What is the Arbitration Process? How Does Arbitration Work?

Arbitration Process Explained
Arbitration Process Explained. Flying Colours Ltd/Getty Images

Arbitration sounds like a term you might have found in a union dispute a few decades ago, but it is more and more common in the business world. You'll run across it in employment contracts, credit card agreements, and retail contracts all the time, so it's good to know what it means and how arbitration works. In particular, you may have seen a mandatory arbitration clause in a contract. 

What is Arbitration? 

Arbitration (n.)is the process of bringing a business dispute before a disinterested third party for resolution.

The third party, an arbitrator, hears the evidence brought by both sides and makes a decision. Sometimes that decision is binding on the parties.

To arbitrate (v.)a matter is to bring it before an arbitrator. An arbitrator is a spectator, witness, or hearer (based on Old English arbiter.) 

Arbitration is a form oalternative dispute resolution (ADR), used in place of litigation in the hope of settling a dispute without the cost and time of going to court. Litigation is a court-based process that involves a decision that is binding on both parties and a process of appealing the decision.

The differences between arbitration and litigation involve the processes themselves and the result of decisions on the disputes. 

Arbitration is often confused with mediation, which is an informal process of bringing in a third party who goes between the disputing parties to help them settle a dispute. The mediation process is not binding on the parties, and the mediator does not hear evidence.

Litigation, arbitration, and mediation are all involved in settling business disputes. 

What is an Arbitration Clause? 

Typically, arbitration begins when two parties agree to settle their dispute through arbitration. The decision may also have been made for them by the addition of an arbitration clause to a contract that both parties have signed.


A typical arbitration clause in a business contract might look like this (from the American Arbitration Association):

Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

Arbitration )is the process of bringing a business dispute before a disinterested third party for resolution. The third party, an arbitrator, hears the evidence brought by both sides and makes a decision. Sometimes that decision is binding on the parties. 

What is Mandatory Arbitration? 

In recent years, the arbitration process has become more widespread, and many retailers, credit card companies, and other businesses are using mandatory arbitration in their contracts, requiring that customers consent to arbitration instead of litigation. 

Steps in the Arbitration Process

According to the American Arbitration Association (AAA), here is the general process for arbitration.

Filing and Initiation
An arbitration case begins when one party submits a Demand for Arbitration to the AAA.

The other party (the respondent) is notified by the AAA and a deadline is set for response.

Arbitrator Selection
The AAA works with the parties to identify and select an arbitration based on the criteria determined by the parties.

Preliminary Hearing
The arbitrator conducts a preliminary hearing with the parties, to discuss the issues in the case and procedural matters, such as witnesses, depositions, sharing information, and other matters.

Information Exchange and Preparation
The parties then prepare for presentations and exchange information.

At the hearing, both parties may present testimony and evidence to the arbitrator. Unless the case is very complex, this is usually the only hearing before the arbitrator.

Post-Hearing Submissions
After the hearing, both parties may present additional documentation, as allowed by the arbitrator.

The Award
Finally, the arbitrator closes the record on the case and issues a decision, including an award, if applicable.

Why Is Arbitration Getting More Popular? 

As the cost of litigation increases, and lawsuits become the preferred way to settle business disputes, company executives have looked more and more at arbitration as an alternative. The cost of arbitration is lower and the process is more streamlined than litigation. Arbitration clauses often include provisions that deny signers the right to pursue class action lawsuits, another huge savings for businesses and employers.