Editor’s Note: In this legal guide, our arbitration lawyers discuss the ins and outs of arbitration in Colorado.
When you find yourself in a legal dispute, your contract may require arbitration. Arbitration is a form of alternative dispute resolution in which the parties work out their conflict without going to court. An impartial third party arbitrator is chosen to listen to their case and make a decision. The meeting takes place outside court, but is much like a court hearing, in that both sides present testimony and evidence. As arbitration is considered a method of relieving the congestion of court calendars, the decision the arbitrator makes is almost always final.
Examples of Arbitration
Arbitration is often driven by a clause included in a contract between the parties. This clause will govern any breach of contract. It will usually specify the arbitration rules that apply (based on jurisdiction and type of dispute), kinds of evidence and hearings that will be allowed, and the binding nature of the arbitrator’s decision. The parties to a dispute can also just decide to have it decided by an arbitrator and submit their case.
Small businesses, individuals and and business-vs-business cases have common issues and are often subject to arbitration. Car accidents, slip and fall cases, dog bite cases and product liability typically do not go to arbitration. Sometimes arbitration is in the best interests of both parties, sometimes it can be seen to favor one over the other. Consider the following examples:
- During the summer of 2005, a man was bitten on the face, neck and head by a 75-pound dog while visiting the home of its owners. He had emergency surgery and underwent continuing treatment for physical and psychological harm. He sued the dog’s owners for pain and suffering, medical bills and wage loss, but the defendants denied liability. The man sought relief through an arbitrator, where he was awarded over $120,000 in damages.
- After Republic Airways Holdings bought Midwest Airlines in 2009, more than 400 Midwest Airlines flight attendants were laid off in favor of non-Midwest employees who were paid as much as 70 percent less, complaining of a contract violation. As it turned out, the Midwest flight attendants’ union contract protected their jobs in the event the airline was purchased by another company. The Association of Flight Attendants (AFA) filed a grievance accusing Republic Airways of violating their contract and won an arbitration ruling that required a settlement in the best interest of the former Midwest flight attendants.
Alternatively, arbitration can work against employees when a provision requiring arbitration means employees can’t band together to file a class action suit. In a more recent case, an Uber employee alleged sexual harassment and employment discrimination. Her contract contained a class action waiver, which meant she could not resolve her case in court and would be required to arbitrate her claim privately. Her lawyer filed a brief requesting that the court invalidate the waiver and judge the case in court. In March 2018, the class action lawsuit was settled with 56 current and former employees who filed claims stand to set to collect an average of about $34,000 apiece. Arbitration can be seen as a dispute resolution method that favors employers, because it is private and the awards are not governed by the laws of the land, but rather by the personal experience and opinions of the arbitrator(s). Uber would have preferred to have settled the cases individually and in private.
Parties can exercise additional control over the arbitration process by adding specific provisions to their contracts’ arbitration clauses or, when a dispute arises, through the modification of certain aspects of the arbitration rules to suit a particular dispute.
Should You Include an Arbitration Clause in Your Contract?
You should consider an arbitration clause in your standard contract if at least one of these factors is present:
- Any disputes are likely to be very technical. If having a knowledgeable industry professional decide the dispute is very important (an architect, engineer, doctor, reinsurance expert, etc.), you might want an arbitrator with that knowledge instead of a judge or jury without that expertise.
- Keeping the proceedings confidential (and not publicly available in court filings) is important. (Note however, that if either party moves to reverse the arbitrator’s decision, much of your arbitration proceeding could become part of a court record.)
- You want to prevent a class action suit. (A class action suit can often be precluded in an arbitration agreement; it is less simple without an arbitration agreement.)
- You want to arbitrate because other parties on the same project or deal have arbitration provisions. (For example, if the owner and general contractor on a construction project are bound to arbitrate, the owner and architect may also want to agree to arbitrate in case the architect is implicated in claims between the owner and general.)
- There is a chance that you may have to enforce a judgment in a foreign court. The New York Arbitration Convention allows the winning party in an arbitration to enforce its judgment abroad much more easily than if the judgment had come from a U.S. court, which is important if the loser’s assets are located abroad.
Stages of Arbitration
Prepare the Case
Once the arbitration has begun, you should prepare as in a court case, locating and preserving any relevant documents. Identify the documents that support your claim and any documents that may be privileged. You will need statements from any relevant witnesses and you should identify and retain any necessary experts. An attorney can help by determining the law that governs the dispute and obtaining advice from foreign lawyers when necessary.
A case may go to arbitration in one of two ways: either one side initiates via an arbitration clause in a mutually binding contract, or both parties decide arbitration will serve their interests better than litigation and submit the case to the relevant arbitration authority. Either of these methods serves as an agreement to arbitrate.
