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Arbitration: What Is it and How Does it Work?

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Last editedSep 20212 min read

Although it’s a legal term, the arbitration process also applies to business contracts. So, what is arbitration, and how does this process work? We’ll cover everything you need to know about the arbitration meaning below along with its pros and cons.

What is arbitration?

The process of arbitration allows two parties involved in a dispute to avoid taking the case to court. It offers an alternative form of dispute resolution involving less time and lower cost than litigation. Rather than taking your case to court in front of a judge, instead you’ll use designated arbitrators to come to a binding agreement.

During the arbitration process, the claimant files a claim against a respondent. Both can present their case to an independent arbitrator, who views evidence and listens to both sides before deciding on an award. The award is legally binding, which means you can’t go to court for an appeal except for exceptional circumstances.

Arbitration clauses are commonly included in business contracts, stating that any claims arising must be settled by an arbitrator. You’ll see this in credit card, retail, and employment contracts among others.

How does the arbitration process work?

There are slightly different procedures to follow depending on the country of arbitration, but generally the first step is to select an arbitrator before attending a hearing. The arbitrator listens to both sides, views supporting evidence, and then shares their decision.

In the UK, you’ll need to apply with the Chartered Institute of Arbitrators to find a qualified professional to hear your claim. The claimant will need to pay a fee plus VAT as part of the application. Chartered arbitrators are professionals with a high level of expertise in their area, whether it’s labour, employment, commercial, or international legal issues.

Although the arbitration process is faster than litigation, it still can take up to 45 days for the arbitrator to make his or her decision. You can speed up the process by agreeing upon a shorter timescale with all parties involved.

After hearing all evidence, the arbitrator gives an award to the claimant or respondent. It’s difficult to launch any appeal if you lose the case, unless you can prove it was mishandled in some way.

Arbitration vs mediation

The arbitration meaning is often used synonymously with mediation, but the two terms involve different processes. Mediation is also an alternative dispute resolution method, but while arbitration is binding, mediation is far less formal. With mediation, a third party helps two parties resolve a dispute. The process is entirely voluntary, with no binding settlement imposed at the end. Instead, a mediator simply tries to help the parties come to a verbal agreement to resolve the matter.

Advantages and disadvantages of arbitration

Arbitration often makes sense for businesses when the dispute relates to technical subject matter. In a traditional courtroom, you wouldn’t be able to choose a judge who happens to be an industry expert, whereas you can choose an expert arbitrator with the right skill set.

There are additional advantages and disadvantages of arbitration to consider.

Advantages include:

  • Arbitration is usually faster and cheaper than litigation in court

  • It’s a more flexible process for businesses

  • You can agree to make the process and awards confidential

  • It’s difficult to appeal an arbitral award, putting an end to the matter

However, arbitration isn’t the best course of action in every case. Although arbitration is usually less costly than litigation, both parties will still need to pay for their own arbitrators. When a decision is binding, this means that the parties waive any rights to have a judge decide the case. There’s also limited possibility for appeal, which is an advantage for the winning party and a disadvantage for the losing party. In other words, when the process is complete, you’ll need to stick with the decision.

While arbitration is useful for some parties, others will prefer to pursue the avenues of mediation or even litigation.

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