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Arbitration

ARBITRATION

ARBITRATION is the use of an impartial third party to resolve a dispute. Unlike mediation or conciliation, in which a third party facilitates the end of a dispute by helping the negotiators find common ground, an arbitrator ends a dispute by issuing a binding settlement. Before submitting their dispute to arbitration, the parties to a dispute agree to abide by the arbitrator's ruling.

Arbitration has been used to resolve disputes for centuries. Examples from as far back as the sixth century b.c.e. affirm the use of arbitration to resolve disputes between individuals and between city-states in ancient Greece. In the Old Testament, King Solomon acted as an arbitrator to resolve a conflict between two women over the identity of a child (1 Kings 3:16–28). George Washington in 1799 provided for the use of arbitration should any disputes arise over his will.

In U.S. history, labor arbitration, to settle industrial disputes between labor unions and employers, and commercial arbitration, to settle disputes involving business and consumer transactions, have been the most extensive uses of arbitration. The development of labor arbitration stems from the government's desire to avoid strikes that threaten the public interest, while commercial arbitration results from a desire to avoid the court system.

Commercial arbitration has expanded to include international commercial arbitration and has become more widespread as participants in the legal system have explored the use of alternative dispute resolution (ADR) to reduce the costs and delays of court cases. ADR includes arbitration, mediation, and other forms of dispute resolution. A significant example is the growing trend to use arbitration instead of the courts to resolve employment disputes involving allegations of discrimination and other violations of federal and state employment laws.

The Arbitration Process

The central features of the arbitration process are generally similar regardless of the topic of the dispute. Except in some cases in which arbitration is required by law, the parties agree ahead of time, usually when drafting a contract, to submit any disputes to binding arbitration. Nearly every union contract between labor unions and employers specifies arbitration as the final step of the grievance procedure to resolve employee grievances. A typical clause in contracts between builders, architects, and owners in the construction industry might read as follows: "Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Construction Industry Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof."

Once arbitration is initiated by one of the parties, an arbitrator must be selected. If the parties have not selected an arbitrator, agencies such as the American Arbitration Association and the Federal Mediation and Conciliation Service can provide a short list of qualified arbitrators. The parties then select an arbitrator from this list, for example, by alternately striking out names. Some arbitration processes may involve a panel of arbitrators, especially in complex commercial cases. When labor arbitration involves a panel, it is common to have an impartial chairperson, one member selected by labor, and one member selected by management.

Each party to the dispute then presents its case and argues its position at a hearing. It is of utmost importance that each party receives a full and fair hearing. Witnesses and exhibits often are presented to support a case, though the strict rules of evidence used by judges are not followed. The arbitrator decides the relevance and importance of the evidence. As with a traditional court case, opening and closing statements are made, and witnesses can be cross-examined. The parties frequently are represented by attorneys.

After the hearing, the arbitrator considers all of the material and issues a ruling. In commercial arbitration, it is common for the decision to simply provide the arbitrator's resolution to the disputed issues without providing details about the arbitrator's reasoning. In labor arbitration, however, it is common for the decision to be accompanied by an opinion indicating the reasons for the decision. The opinions are often used as precedents in subsequent cases.

The parties agree ahead of time to abide by the arbitrator's ruling or award. Laws such as the Federal Arbitration Act and judicial precedent have established the authority of arbitration awards, and the scope for challenging an award in court is limited to alleged problems in the process, such as arbitrator misconduct or disregard for the contract or law. The merits of an arbitrator's decision are not subject to judicial review, and awards can be enforced by the courts.

Labor Arbitration

Labor arbitration usually resolves disputes involving labor unions, employees, and employers. It is commonly divided into two distinct categories: interest arbitration and rights arbitration.

Interest arbitration resolves conflicts of interest over the establishment of the terms and conditions of employment, for example, the wage rate, working hours, and number of vacation days for each employee. In labor relations, these terms and conditions are negotiated through collective bargaining, and agreements are formalized in collective bargaining agreements or union contracts. A breakdown in these negotiations typically results in a strike. Interest arbitration avoids or ends strikes. In the United States the development of interest arbitration can be attributed to the government's desire to protect the public interest by preventing or ending strikes in key industries during the first part of the twentieth century. In 1902, President Theodore Roosevelt ended a five-month coal strike via arbitration, and several laws provided for voluntary arbitration in the railroad industry and the appointment of boards of inquiry if interstate commerce was affected.

