Arbitration may also serve a distinct purpose: as an alternative to strikes and lockouts as a means of resolving labor disputes. Labor arbitration comes in two varieties: interest arbitration, which provides a method for resolving disputes about the terms to be included in a new contract when the parties are unable to agree, and grievance arbitration, which provides a method for resolving disputes over the interpretation and application of a collective bargaining agreement.
During the Industrial Revolution, large corporations became increasingly opposed to this policy. They argued that too many valuable business relationships were being destroyed through years of expensive adversarial litigation, in courts whose rules differed significantly from the informal norms and conventions of businesspeople (the private law of commerce, or jus merchant). Arbitration was promoted as being faster, less adversarial, and cheaper.
The result was the New York Arbitration Act of 1920, followed by the United States Arbitration Act of 1925. Both made agreements to arbitrate valid and enforceable (unless one party could show fraud or unconscionability or some other ground for rescission which undermined the validity of the entire contract). The USAA is now known as the Federal Arbitration Act. Due to the subsequent judicial expansion of the meaning of interstate commerce, the U.S. Supreme Court reinterpreted the FAA in a series of cases in the 1980s and 1990s to cover almost the full scope of interstate commerce. In the process, the Court held that the FAA preempted many state laws covering arbitration, some of which had been passed by state legislatures to protect their consumers against powerful corporations.
Since commercial arbitration is based upon either contract law or the law of treaties, the agreement between the parties to submit their dispute to arbitration is a legally binding contract. All arbitral decisions are considered to be "final and binding." This does not, however, void the requirements of law. Any dispute not excluded from arbitration by virtue of law (e.g. criminal proceedings) may be submitted to arbitration.
Unions and employers have also employed arbitration to resolve employee and union grievances arising under a collective bargaining agreement. The Amalgamated Clothing Workers of America made arbitration a central element of the Protocol of Peace it negotiated with garment manufacturers in the second decade of the twentieth century. Grievance arbitration became even more popular during World War II, when most unions had adopted a no-strike pledge. The War Labor Board, which attempted to mediate disputes over contract terms, pressed for inclusion of grievance arbitration in collective bargaining agreements. The Supreme Court subsequently made labor arbitration a key aspect of federal labor policy in three cases which came to be known as the Steelworkers' Trilogy. The Court held that grievance arbitration was a preferred dispute resolution technique and that courts could not overturn arbitrators' awards unless the award does not draw its essence from the collective bargaining agreement. State and federal statutes may allow vacating an award on narrow grounds (e.g., fraud). These protections for arbitrator awards are premised on the union-management system, which provides both parties with due process. Due process in this context means that both parties have experienced representation throughout the process, and that the arbitrators practice only as neutrals.
The process operates under its own rules, and is described in an article Introduction to Securities Arbitration Securities arbitrations are held primarily by the Financial Industry Regulatory Authority ("FINRA").
The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (Done at New York, 10 June 1958; Entered into force, 7 June 1959; 330 U.N.T.S. 38, 1959) provides for the enforcement of foreign arbitral awards on the territory of the contracting parties. Similar provisions are contained in the earlier Convention on the Execution of Foreign Arbitral Awards (Done at Geneva, 26 September 1927; Entered into force, 25 July 1929; L.N.T.S. ???).
Some jurisdictions have instituted a limited grace period during which an arbitral decision may be appealed against, but after which there can be no appeal. In the case of arbitration under international law, a right of appeal does not in general exist, although one may be provided for by the arbitration agreement, provided a court exists capable of hearing the appeal.
When arbitration occurs under U.S. law, either party to an arbitration may appeal from the arbitrator's decision to a court, however the court will generally not change the arbitrator's findings of fact but will decide only whether the arbitrator was guilty of malfeasance, or whether the arbitrator exceeded the limits of his or her authority in the arbitral award or whether the award conflicts with positive law. The Supreme Court has described the standard of review as one of the narrowest known to Western jurisprudence. Wherever so seen, arbitration may be the best approach to the legal manners and parties involved.
It is open to the parties to restrict the possible awards that the abitrator can make. If this restriction requires a straight choice between the position of one party or the position of the other, then it is known as pendulum arbitration or final offer arbitration. It is designed to encourage the parties to moderate their initial positions so as to make it more likely they receive a favourable decision.
No definitive statement can be made concerning the credentials or experience levels of arbitrators, although some jurisdictions have elected to establish standards for arbitrators in certain fields. Several independent organizations, such as the American Arbitration Association and the National Arbitration Forum, offer arbitrator training programs and thus in effect, credentials. Generally speaking, however, the credibility of an arbitrator rests upon reputation, experience level in arbitrating particular issues, or expertise/experience in a particular field. Arbitrators are generally not required to be members of the legal profession.
