What is the Process of Arbitration and How Does it Work?

Arbitration is a binding form of contract-based dispute resolution. It is a procedure in which a dispute is presented, by agreement of the parties, to one or more arbitrators who make a final decision on the matter. The main difference between arbitration and mediation is that, while the process is much less formal than litigation, the role of the arbitrator is similar to that of a judge. The parties and the arbitrators meet in person to conduct the hearing in which the parties present arguments and evidence in support of their respective cases.

By choosing arbitration, the parties opt for a private dispute resolution procedure instead of going to court. The reasons on which an award can be challenged or appealed vary depending on factors such as the terms of the arbitration agreement, the “venue” of the arbitration, and institutional rules. Alternatively, the Center may suggest potential arbitrators with relevant experience or directly appoint the members of the arbitral tribunal. An arbitral decision or award is legally binding on both parties and can be enforced in court, unless all parties stipulate that the arbitration process and the decision are not binding. Because the cost of arbitration is less expensive, many contracts and legal agreements contain provisions for resolving disputes through the arbitration process. Arbitration clauses can be simple and state that claims will be resolved in accordance with the applicable arbitration rules and will then be enforced by a local court.

If they choose to have a three-member arbitral tribunal, each party appoints one of the arbitrators; those two people then agree on who will be the presiding arbitrator. Arbitration agreements generally provide a means of selecting the arbitrator or panel of arbitrators, the format of the hearing, the procedural and evidentiary rules to be used, and the applicable law. The American Arbitration Association estimates that it manages more than 2 million arbitrations each year, and that other groups and individuals carry out hundreds of thousands more. Arbitration clauses can be mandatory or voluntary, and the arbitrator's decision can be binding or non-binding. The dispute will be decided by one or more persons (the arbitrators, the arbitrators or the arbitral tribunal), who will determine the arbitral award.

Compulsory consumer and employment arbitration must be distinguished from consensual arbitration, in particular commercial arbitration. Because arbitration is a contract-based dispute resolution mechanism, there may be steps set out in the contract that need to be followed before arbitration can be initiated. In the United States, arbitration is frequently used in consumer and employment matters, where arbitration may be required by the terms of commercial or employment contracts and may include a waiver of the right to file a class action.