Interest arbitration in the private sector is voluntary, and the parties can choose arbitration as an alternative to a strike if desired. Examples have involved the apparel and steel industries as well as Major League Baseball. Congress, however, has prevented railroad strikes through arbitration, and President Bill Clinton ended a flight attendants strike at American Airlines in 1993 by persuading the parties to submit their dispute to arbitration.

In the public sector, interest arbitration is often compulsory, that is, required by law, which echoes the rationale of preventing strikes that harm the public interest. At least twenty states and the federal government deny government employees the right to strike and instead require interest arbitration. These compulsory arbitration laws are especially prevalent among occupations deemed essential, such as police officers, firefighters, and prison guards. Most interest arbitration in the United States occurs in the public sector under these compulsory statutes; private sector negotiators are generally reluctant to give up their right to strike and to turn over their decision making authority to a third party.

In contrast, rights arbitration is widely used in both private-and public-sector labor relations. Rights arbitration resolves conflicts of rights, more commonly referred to as grievances, which are disagreements over the application or implementation of an existing union contract. In other words, has a right that was granted by the contract to a specific party been violated? A common example involves the discipline and discharge of employees. Most union contracts specify that employees can only be disciplined and discharged with just cause, so grievances are frequently filed over whether or not a specific instance of discipline or discharge was consistent with the requirements of just cause. An arbitrator might rule that the discharge was consistent with just cause and therefore stands or that management violated a principle of just cause and therefore the grievant is entitled to be reinstated to his or her job, perhaps with back pay. Other examples include questions of whether or not the contractual provisions were followed in layoffs or promotions, whether or not a specific employee was eligible for vacation pay, or whether or not management has the right to subcontract work.

The widespread adoption of rights or grievance arbitration in the United States originated during World War II. This period was marked by significant growth in union membership and an obvious public interest in avoiding strikes that interrupted war production. The U.S. government, through the National War Labor Board, prompted organized labor to give up the right to strike over grievances in return for binding grievance arbitration as the final step of the grievance procedure. At the conclusion of the war, the only thing that labor and management could agree on was that grievances were best settled through a grievance procedure ending in binding arbitration rather than a strike.

Grievance arbitration was further institutionalized by the important Supreme Court decisions in Textile Workers v. Lincoln Mills (1957) and the Steelworkers Trilogy Cases (1960). In short, these decisions prohibit labor and management from ignoring an arbitration clause in their contract, provide significant legitimacy to the arbitration process, and restrict the scope of judicial review.

No-strike clauses are in 95 percent of union contracts, and clauses providing for binding arbitration to settle unresolved grievances are in nearly all contracts. Note carefully that these no-strike clauses pertain to grievances, rights disputes during the term of a collective bargaining agreement, not to interest disputes at the expiration of the agreement. This system of grievance arbitration, with its established body of precedents on just cause and other important issues, is widely recognized as a positive contribution to labor-management relations in the workplace.

However, the application of arbitration to employment disputes in the nonunion arena is contentious. A number of employment laws provide employees with rights pertaining to nondiscrimination, safety and health, family and medical leave, and other subjects. To avoid costly litigation, some employers require employees, as a condition of employment, to agree to arbitrate any future employment law disputes rather than take the employer to court.

The Supreme Court, in Gilmer v. Interstate/Johnson Lane Corporation (1991), upheld forcing an employee who agreed to binding arbitration in advance to submit his or her dispute to arbitration, but numerous legal and policy questions remained. In particular, it is central to the legitimacy of arbitration as a dispute resolution process that all parties receive due process. In light of the differences in resources between corporations and individual employees, it is debatable whether or not employees are provided with due process in this nonunion context, especially if they must waive their right to litigation as a condition of employment in advance of any dispute. This issue impacts significantly arbitration in the United States.

