How do arbitrations work?

Bringing or defending a lawsuit in federal or state district courts is an outrageously expensive endeavor. Even simple cases in state district courts will likely costs more than $25,000.00 in attorney’s fees to have a trial.

In real estate transactions and increasingly in many other areas, buyers and sellers commonly sign an agreement to arbitrate disputes not through the courts but instead through a private arbitration forum. Often in real estate transactions the chosen forum is the American Arbitration Association or “AAA.” Creditcard holders often agree to arbitration disputes with the National Arbitration Forum. Similarly, investors usually agree to arbitrate disputes with FINRA (Financial Industry Regulatory Authority, Inc.). Although many lawyers (who generate their livelihood from handling expensive district court cases) discourage arbitration agreements, they are often a very effective and economical alternative to the district courts, but only if you understand the forum and the rules.

When litigants have previously agreed to arbitrate any dispute, the arbitration usually starts with a “demand” by one party to arbitrate. When a party files a demand with the hosting forum and pays the fee to start the arbitration, the demand is given to the opponent, and the opponent is given an opportunity to respond. When the demand is filed, the case has begun.

Once a case has begun, the hosting forum circulates a list of people known as “qualified neutrals” who might serve as arbitrator in the case. Although the process varies slightly depending on the forum and whether the parties are required to select one or three arbitrators, generally the parties select the arbitrator panel by striking unacceptable candidates and ranking the rest. Arbitrator candidates are usually lawyers or other professionals who have experience in the subject matter at issue in the case.

Once the arbitrator panel is agreed upon, the parties typically confer with the arbitrator(s) and come up with a schedule for conducting the arbitration. Typically a month or two is allocated for the parties to informally exchange information and a date is established for the arbitration hearing.

Although arbitrators have some discretion regarding how much “discovery” to allow in a case, depositions and formal written requests are not typically allowed. Arbitrators also may refuse to hear motions, favoring an arbitration on the merits over summary dismissal. These are some of the more expensive aspects of court litigation. The parties may nonetheless secure subpoenas or compel the testimony of witnesses if necessary for the arbitration.

Arbitrations are usually conducted either at the site of the dispute or a location selected by the arbitrator. Some of the forums have their own offices for arbitrations. Most arbitrations last less than a day. Parties to residential real estate arbitrations often submit their arguments, exhibits and witness testimony at the dining room table in the home or property at issue. The arbitrators are not bound by the rules of evidence and rarely disallow the submission of evidence offered by either party.

Once all evidence is submitted, the arbitrator(s) usually takes the matter under advisement and issues a written decision within a few weeks.

Since the arbitration process is favored by courts as a fair alternative to district court litigation, the arbitrator’s decision is binding and enforceable, and subject to only a limited set of appeal issues. As such, arbitrations should not be taken lightly and it is every bit as important to be represented by counsel as it would be in district court.

At Peters Law Firm we have a solid record of success in arbitrations and we welcome inquiries regarding arbitration disputes. Our first consultation is always free.