Arbitration – What is It?

Arbitration is an alternative dispute resolution process in which parties engage one or more qualified arbitrators to make a determination to resolve their dispute. In choosing arbitration as their preferred method of dispute resolution, parties are opting for a more private dispute resolution procedure as compared to court litigation. Generally, the parties’ right to refer a dispute to arbitration depends on the existence of and ‘arbitration agreement’. These arbitration agreements can be a separate document, though typically, they take the form of a clause within a contract, usually found under the dispute resolution provisions in commercial contracts that nominate arbitration as the preferred method of dispute resolution.

How is it different to Mediation?

Although both arbitration and mediation are processes that enable the resolution of disputes outside of court, the processes are distinctly different. Put simply, mediation is a facilitated negotiation in which a resolution is reached by the actual parties to a dispute, whereas arbitration involves a third-party decision maker. Both processes involve the engagement of a neutral third-party, but the role of that third-party differs between mediation and arbitration. In mediation, the mediator facilitates productive discussions between the parties with a goal towards reaching a beneficial outcome for both parties. In arbitration, the arbitrator acts as a ‘private judge’ for the purposes of considering both sides of the dispute and making determinations in regard to the outcome of that dispute. Notably, the award or decision handed down by the arbitrator is final, binding, and enforceable in courts. Further, the arbitrator is in control of the arbitration process and the outcome, whereas in mediation, the disputing parties maintain control of the dispute resolution process.

How does Arbitration work?

Given that arbitration is a contract-based dispute resolution mechanism, there may be provisions in a contract that outline steps that must be taken prior to the commencement of the arbitration process. Common ‘preliminary’ steps include ‘reasonable efforts’ to negotiate or mediate to resolve the dispute quickly.

The typical process of arbitration involves the following:

1. Filing and initiation: This is where one party, the applicant, sends documents such as a ‘request for arbitration’ or a ‘notice to arbitrate’ to the other side. If the parties have opted for an institutional arbitration process, the relevant institution will prescribe what must be included in a ‘notice to arbitrate’. Usually, the notice would include the description of the issues in the dispute, the demand for arbitration, the details of the relationship between parties, the remedy sought and maybe even the names of individuals they wish to nominate as arbitrators.
2. Answering the claim: This is where a respondent responds to the claim made by the applicant, by filing an answer that specifies the relevant facts and available defences to the claim.
3. Arbitrator selection: Parties have autonomy to select arbitrators for the formation of the arbitral tribunal. Although the arbitrator selection process differs with each arbitration agreement, typically, parties generate a list of potential arbitrators which is then narrowed down to one or multiple arbitrators, depending on the preference of parties.
4. Preliminary Hearing and Information Exchange: This provides an opportunity for the parties and for the arbitrator to discuss the scope and course of the arbitration. After the appointment of the tribunal or the arbitrator, the preliminary and substantive issues are addressed, and an exchange of information should be scheduled to facilitate the preparation for the hearings. The information exchanged may include written submissions supported by written witness statements and reports of technical experts, where appropriate.
5. Hearings: Arbitrations involve hearings before the arbitration tribunal. In these hearings, parties present their case to the arbitrator(s) in accordance with the rules of the arbitration agreement. Sometimes, at the direction of the tribunal, parties may submit written arguments after the hearing.
6. Award: After the hearings are completed, the tribunal or arbitrator renders a written award or determination which decides the outcome of the case, and this is sent out to the parties. Absent any challenges, this determines the rights and the obligations of the parties to the dispute.

Parties wishing to challenge or appeal an award rendered by an arbitrator have varying grounds to do so, depending on the terms of the arbitration agreement and institutional rules.

The Benefits of Arbitration & When it is Ideal

Like most alternative dispute resolutions, arbitration is a less expensive and more efficient option compared to traditional litigation. For instance, arbitration hearings can be dealt in a matter of weeks, whereas some court hearings may take half a year or even longer. Further, once the hearing date is scheduled in an arbitration, it is unlikely to be delayed or cancelled, streamlining the dispute resolution process. Additionally, the ability of the parties to select arbitrators allows parties to choose skilled individuals whose knowledge and expertise are suitable for their dispute. This will help ensure parties are comfortable with the award or determination that is made by the arbitrator.

Also, another key advantage of arbitration is that it exists as a formal resolution process whilst retaining the ability to be flexible to the needs of the party. Particularly, parties can adapt the arbitration proceedings according to the size and complexity of the commercial matter in question. Yet, despite its flexibility, the outcome of the process remains enforceable such that any orders or awards are final, and therefore, provides certainty to parties. Given the costly and slow nature of litigation, arbitration has become an increasingly common method for dispute resolution. It very well could be the alternative that is most suited to your needs.

If you have any questions or wish to discuss your circumstances with a lawyer, please contact the BAL Lawyers Litigation and Dispute Resolution team on 02 6274 0999.