Commercial Arbitration

Commercial arbitration resolves disputes involving business transactions. Merchants and traders have used arbitration for centuries. The chambers of commerce of New York and other eastern cities used arbitration before 1800, though perhaps not frequently. Widespread acceptance of commercial arbitration, however, did not start until the 1920s. New York State passed a law in 1920 and Congress passed the Federal Arbitration Act in 1925, making contract clauses containing an agreement to arbitrate disputes legally binding. Also significant was the founding in 1926 of the American Arbitration Association, a not-for-profit organization that provides guidelines and assistance in using arbitration.

As a result, contracts in the United States between builders, architects, and owners in the construction industry or between cloth mills and garment manufacturers in the textile and apparel industry often have a clause specifying that disputes will be resolved through arbitration. Transactions in the real estate, financial securities, and publishing industries often include arbitration as the dispute resolution procedure. One of the largest commercial arbitration applications involves uninsured motorist claims, in which liability and damages are determined through arbitration.

While labor arbitration developed as a means for avoiding strikes, the rationale for commercial arbitration is to avoid the court system. Relative to court action, arbitration can be faster, less expensive, and more private. Moreover, arbitrators are experts in the subject matter of the dispute. Increased economic globalization and complex international business relationships combined with a reluctance to litigate disputes in a foreign court have increased adoption of arbitration to resolve international business disputes.

BIBLIOGRAPHY

Bales, Richard A. Compulsory Arbitration: The Grand Experiment in Employment. Ithaca, N.Y.: ILR Press, 1997. Overview of arbitration to settle employment law disputes. Includes historical and contemporary developments.

Bühring-Uhle, Christian. Arbitration and Mediation in International Business: Designing Procedures for Effective Conflict Management. The Hague and Boston: Kluwer Law International, 1996.

Devinatz, Victor G., and John W. Budd. "Third Party Dispute Resolution—Interest Disputes." In The Human Resource Management Handbook, part 2. Edited by David Lewin, Daniel J. B. Mitchell, and Mahmood A. Zaidi. Greenwich, Conn.: JAI Press, 1997. Reviews the extensive research literature on interest arbitration.

Dunlop, John T., and Arnold M. Zack. Mediation and Arbitration of Employment Disputes. San Francisco: Jossey-Bass, 1997.

Elkouri, Frank, and Edna Asper Elkouri. How Arbitration Works. 5th ed. Edited by Marlin M. Volz and Edward P. Goggin. Washington, D.C.: Bureau of National Affairs, 1997. The classic treatment of grievance arbitration.

Kheel, Theodore W. The Keys to Conflict Resolution: Proven Methods of Settling Disputes Voluntarily. New York: Four Walls Eight Windows, 1999. Wisdom and examples from an experienced arbitrator and mediator.

Ponte, Lucille M., and Thomas D. Cavenagh. Alternative Dispute Resolution in Business. Cincinnati, Ohio: West Educational, 1999.

JohnBudd

See alsoCollective Bargaining ; Labor Legislation and Administration ; Strikes .

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Arbitration

ARBITRATION

The submission of a dispute to an unbiased third person designated by the parties to the controversy, who agree in advance to comply with the award—a decision to be issued after a hearing at which both parties have an opportunity to be heard.

Arbitration is a well-established and widely used means to end disputes. It is one of several kinds of alternative dispute resolution, which provide parties to a controversy with a choice other than litigation. Unlike litigation, arbitration takes place out of court: the two sides select an impartial third party, known as an arbitrator; agree in advance to comply with the arbitrator's award; and then participate in a hearing at which both sides can present evidence and testimony. The arbitrator's decision is usually final, and courts rarely reexamine it.

Traditionally, labor and commerce were the two largest areas of arbitration. However, since the mid-1970s, the technique has seen great expansion. Some states have mandated arbitration for certain disputes such as auto insurance claims, and court decisions have broadened into areas such as securities, antitrust, and even employment discrimination. International business issues are also frequently resolved using arbitration.