To ensure effective arbitration and to increase the general credibility of the arbitral process, arbitrators will sometimes sit as a panel, usually consisting of three arbitrators. Often the three consist of an expert in the legal area within which the dispute falls (such as contract law in the case of a dispute over the terms and conditions of a contract), an expert in the industry within which the dispute falls (such as the construction industry, in the case of a dispute between a homeowner and his general contractor), and an experienced arbitrator.
Also, some have argued that the fact that an arbitration company may handle many cases for a corporation while an individual rarely goes through arbitration twice may bias the arbitrators in favor of the company. On this note, many arbitration companies have these corporations as their sole source of income, further biasing their judgments. The Christian Science Monitor found that the 10 most frequently used arbitrators – who decided almost 60 percent of the cases heard – decided in favor of the consumer only 1.6 percent of the time .
The fact that most arbitral procedures are not public, and that there may be no provision for an individual to be represented by counsel, may also work to the disadvantage of the individual. These potential disadvantages make the ethics and professionalism of arbitrators even more important.
Arbitration in the U.S. has also been criticized because of the unavailability of appellate review. Although the New York and federal arbitration laws were based on the English arbitration law of 1898, they omitted the English provision permitting for de novo review of questions of law. Thus, American courts can overturn arbitral rulings only for extremely gross procedural errors that violate due process, but cannot reverse most substantive errors.
Unlike judicial opinions, arbitration opinions are often confidential. As a result, the law relating to activities (such as reinsurance contracts and certain types of securities industry disputes) where contracts to arbitrate are widespread may develop more slowly because the usual process of creating precedent is not available.
Critics say arbitration can mean high filing fees, unqualified arbitrators, lost legal rights, limited awards and no appeals. Filing a case in state Superior Court costs from $90 to $185, depending on the amount claimed. Filing fees for arbitration can cost thousands of dollars, depending on the case and the arbitration firm. Fees for hearing rooms and the arbitrator's time can run tens of thousands of dollars more and discourage individuals from pursuing a case.
In court, Judges or other judicial officers hear cases. Many arbitrators are former judges, but some are not even lawyers. Arbitrators are rarely required to follow the law and are regulated in only two states. Judges are usually assigned according to a rotation or by a presiding judge. Parties select arbitrators, usually from a list compiled by an arbitration firm. Firms offer parties various methods of striking names from the list and reducing them to one. If the parties cannot agree, the firm may designate an arbitrator. .
In courts, the right to a fair process is protected by legal safeguards such as discovery, testimony and evidence rules. Court rules do not apply to arbitration, meaning the arbitrator - sometimes guided by an arbitration agreement or the rules of an arbitration firm - controls the process.
Arbitration awards are generally lower than in court, and arbitration agreements sometimes limit the type of damages an individual can recover.
Judges' decisions are public record and subject to appeal. Most decisions by arbitrators are confidential. They cannot be appealed and are subject to judicial review only in narrow circumstances.
Critics say many arbitrators "cut the baby in half" irrespective of the merits of the parties' cases.
Most recently Senators Russ Feingold of Wisconsin and Congressman Hank Johnson of Georgia, together with numerous co-sponsors in both Houses, introduced the Arbitration Fairness Act (S. 1782, H.R. 3010) in the U.S. Congress. The bill would prohibit mandatory pre-dispute binding arbitration in consumer, employment, and franchise disputes. Parties to a dispute would still be able to choose arbitration over court if they wanted to, but individuals would be given a choice in the matter and would not be denied their constitutional right to access the courts and have a jury trial. The bill would overturn the strong presumption in favor of arbitrability that has been erected by decisions of the United States Supreme Court under the rubric of the Federal Arbitration Act, at least as applied to consumer and employment disputes. The bill is supported by the groups such as Public Citizen, Center for Responsible Lending, Consumer Federation of America, Homeowners Against Deficient Dwellings, Home Owners for Better Building, National Association of Consumer Advocates, National Consumer Law Center, National Consumer Coalition for Nursing Home Reform, National Employment Lawyers Association, and American Association for Justice. Opposition to the bill is led by the U.S. Chamber of Commerce's Institute for Legal Reform.
Among other things, the proposed Act states that: "No predispute arbitration agreement shall be valid or enforceable if it requires arbitration of— (1) an employment, consumer, or franchise dispute; or (2) a dispute arising under any statute intended to protect civil rights or to regulate contracts or transactions between parties of unequal bargaining power."