Certain expedited procedures apply in any case where the disputed damages are below $75,000. These procedures provide for notice of arbitrator appointment and notice of hearing by telephone and for the award of the arbitrator to be rendered no later than 14 days from the date of closing of the hearing.
Demand for Arbitration
When one party decides to invoke the arbitration clause (the most common way for an arbitration to begin), they draft a Demand for Arbitration. This document should summarize the type of claim(s) with a brief, clear statement that sets out:
- The nature of the dispute;
- The relief (resolution) they are seeking;
- The scope of the damages;
- The official names and addresses of all parties; and
- The arbitration clause of the contract, quoted in full, and including the date of the document.
Once the demand for arbitration has been filed, the respondent has 14 days to file and serve an answering statement, which may include counterclaims. Failure to submit an answering statement is considered a denial of any claims in the demand for arbitration.
If the respondent asserts any counterclaims, the claimant has 14 days to respond. Although it can be beneficial to file an answering statement (or answer), this is not mandatory.
There is no prescribed form for the answering statement, but it should set out briefly and clearly the respondent’s denial of the claims made in the Demand for Arbitration and include a request for the desired number of arbitrators, if this is not specified in the arbitration clause. If the respondent wishes to assert any counterclaims, these must be included in the answering statement, along with any filing fee.
The answering statement must contain any objections to jurisdiction or the validity of the arbitration that arise from the Demand. It should also include a request for a “reasoned award” or opinion (one that includes the reasons for the award or opinion), if desired. This may be submitted after the answering statement but must be submitted before appointment of the arbitrator(s).
Appointment of Arbitrator
After the filing of the submission or the answering statement, or upon the expiration of the time within which the answering statement is to be filed, the arbitration authority sends each party a list of proposed arbitrators.
The parties then strike any names they object to, and number the remaining names in order of preference. Where parties are unable to find a mutual choice on a list, additional lists may be submitted at the request of both parties.
If the parties cannot agree on an arbitrator, the arbitration authority will make an administrative appointment, avoiding any arbitrator whose name was crossed out by either party.
To prepare for the arbitration hearing, parties should assemble all documents likely to be needed at the hearing, as well as duplicates for the other parties and arbitrators, as early as practicable. A party’s witnesses should be interviewed and briefed on the issues which they are likely to be cross-examined on. Witnesses from the other side who are candidates for cross-examination should be identified. Determine early on which witnesses to cross-examine.
The laws of some jurisdictions, including those of many U.S. states, authorize the arbitrators or other persons to subpoena documents and witnesses. Parties should consider whether subpoenas may be necessary and take steps to ensure compliance with local laws. The AAA Rules permit subpoenas to be issued on request of any party or independently.
Additionally, any necessary inspection or investigation should be made as soon as possible. A party representative should accompany the arbitrators, unless they are specifically authorized to proceed without a representative or the other party fails to attend after notification.
Arbitration hearings are conducted somewhat like court trials, except that arbitrations are less formal Arbitrators are not required to follow strict rules of evidence. They must hear all of the evidence material to an issue but they may determine for themselves what is relevant Arbitrators are therefore inclined to accept evidence that might not be allowed by judges. The arbitrators have broad discretion to direct the exchange of information, on their own initiative or at the request of the parties. The parties, however, are required to exchange exhibits for use at the hearing at least five days before the hearing. The arbitrators may also conduct inspections or investigations if necessary.
Conduct of Proceedings
The arbitrators have wide discretion to shape the hearing procedure but are limited by the due process requirements that each party is treated equally, has the right to be heard, and is given a fair opportunity to make its case.
The claimant typically presents the evidence to support its claim first, followed by the respondent’s presentation of evidence in defense. The arbitrators, however, may vary this procedure at their discretion.
In contrast to common law litigation, the direct testimony of witnesses in international arbitrations is usually given in writing through witness statements. The hearings are held for those witnesses to submit to questioning from the other side (in other words, cross examination), as well as from the arbitrators.
The award is the decision of the arbitrator on the matters submitted to him or her under the arbitration agreement. If there is more than one arbitrator, the majority decision is binding. The purpose of the award is to dispose of the controversy finally and conclusively. It is made within the limits of the arbitration agreement and rules on each claim submitted. Arbitrators are not required to write opinions explaining the reasons for their decisions, but in some cases, both parties will request an opinion or the arbitration agreement provides for one.
In conclusion, arbitration can be useful as a private way to get to a binding resolution. You present evidence as you would in court, but you have a private judge (or judges) to listen (give you a hearing), decide the case, and present a recommendation for an award. The pros and cons of this method of resolving a dispute may serve your purposes best, but you should consult an experienced attorney to evaluate your options. Call Robinson & Henry at 303-688-0944 to set up a free consultation.