Arbitration in the United States dates to the eighteenth century. Courts frowned on it, though, until attitudes started to change in 1920 with the passage of the first state arbitration law, in New York. This statute served as a model for other state and federal laws, including, in 1925, the U.S. Arbitration Act, later known as the Federal Arbitration Act (FAA) (9 U.S.C.A. § 1 et seq.). The FAA was intended to give arbitration equal status with litigation, and, in effect, created a body of federal law. After world war ii, arbitration grew increasingly important to labor-management relations. Congress helped this growth with passage of the taft-hartley act (29 U.S.C.A. § 141 et seq.) in 1947, and over the next decade, the U.S. Supreme Court firmly cemented arbitration as the favored means for resolving labor issues, by limiting the judiciary's role. In the 1970s, arbitration began expanding into a wide range of issues that eventually included prisoners' rights, medical malpractice, and consumer rights. In 2003, all 50 states had modern arbitration statutes.

Arbitration can be voluntary or required. The traditional model is voluntary, and closely linked to contract law: parties often stipulate in contracts that they will arbitrate, rather than litigate, when disputes arise. For example, unions and employers almost always put an arbitration clause in their formal negotiations, known as collective bargaining agreements. By doing so, they agree to arbitrate any future employee grievances over wages, hours, working conditions, or job security—in essence, they agree not to sue if disagreements occur. Similarly, a purchaser and a provider of services who disagree over the result of a business deal may submit the problem to an arbitrator instead of a court. Mandatory arbitration is a more recent phenomenon. States such as Minnesota, New York, and New Jersey have enacted statutes that force disputes over automobile insurance claims into this forum. In addition, courts sometimes order disputants into arbitration.

In theory, arbitration has many advantages over litigation. Efficiency is perhaps the greatest. Proponents say arbitration is easier, cheaper, and faster. Proponents also point to the greater flexibility with which parties in arbitration can fashion the terms and rules of the process. Furthermore, although arbitrators can be lawyers, they do not need to be. They are often selected for their expertise in a particular area of business, and may be drawn from private practice or from organizations such as the American Arbitration Association (AAA), a national non-profit group founded in 1926. Significantly, arbitrators are freer than judges to make decisions, because they do not have to abide by the principle of stare decisis (the policy of courts to follow principles established by legal precedent) and do not have to give reasons to support their awards (although they are expected to adhere to the Code of Ethics for Arbitrators in Commercial Disputes, established in 1977 by the AAA and the american bar association).

These theoretical advantages do not always hold up in practice. Even when efficiency is achieved, some critics argue, the price is a lower quality of justice, and it can be made worse by the difficulty of appealing an award. The charge is frequently made that arbitration only results in "splitting the baby"—dividing awards evenly among the parties. The AAA roundly rejects this claim. Yet even arbitrators agree that as arbitration has become increasingly formal, it sometimes resembles litigation in its complexity. This may not be an inherent problem with the process as much as a result of flawed use of it. Parties may undermine arbitration by acting as lawyers do in a lawsuit: excessively demanding discovery (evidence from the other side), calling witnesses, and filing motions.

Ultimately, the decision to use arbitration cannot be made lightly. Most arbitration is considered binding: parties who agree to arbitration are bound to that agreement and also bound to satisfy any award determined by the arbitrator. Courts in most jurisdictions enforce awards. Moreover, they allow little or no option for appeal, expecting parties who arbitrate to assume the risks of the process. In addition, arbitration is subject to the legal doctrines of res judicata and collateral estoppel, which together strictly curtail the option of bringing suits based on issues that were or could have been raised initially.

Res judicata means that a final judgment on the merits is conclusive as to the rights of the parties and their privies, and, as to them, operates as an absolute bar to a subsequent action involving the same claim, demand, or cause of action. Collateral estoppel means that when an issue of ultimate fact has been determined by a valid judgment, that issue cannot be relitigated between the same parties in future litigation. Thus, often the end is truly in sight at the conclusion of an arbitration hearing and the granting of an award.

