Arbitration and Mediation

This article is taken from a course taught by Jonathan Gelber, Esq. This article is not a substitute for the information taught in that course, the course itself, or consultation with an attorney, but represents both a summary and commentary on this particular topic.

Arbitration and its sibling, mediation, are two of the many topics I deal with in my collections practice on a frequent basis. As there is much misunderstanding that surrounds these topics, they deserve the time and attention afforded by this column.

Arbitration and mediation go in and out of fashion; the latest cycle in occurred in the late 1990’s when the dot-commers decided that they could “shift the paradigm” of the entire legal system, as they had done to other areas with the computer revolution. Arbitration and mediation are thought of by the uninitiated as being a substitute for the entire legal process. In fairness to the dot-commers, the computer revolution was based upon the ever-growing efficiencies of computers and Moore’s Law; computers roughly double their efficiency every eighteen months. Therefore, the computer industry was used to doing twice as much work with the same resources over an eighteen-month period on a regular basis. What bothered the dot-commers was that the legal trade was not experiencing a similar growth in efficiency. Therefore, it was the belief of many of the naïve dot-commers that they could make lawyers obsolete by simply arbitrating conflicts or disputes. In fact, I was told one story by a client about the founder of a medium-sized company which could easily be characterized as a “dot-com,” that had a near-religious belief in arbitration. Apparently, the founder was on an airplane and read an article about how to get rid of lawyers by arbitrating everything and placing arbitration clauses in all agreements. While he had much knowledge about computers, the founder’s wide-eyed innocence with regards to the legal system ended up costing his company millions of dollars.

The first step in understanding arbitration and mediation is to recognize that there is a technical distinction between the two. Arbitration is binding, while mediation is non-binding. Arbitration should resolve the entire issue to include, theoretically, getting paid, and the results are binding on the parties involved. Mediation, on the other hand, is simply an opportunity for the disputing parties to share their respective positions with a third party, and obtain his or her perspective and suggestions on the matter.

Focusing on arbitration, it has a statutory basis, with both federal and state laws that put a backbone in arbitration. The Commonwealth of Virginia has adopted the Uniform Arbitration Act with a few minor changes. The Federal Arbitration Act, which is contained in Title Nine of the U.S. Code, also exists. However, the state code section is probably used more often and, in fact, contains a more comprehensive scheme for arbitration, at least in the opinion of this writer.

The entire Virginia Uniform Arbitration Act is contained in Virginia Code § 8.01-581.01 through § 8.01-581.016. To demonstrate the comprehensive nature of arbitration, as well as to illustrate how arbitration functions, it is best to review several pertinent sections of the Virginia Uniform Arbitration Act.

Section .01 of the Act indicates that arbitration agreements are “valid, enforceable and irrevocable…” There is an exception, of course, on “such grounds that might exist at law and equity” for the revocation of a contract. Section .02 of the Act allows a party to compel arbitration, subject to the existence of an arbitration agreement, or, if another party has commenced arbitration, to challenge the existence of the arbitration agreement and have the court rule on the existence of the agreement itself, as well as whether it does, in fact, compel arbitration.

Section .04 of the Act describes how the arbitration hearing should be held. Whatever few fundamental due process rights are granted are found here. However, arbitration is a contractual mechanism and, accordingly, due process rights can be contracted away. Section .05 of the Act provides that a party may be represented by an attorney, and further indicates that a waiver of this is ineffective; this section represents a rare instance of a statute compelling the contractual rights of a party in arbitration.

An arbitration award must be in writing and signed by the arbitrator under Section .07 of the Act. For a period of twenty days after the delivery of the award to a party, a party may ask the arbitrator to change the award. This has the effect of keeping the ball in the air for an additional twenty days after the arbitration ruling. However, under Section .09 of the Act, after these twenty days, the arbitration may then be confirmed by a court. This Section, along with Section .012, allows a court to turn the arbitration into a judgment of the court. Therefore, after the effort of going through arbitration, if it does not result in payment, one is left with bringing the matter before a court in order to seek recourse.

