From the December 2000 issue of Entrepreneur

Frustrated by how long it takes to get your lawsuit through the courts so you can get on with your life? How about hiring your own judge? That's essentially what happens when you submit a dispute to arbitration. Like mediation, which we discussed last month, arbitration is a form of alternative dispute resolution (ADR) that can be used to resolve disputes faster and less expensively than going to court. But while mediation involves hiring a neutral mediator to help you and the other party work out your own so-lution, arbitration is for those times when you just can't reach an agreement even with the help of a mediator.

Many companies have suppliers, employees and major customers sign agreements stating that any dispute that cannot be resolved through negotiation or mediation will go to binding arbitration. The parties agree on the arbitrators, typically people familiar with the industry, and effectively hire these people to serve as judges. The decisions they make are final.

Arbitration clauses, which for decades have been standard in collective bargaining agreements and in the securities industry, are now used in a wide range of business relationships. According to a 1998 study by the Cornell Institute's School of Industrial and Labor Relations, 90 percent of the corporations surveyed had used mediation, arbitration or both, and overwhelmingly preferred them to litigation regardless of the type of dispute.

"It's a cultural shift," says Nashville, Texas, attorney Larry Bridgesmith of Waller, Lansden, Dortch & Davis, a specialist in employment law and ADR. "This may become the normal way of resolving disputes."

For instance, companies where the senior executives have signed employment agreements often turn to arbitration to resolve disputes about compensation when an executive leaves the company, such as whether the company met certain goals that would trigger certain bonuses. Internet start-up firms typically arbitrate disputes with departing employees where the compensation package may have included assets, such as stock options, that are difficult to quantify. Many businesses have suppliers and customers sign arbitration agreements as a condition of doing business. And now, even employment discrimination and sexual harassment claims are sometimes submitted to arbitration.


Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.

Cheap Justice

One reason so many companies opt for arbitration is that it's both faster and cheaper than going to court. Instead of months of depositions, the process of discovery is normally limited to each side turning over requested documents. Arbitrating a dispute might be over in a few months rather than the several years a lawsuit often takes. And instead of trying to educate a jury, you present the case to arbitrators who are already familiar with your industry and with the issues involved-and less likely to issue a runaway verdict.

"You have much more control and efficiency for commercial disputes [using ADR]," says employment attorney Daniel L. Schwartz of Day, Berry & Howard in Stanford, Connecticut. As an entrepreneur, you also limit your exposure because arbitrators rarely have the authority to impose punitive damages. The decision of an arbitrator can't be appealed unless the arbitrator's ruling is so outrageous that it violates public policy to enforce it; however, truly unreasonable rulings are so rare, according to Bridgesmith, that companies are willing to take the risk.

On the other hand, because arbitration is less expensive than litigation, it's also easier for someone to file a claim against you. And if your arbitration policy commits your company to paying most of the expenses, you may in effect be inviting employees to initiate arbitration. Fortunately, this door swings both ways. It's also easier to defend a claim, so former employees and other people unhappy with your business are less likely to extort a settlement from you based on the cost of a lawsuit.

How It Works

So what's arbitration like? After the initial period of requesting documents, the attorneys for each side write a brief summarizing their cases. The parties each have a chance to approve the arbitrators assigned to the case-typically a panel of three. At the proceeding, witnesses are examined and cross-examined under oath. But because the arbitrators are already experts in the field, there's less need for explaining background than there would be for a jury. Questioning of witnesses is more direct and focused, and the arbitrators may ask questions directly.

Need more insight about ADR? Read "Stuck In The Middle" to see how you can keep the peace in the office.

After closing arguments, the arbitrators typically have 30 days to issue their ruling, but you can get a decision on the same day if you make arrangements in advance. If the parties request a written finding of facts with legal reasoning and conclusion, the arbitrators provide one. Otherwise, their ruling simply states who the winner is and who gets what.

"The great thing about arbitration is that the parties control the process," says Schwartz. "They set it up ahead of time to meet their needs."

Bridgesmith notes that in recent years, the arbitration process offered by the major associations, including Judicial Arbitration and Mediation Services (JAMS) and the American Arbitration Association, has become more like litigation, with more discovery required and more stringent guidelines designed to make the process acceptable to both sides.

Arbitration Policies

There's been considerable controversy over exactly when arbitration agreements are enforceable. After all, if you require your employees to sign arbitration agreements, you're requiring them to sign away their right to jury trials. This is particularly controversial if the employment relationship ends in charges of sexual harassment or discrimination. A decade ago, when ex-employees were questioning the enforceability of arbitration agreements, courts ruled that the agreements could be assumed to cover discrimination and other "statutory claims" brought under state or federal law. More recently, courts in most jurisdictions have been enforcing arbitration agreements only if the agreements specifically state that they cover discrimination and other statutory claims. The apparent reason? Because Congress in Title VII granted employees the right to a jury trial, employees must knowingly and willingly sign away that right before the court will enforce arbitration.

Accordingly, if you're drawing up an arbitration clause for employees to sign, cover the following points to ensure that it will hold up if challenged:

The clause must be equally binding on both sides.

The employee must have read, understood and signed the agreement. It can't be hidden in fine print at the back of the employee handbook.

The clause has to provide a procedure for discovery. It's best to state that the arbitration process will follow the rules that have been agreed on by the American Arbitration Association or another major association where these issues have already been addressed.

www.jamsadr.com: The JAMS Web site describes the company's dispute resolution services and allows users to start the dispute resolution process by submitting cases online.

www.adr.org: The Web site of the American Arbitration Association (AAA) includes state-by-state laws, arbitration procedures and biographies of AAA arbitrators.

There must be some kind of "consideration"-that is, the employee must have received something of value in exchange for signing the arbitration clause. Saying "Sign this or I'll fire you" isn't good enough. For current employees, you can offer bonuses or promotions in exchange for signing. For new hires, you can require their signatures as a condition of employment. If they don't like it, they don't have to take the job.

In some jurisdictions, the arbitrator must be able to assess the same level of damages as a regular judge-including punitive damages. Check with your attorney on this one. Have your lawyer look at the clause in any case, because some states have other distinctive rules.

To be effective, an arbitration clause should be part of a whole dispute resolution system. "An employer looking to go down this path is looking at conflict in the work environment as a matter to be addressed," Bridgesmith says. "A culture of conflict resolution in the workplace will be multifaceted, with arbitration being the most formal [method]." Your dispute resolution policy might start with a meeting with the supervisor in hopes of ironing out the problem informally. If needed, the dispute would go to mediation. Only if mediation fails would it go to arbitration.

Bridgesmith advises employers considering a dispute resolution policy to involve their employees in its final design. "Anything imposed from above tends to be resisted," he says. But if employees are involved in creating the policy, they'll probably agree that alternative dispute resolution can be better for everyone concerned.

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