The FAA gives only four grounds on which a court may vacate, or overturn, an award: (1) where the award is the result of corruption, fraud, or undue means; (2) where the arbitrators were evidently partial or corrupt; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing or hear pertinent evidence, or where their misbehavior prejudiced the rights of any party; and (4) where the arbitrators exceeded their powers or imperfectly executed them so that a mutual, final, and definite award was not made. In the 1953 case Wilkov. Swan, 346 U.S. 427, 74 S. Ct. 182, 98 L. Ed. 168, the U.S. Supreme Court suggested, in passing, that an award may be set aside if it is in "mani-fest disregard of the law," and federal courts have sometimes followed this principle. Public policy can also be grounds for vacating, but this recourse is severely limited to well-defined policy based on legal precedent, a rule emphasized by the Supreme Court in the 1987 case United Paperworkers International Union v. Misco, 484U.S. 29, 108 S. Ct. 364, 98 L. Ed. 2d 286.

The growth of arbitration is taken as a healthy sign by many legal commentators. It eases the load on a constantly overworked judicial system, while providing disputants with a relatively informal, inexpensive means to solve their problems. One major boost to arbitration came from the U.S. Supreme Court, which held in 1991 that age discrimination claims in employment are arbitrable (Gilmer v. Inter-state/Johnson Lane Corp., 500 U.S. 20, 111 S. Ct. 1647, 114 L. Ed. 2d 26). Writing for the majority, Justice byron r. white concluded that arbitration is as effective as a trial for resolving employment disputes. Gilmer led several major employers to treat all employment claims through binding arbitration, sometimes as a condition of employment.

Arbitration clauses have become a standard feature of many employment contracts. This has led to conflicts concerning the applicability of these clauses when an employee seeks to sue an employer for a civil rights violation under Title VII of the Civil Rights Act of 1964, as amended by the civil rights act of 1991. A provision of this law addressed, for the first time, the arbitration of Title VII claims. Section 118 of the act states that the parties could, "where appropriate and to the extent authorized by law," choose to pursue alternative dispute resolution, including arbitration, to resolve their Title VII disputes. Since its enactment, the federal courts have been required to determine what this clause means in practice. For example, in the securities industry disputes arose over whether employers could require their employees to waive their right to bring a Title VII claim in court. The circuit courts of appeal have uniformly ruled that Congress did not mean to preclude compulsory arbitration of Title VII claims.

The equal employment opportunity commission (EEOC) has contended that employment arbitration clauses do not prohibit the EEOC from filing an action against an employer for a civil rights violation. The Supreme Court agreed in Equal Employment Opportunity Commission v. Waffle House, Inc., 534 U.S. 279, 122 S.Ct. 754, 151 L.Ed.2d 755 (2002), holding that the EEOC could seek damages on behalf of an employee. The commission could also seek injunctive relief to change a company's discriminatory methods. In so ruling, the Court resolved an issue that had divided the circuit courts of appeal.

The employee in question was fired from his job at the Waffle House after he suffered a seizure. He filed a claim with the EEOC, arguing that his rights under Title I of the Americans with Disabilities Act (ADA) had been violated. Under this act, the EEOC has the authority to bring its own enforcement actions against employers and to seek reinstatement, backpay, and compensatory and punitive damages on behalf of an employee. Moreover, the ADA makes no exception for arbitration agreements, nor does it even mention arbitration. Therefore, the EEOC, which had not signed an arbitration agreement with the employer, was free to pursue its claims in court. The Court also concluded that the general policies surrounding the ADA, and the EEOC's enforcement arm, justified the pursuit by the EEOC of victim-specific relief. It stated that punitive damages "may often have a greater impact on the behavior of other employers than the threat of an injunction."

The Supreme Court also has validated the enforceability of arbitration awards relating to collective bargaining agreements. In Eastern Associated Coal Corporation v. United Mine Workers of American, District 17, 531 U.S. 57, 121S.Ct. 462, 148 L.Ed.2d 354 (2000), the issue involved a labor arbitrator who ordered an employer to reinstate an employee who had twice tested positive for marijuana use. The employer filed a lawsuit in federal court seeking to have the arbitrator's decision vacated, arguing that the award went against a public policy against the operation of dangerous machinery by workers who test positive for drugs.

