January 1, 1900

by Todd D. Greene

Many of us have heard the term "arbitration", but what exactly does it mean? Usually arbitration is used in conjunction with labor disputes or a professional athlete’s salary negotiation, but few people may have actually gone through the process. Increasingly, in today’s society, contracts are prepared in commercial transactions with terms requiring that disputes arising from the agreement to be submitted to arbitration. The following presents a brief overview of the process of arbitration and discusses the pros and cons of its use.

So What Is Arbitration?

The arbitration process begins by the opposing sides selecting a neutral third party to hear their controversy. Once selected, the parties’ attorneys may meet with the arbitrator and one another to discuss the issues in dispute and decide on a time frame for their resolution. The parties will then generate a formal Arbitration Agreement, which incorporates all the issues to be resolved. Only the disputes identified in the Arbitration Agreement will be decided by the arbitrator.

Once these preliminary steps are taken, the parties will present their cases to the arbitrator. The proceedings may or may not be recorded and often do not abide by the rules of evidence used in traditional litigation. When the parties have completed their presentations, the arbitrator will render a final decision.

The rules governing arbitration in New Jersey emanate from three sources: the state’s common law; the New Jersey Arbitration Act; and the New Jersey Alternate Procedure for Dispute Resolution Act. However, New Jersey Courts, however, have held that if the parties do not clearly state that they are proceeding under the Act, it will be assumed, in most cases, that the parties are proceeding under the common law. See Heffner v. Jacobson.

Under common law arbitration, only agreements to arbitrate, made after a dispute arises, are enforceable. Thus, agreements to arbitrate future disputes are voidable. However, common-law agreements to arbitrate do not have to be in writing to be enforced. Yet, a party seeking to enforce an arbitrator’s award must file a contract alleging damages based on the other party’s breach of the arbitration award.

In contrast to the common law, the Act, N.J.S.A. 2A:24-1, et seq., permits parties to enter into agreements to arbitrate before and after a dispute arises. The agreement, however, must be in writing to be enforced. Additionally, if a party fails to submit to arbitration when there is a binding agreement, the Act permits the injured party to obtain a court order to enforce the arbitration agreement. The Act also permits the court to stay litigation pending arbitration of a valid arbitration agreement.

The last statute involving arbitration is the New Jersey Alternate Procedure for Dispute Resolution Act or ("NJDRA"), N.J.S.A. 2A:23A-1, et seq. In order for the NJDRA to apply, the parties must specify in their arbitration agreement that the statute controls. The major difference between the NJDRA, the Act and common law arbitration is that the Court Rules regarding discovery apply to arbitrations under NJDRA. Under the Act, discovery is limited by the arbitration agreement. In contrast, discovery under the NJDRA is confined only by the rules of court, thus, the parties can conduct depositions, exchange interrogatories and other forms of discovery.

It should be noted, however, that an arbitration award will not be set aside without substantial justification. Under the NJDRA and the Act, an award can only be vacated if the rights of a party were prejudiced by corruption, partiality of a supposedly neutral arbitrator was found, the arbitrator exceeded his or her powers, or the arbitrator failed to adhere to the procedures articulated in the respective Act. N.J.S.A. 2A:24-8; N.J.S.A. 2A:23A-13(c). Furthermore, the courts will only modify an award if there is a miscalculation of figures or a mistake in the description of a person, thing, or property referred to in the award; or the arbitrator has made an award on an issue not submitted for arbitration, and the award may be corrected without affecting the merits of the award; or the award is imperfect in a matter of form. N.J.S.A. 2A:24-9, N.J.S.A. 2A:23A-13(e).

The Benefits of Arbitration

Proponents of arbitration claim that the process offers faster resolution than the courts. It is common for a civil dispute to take over a year before it is brought to court. Since arbitration is private, the timing of the matter is contingent upon the preparation of the parties instead of the caseload of the courts. Thus, an arbitrator’s decision can come in a matter of months instead of years. Furthermore, arbitration can be more cost effective. By limiting discovery and the time it takes to resolve an issue, the parties often expend less money preparing for and arbitrating a matter than litigating in court.

In addition, the parties have great flexibility in selecting an arbitrator. The freedom to choose an arbitrator is especially beneficial to highly technical disputes. Many parties believe that it is advantageous to have an arbitrator who works or worked in their field because the arbitrator is familiar with the normal course of conduct and terms of the trade.

The Disadvantages of Arbitration

One disadvantage of arbitration is that most proceedings are based on limited discovery. By limiting discovery, both sides may never be able to acquire the facts necessary to accurately evaluate the controversy. Thus, the arbitrator’s decision may be flawed because the information presented is incomplete. In addition, most proceedings, as discussed above, do not use the rules of evidence. While this might allow for the free flow of information, the protections the rules provide are essentially waived.

Conclusion

Arbitration often costs less and is more expeditious than traditional litigation. However, great care must be taken to ensure that valuable rights are not waived by the terms of an arbitration agreement. The assistance of an experienced attorney is essential for any individual or entity seeking to enter an agreement with an arbitration clause.

Todd D. Greene is an associate of Hill Wallack and member of the Administrative Law/Government Procurement Practice Group. His principal area of practice is in the areas of economic and business development with a particular emphasis on municipal law and government affairs.