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ARBITRATION

By: John B. Newman

Arbitration is being more widely used than ever before.  The New Jersey Court Rules mandate arbitration for most claims for personal injuries and many commercial matters.  Given that fact, everyone must have a working knowledge of arbitration.

Traditionally, arbitration would only take place when two parties agreed contractually to submit a claim to an arbitrator.  This type of arbitration, consensual contractual arbitration, continues to flourish.  The scope of the arbitration, the number, identity or method of choosing the arbitrator(s) and even potential remedies can all be set forth in the contract.

Under contractual arbitration, the arbitrator’s decision is final and non-appealable.  The prevailing party can obtain a court judgment consistent with the award that will be enforced like any other judgment in New Jersey.  A court can only vacate an arbitration award for fraud, corruption or similar wrongdoing by the arbitrator.  Recent case law makes it clear that even a mistake of law by the arbitrator is not grounds to set aside an arbitration award.  However, a court can correct a mathematical error made in computing damages or other obvious clerical errors on the part of the arbitrator.

Traditionally, organizations sponsoring panels of arbitrators trumpet arbitration’s alleged cost advantage over traditional court litigation.  They point out that unless the contract provides for discovery, there will be little or none, and depositions are extremely rare.  Discovery and depositions can account for a large part of the cost of a traditional lawsuit.

However, both parties pay the arbitrator’s fees commensurate with his experience and reputation, while they do not pay the judge conducting a trial.  If a contract provides for a three-person panel with an average hourly rate of $300 per hour, then the two parties to the arbitration would have to split the $900 per hour for the arbitrators in addition to paying attorney’s fees, just to have the case heard.  In addition, organizations such as the American Arbitration Association charge substantial fees based upon the amount of the claim on top of their administrative fees.  Also, an arbitration rarely proceeds continuously from day to day but is scheduled episodically as the schedules of the parties, their counsel and the arbitrator(s) permit.  Conversely, a trial can last for months but has a specific end.  The question of whether or not arbitration is less expensive than litigation in court can only be answered, “It depends.”

Courts have devised various ways to divert cases from traditional resolution.  As noted above, the New Jersey Court Rules mandate arbitration in a wide variety of civil cases.  This arbitration differs markedly from consensual contractual arbitration.  The only true similarity is the neutral third party who hears the case and renders a decision.  Unlike contractual arbitration, not only is the decision not final and non-appealable but either party can reject the decision and demand a trial in court just by paying a $200 fee.  The only downside of rejecting the arbitrator’s award is that the rejecting party may sometimes be ordered to pay a portion of the attorney’s fees and expert witness fees of the other party if the court award is less than that of the arbitration.

Some might question the purpose of non-binding arbitration.  It is to bring the parties together at a time when discovery is complete in order to foster a settlement with the aid of an impartial party.  If the parties were at $18,000 and $7,000, and an arbitrator determines that a case is worth $10,000, there is a strong incentive to accept the arbitrator’s award and settle the case for $10,000.  Every case removed from the court system relieves the case backlog and avoids the risks and expense of a jury trial.

Whatever your personal situation or occupation, you are likely to come into contact with arbitration.  A well-drafted contract anticipates what would happen if there is a breach and whether an arbitrator or a judge will enforce it.  While there is no right answer, the issue must always be carefully considered.

This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.