The Court unanimously agreed that the employee should be reinstated. The Court made it clear that the question was not whether the employee's drug use itself violated public policy, but whether the agreement to reinstate him did so. However, the Court also pointed out that the public policy exception is a narrow one. Based on these principles, the Court ruled that the reinstatement did not violate public policy, as the award did not condone drug use or its impact on public safety. In addition, the arbitrator placed conditions on the employee's reinstatement, which included suspension of work for three months without pay, participation in a substance abuse program, and continued random drug testing. The fact that the employee was a recidivist did not tip the balance in favor of discharge.

further readings

Crowley, Thomas. 1994. "The Art of Arbitration Advocacy." Hawaii Bar Journal (September).

Culiner, Helen. 1994. "Practical Guidelines for Lawyers Representing Clients in Arbitration Proceedings Today." Dispute Resolution Journal (September).

Deye, James, and Lesly Britton. 1994. "Arbitration by the American Arbitration Association." North Dakota Law Review (spring).

Nolan-Haley, Jacqueline M. 2001. Alternative Dispute Resolution in a Nutshell. 2d ed. St. Paul, Minn.: West Wadsworth.

Ware, Stephen J. 2001. Alternative Dispute Resolution. St. Paul, Minn.: West Wadsworth.

cross-references

Alternative Dispute Resolution.

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Arbitration

ARBITRATION

Arbitration is the process by which two parties agree to submit a dispute they cannot settle on their own to a third party, or arbitrator, whose decision is final and binding on both sides. Disputing parties resort to arbitration when they have reached a point where the only alternative is a lawsuit or a strike. In some cases arbitration is required by law. Arbitration is common in disputes over construction contracts, landlord-tenant contracts, and even salary disagreements in professional sports. After evaluating the dispute, the arbitrator either sides with one of the parties or tries to find a solution that is fair to both. He may be appointed by the two parties or assigned by a court. The arbitrator may be a respected individual or panel of individuals or a professional arbitrator hired through organizations like the American Arbitration Association.

Arbitration proceedings differ from lawsuits. They are faster and cheaper, and arbitrators have greater flexibility than law courts because they do not have to assign "blame" to one of the parties. Arbitration proceedings are ideally suited to complex disputes where the arbitrator has specialized expertise in the subject matter of the dispute, and they enable the disagreeing parties to maintain greater privacy over the arbitration process.

Commercial or contract arbitration arose in medieval Europe to settle disputes when the law was no help because the disputing merchants lived in different political or legal systems. By the nineteenth century the United States had developed a voluntary arbitration system in which workers and owners freely submitted their labor disputes to an "umpire" for resolution. In 1926 the American Arbitration Association was established to create a trained pool of professional arbitrators. Nine years later, the National Labor Relations Act was passed, making it easier for workers to use arbitration to bargain collectively for better labor agreements. The need for quick resolution of labor disputes during World War II (19391945) increased the number of arbitrated labor disputes. The passage of the Arbitration Acts of 1947, 1970, and 1990 strengthened the process of arbitrating commercial disputes, made the process more uniform, and established procedures for resolving disputes with foreign companies. In 1960 the landmark "Steelworkers' Trilogy" Supreme Court case limited the role of the courts in overturning arbitration cases, paving the way for today's independent, legally binding arbitration decisions.

See also: Collective Bargaining, Strike

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Arbitration

Arbitration


Arbitration is a process in which disputing parties abandon their right to litigate or appeal to the judicial court and instead put their case before an impartial third party who renders an opinion or recommendation. If the arbitration is nonbinding, the parties may choose to accept it or not. If it is binding, the parties must abide by the decision, which has the force of law and can be enforced. Parties may voluntarily submit to arbitration rather than incur the costs of litigation. Courts may also force parties to go to arbitration. Examples of cases that have gone to arbitration concern the location of gas pipelines and liability for paying for pollution cleanup.

see also Consensus Building; Enforcement; Litigation; Mediation; Public Policy Decision Making; Regulatory Negotiation.

Internet Resource

u.s. institute for environmental conflict resolution web site. available from http://www.ecr.gov.

Susan L. Senecah

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arbitration

ar·bi·tra·tion / ˌärbiˈtrāshən/ • n. the use of an arbitrator to settle a dispute.

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