

After the Award

If the arbitrator makes an award, the prevailing party can present the award to a court and have it certified. The arbitrator does not get involved in how the award is decided or how it is paid. He is through once he has, rendered his award or denied an award. He sits back and hopes that it won’t be overturned.

In most states the court cannot overturn an award simply because the court would not have made the award if it had heard the case. It can only overturn the award if it questions the actions of the arbitrator. Was there fraud or corruption involved? Did the arbitrator act in a biased way? Hopefully we can exclude fraud or corruption. So, we see that the only viable way to overturn an award is to prove that the arbitrator was biased. See why it’s so important that the arbitrator do everything he can to prove to the parties that he’s neutral?

After the arbitrator has rendered his award, he will destroy any notes that he has taken. He will return all pieces of evidence to the parties after verifying that he has not made any notes on them or even left a paper clip. There should be nothing to indicate his thinking while examining the evidence.

So, in the previous two chapters we have examined two methods of resolving disputes other than going to court. As you can see, there is a huge difference between the two. With mediation, both sides come together in the hope that they can find a compromise that is acceptable to both sides. With arbitration, there will be little if any compromise. There will be a winner and there will be a loser.

In the next chapter I’ll teach you how to handle conflict situations that are so far out of control that they have gone beyond mediation or arbitration. You’ll learn the art of conflict resolution.