Section .010 of the Act allows that an award may be vacated within ninety days after delivery, and contains numerous grounds for vacating the award. Additionally, certain rights are preserved beyond ninety days, such as when an award is “predicated upon corruption, fraud or other undue means…” Additionally, under Section .011, and within a ninety day period, an award may be modified or corrected if there is an “evident miscalculation of figures or an evident mistake” or if the arbitrators have awarded something “upon a matter not submitted to them…” These two Sections are an invitation to litigation and have been used effectively to preclude the results of an arbitration being enforced by a court, in short rendering the arbitration proceeding moot.

While the statutory scheme described above may give the impression of a clean and simple system, the first thing that is obvious is that after one has gone through an arbitration, one must then return to the court in order to enforce the award. Glaringly obvious to the regular practitioner is that the matter must be “tried” twice, or at least done once in the arbitration and then challenged or enforced again in court.

The practice of arbitration itself depends upon who the arbitrator is, what the arbitration format is, and the parties’ contractual agreement. There are many sources of arbitration and arbitration rules. For example, there is labor arbitration, arbitration through the American Arbitration Association, or various sports arbitration agreements. These are some of many examples; there is even religious arbitration, with thriving Muslim and Jewish court systems functioning as arbitrational forums. However, what is important to recognize is that the arbitration itself delegates the due process that would be afforded by a court to the arbitral panel. In other words, when signing an arbitration agreement, one gives up, by contract, one’s right to a fair trial by a judge which an appellate court can review. Instead, one is left with the grounds of appeal from an award mentioned above, and the contention that the arbitration was not fair may, in fact, fail.

There are strong negatives to arbitration. Initially, many arbitration clauses will compel arbitration in places and forums that are surprising, to say the least. The costs of arbitration also create a tremendous barrier to going forward with a case, and the quality of the fact-finder may also be a problem. Afterwards, once an arbitration award has been issued, there is no finality to it; in order to turn the award into a judgment, one needs to return to a court. Additionally, the duration of arbitration can extend much farther than the time a court case might take, at least within the Commonwealth of Virginia.

Despite these negatives, there is, however, one major positive side to arbitration. Arbitration is frequently a safe haven for marginal businesses, businesses in marginal industries, and businesses in industries with many unhappy customers. For example, aluminum siding was one of the pioneer areas for arbitration agreements. If one owed money to an aluminum siding provider, that provider was allowed to file suit. However, if one had a complaint regarding the aluminum siding, one was compelled to arbitrate. Nowadays, many industries, including stock brokers, insurance companies, and various providers of consumer services, keep their unhappy customers away through arbitration agreements.

Courts, however, are beginning to back away from arbitration, as evidenced by the United States Supreme Court case of Green Tree Financial Corp.-Alabama v. Randall, 531 U.S. 79 (2000) and a similar Virginia case, Camacho v. Holiday Homes, Inc., 167 F.Supp.2d 892 (WD Va. 2001). In Camacho, a purchaser of a mobile home who was filing suit with regards to alleged defects of the mobile home, was not compelled to follow through with arbitration, despite the existence of an arbitration clause. The Court found that the arbitral forum was “financially inaccessible” to the plaintiff and, as a result, that she was unable to vindicate legal rights granted to her by statute. Further, the Court found that the “…additional costs of the arbitration process itself amount to an insurmountable financial barrier…” Accordingly, the Court found the arbitration clause to be unenforceable. While it remains to be seen whether the Supreme Court case or the case cited above represent a major change in direction of the courts, it is the opinion of this writer that this is, in fact, true, and that courts will soon begin to cut back on the broad enforcement of arbitration clauses.

Therefore, the dot-commers’ attempt to “shift the paradigm” has not succeeded; rather, it has simply served to reinvent the wheel. What began as an effort to avoid the courts has resulted in the disputing parties ending up back in court, after a costly, and frequently pointless, excursion to an arbitral hearing.

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