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How do the parties initiate arbitration?
Arbitration can be either voluntary or mandatory.
Voluntary Arbitration – Voluntary arbitration, as the name indicates, means that the parties voluntarily agree to submit a dispute (or any dispute) to arbitration. This is also known as “arbitration at common law”. This is normally done through a formal, written agreement entered into between the parties. Voluntary arbitration generally takes two forms:
- Pre-dispute Arbitration – A contract between parties may contain an arbitration clause. These agreements require that any dispute over the contract will be arbitrated.
- Example: Assume you enter into a contract to purchase a vehicle. The contract contains a clause stating that any legal disputes about the contract will be arbitrated. This is a pre-dispute arbitration clause.
- Post-dispute Arbitration – The parties may enter into an agreement after the dispute arises to resolve a dispute through arbitration.
- Note: Even if the contract has an arbitration provision that makes arbitration of any disputes mandatory, it is still voluntary arbitration. The reason is because the parties voluntarily entered into the contract.
- Example: Now, continuing the above example between you and the car salesman, suppose the agreement does not contain an arbitration clause. If a dispute arises, you and the car salesman may enter into an agreement to submit the dispute to arbitration rather than litigate it.
Mandatory Arbitration – Certain state and federal laws require parties to arbitrate specific types of disputes. When a statute or court requires the parties to arbitrate a matter, this is known as “mandatory arbitration”. This is common in some very technical areas of law, such as alleged violations of rules put forward by the Financial Industry Regulatory Authority (FINRA). The requirement to arbitrate may be tied either to the type of dispute or the amount in controversy in the dispute. When the law requires arbitration, there is also a procedure in place for the identification and hiring of certified arbitrators.
Discussion: How do you feel about laws requiring that individuals arbitrate their dispute? Does this have any constitutional implications (such as the right to Due Process under the law)?
Practice Question: Carlos has a dispute with his employer. He believes that he has been discriminated against in the promotion selection process. In his employment contract, there is a clause requiring arbitration of any dispute under the agreement. Also, a state employment law requires arbitration of any employee-employer, discrimination disputes. In this situation, is the arbitration between the parties voluntary or mandatory?
- In this situation, the arbitration requirement is both mandatory and voluntary. The clause in the contract is voluntary, because the parties voluntarily entered into the agreement. The state law is mandatory, as mandatory arbitration is prescribed by a state or federal law or court order.