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Arbitration, in the law, is a form of alternative dispute resolution -- specifically, a legal alternative to litigation whereby the parties to a dispute agree to submit their respective positions (through agreement or hearing) to a neutral third party (the arbitrator(s) or arbiter(s)) for resolution.
Since arbitration is based either upon contract law or, in the case of international arbitration, the law of treaties, the agreement between the parties to submit their dispute to arbitration is a legally binding contract. All arbitral decisions are considered to be "final and binding." This does not, however, void the requirements of law. Any dispute not excluded from arbitration by virtue of law (e.g. criminal proceedings) may be submitted to arbitration.
Arbitration exists under national and international law, and arbitration can be carried out between private individuals, between states, or between states and private individuals. In the case of arbitration between states, or between states and individuals, the Permanent Court of Arbitration and the International Center for the Settlement of Investment Disputes (ICSID) are the prodominant organizations. Arbitration is also used as part of the dispute settlement process under the WTO Dispute Settlement Understanding. International arbitral bodies for cases between private persons also exist, the International Chamber of Commerce Court of Arbitration being the most important. The American Arbitration Association is a popular arbitral body in the United States. Arbitration also exists in international sport through the Court of Arbitration for Sport.
Various bodies of rules have been developed that can be used for arbitration proceedings. The two most important are the UNCITRAL rules and the ICSID rules. The rules to be followed by the arbitrator are specified by the agreement establishing the arbitration.
The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (Done at New York, 10 June 1958; Entered into force, 7 June 1959; 330 U.N.T.S. 38, 1959) provides for the enforcement of foreign arbitral awards on the territory of the contracting parties. Similar provisions are contained in the earlier Convention on the Execution of Foreign Arbitral Awards (Done at Geneva, 26 September 1927; Entered into force, 25 July 1929; L.N.T.S. ???).
When arbitration occurs under U.S law, either party to an arbitration may appeal against the arbitrator's decision to a court, however the court will generally not change the arbitrator's findings of fact but will decide only whether the arbitrator was guilty of malfeasance, or whether the arbitrator exceeded the limits of his or her authority in the arbitral award or whether the award conflicts with positive law. Some jurisdictions have instituted a limited grace period during which an arbitral decision may be appealed against, but after which there can be no appeal. In the case of arbitration under international law, a right of appeal does not in general exist, although one may be provided for by the arbitration agreement, provided a court exists capable of hearing the appeal.
Some domestic jurisdictions have stipulated that judges may require either arbitration or mediation of certain disputes as a first step toward resolution, familiy law (particularly child custody) being a prime example.
Arbitrators are not bound by precedent and have great leeway in such matters as: active participation in the proceedings, accepting evidence, questioning witnesses, and deciding appropriate remedies. Arbitrators may visit sites outside the hearing room, call expert witnesses, seek out additional evidence, decide whether or not the parties may be represented by legal counsel, and perform many other actions not normally within the purview of a court. It is this great flexibility of action which, combined with costs usually far below those of traditional litigation, makes arbitration so attractive.
No definitive statement can be made concerning the credentials or experience levels of arbitrators, although some jurisdictions have elected to establish standards for arbitrators in certain fields. Several independent organizations offer arbitrator training programs, such as the American Arbitration Association, and thus in effect, credentials. Generally speaking, however, the credibility of an arbitrator rests upon reputation, experience level in arbitrating particular issues, or expertise/experience in a particular field. Arbitrators are generally not required to be members of the legal profession.
A growing trend among employers whose employees are not represented by a labor union is to establish an organizational problem-solving process, the final step of which consists of arbitration of the issue at point by an independent arbitrator. Most collective bargaining agreements in organizations where employees are represented by a labor organization stipulate that the final step of any grievance procedure shall consist of arbitration.
To ensure effective arbitration and to increase the general credibility of the arbitral process, arbitrators will sometimes sit as a panel, usually consisting of three arbitrators. Often the three consist of an expert in the legal area within which the dispute falls (such as contract law in the case of a dispute over the terms and conditions of a contract), an expert in the industry within which the dispute falls (such as the construction industry, in the case of a dispute between a homeowner and his general contractor), and an experienced arbitrator.
Critics of arbitration argue that arbitration can be unfair to the individual when faced with a dispute with a corporation. In these cases, the choice of arbiter may be spelled out in a contract in which the individual has no power to negotiate. The arbitration panel may contain industry experts who may be more sympathetic to the industry than to the individual. Also, some have argued that the fact that an arbitration company may handle many cases for a corporation while an individual rarely goes through arbitration twice may bias the arbitrators in favor of the company. The fact that most arbitral procedures are not public, and that there may be no provision for an individual to be represented by counsel, may also work to the disadvantage of the individual. These potential disadvantages make the ethics and professionalism of arbitrators even more important.
Arbitrators have wide latitude in crafting remedies in the arbitral decision, with the only real limitation being that they may not exceed the limits of their authority in their award. An example of exceeding arbitral authority might be awarding one party to a dispute the personal automobile of the other party when the dispute concerns the specific performance of a business-related contract.
It is open to the parties to restrict the possible awards that the abitrator can make. If this restriction requires a straight choice between the position of one party or the position of the other, then it is known as pendulum arbitration or final offer arbitration. It is designed to encourage the parties to moderate their initial positions so as to make it more likely they receive a favourable decision.