What Is Arbitration? Settling Disputes Without a Court
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Most of the world's large commercial disputes are never seen by a judge. They are decided in hotel conference rooms by arbitrators, lawyers or experts the parties have chosen, under rules the parties have agreed, in proceedings that the public never hears of, and the awards are enforceable in over 170 countries under a treaty of 1958 that makes an arbitrator's decision easier to collect abroad than a court's. Arbitration is older than the courts, since merchants settled their quarrels by chosen umpires before there were states to appeal to, and it is in the small print of most contracts that most people sign, which is where the argument about it begins.
How it works
Arbitration begins with an agreement, usually a clause in a contract, that any dispute will be referred to arbitration rather than to the courts. When a dispute arises, each side appoints an arbitrator and the two appoint a third, or an institution such as the International Chamber of Commerce in Paris or the London Court of International Arbitration appoints a sole one; the tribunal hears the case, with written submissions, documents, witnesses and a hearing, and issues an award, which is binding. Courts will enforce the award and will overturn it only for narrow reasons, fraud, bias, or the tribunal exceeding its powers, not because it got the law or the facts wrong. The parties pay the arbitrators, the venue and their own lawyers, and the whole thing is private unless they choose otherwise.
Why parties choose it
The reasons a business puts an arbitration clause in a contract are practical:
- •Enforceability: under the New York Convention of 1958 an award made in one country is enforceable in any of the 170-odd others, whereas a court judgment often is not, which for a contract between a German exporter and a Brazilian buyer is decisive
- •Neutrality: neither party has to litigate in the other's home courts, and the tribunal can sit in Singapore, Geneva or Stockholm
- •Expertise: a dispute about a ship's cargo or a chemical plant can be decided by people who understand ships or plants
- •Privacy: the dispute, the evidence and the outcome stay confidential, which suits companies with reputations and trade secrets
- •Speed and finality: no appeal, and in principle a faster procedure, though large arbitrations now take as long and cost as much as trials
Where it is used
Commercial arbitration covers construction, shipping, energy, insurance, commodities and the disputes between companies across borders that make up most of international trade. Investment arbitration, under treaties between states, lets a foreign investor sue a government before a tribunal for expropriating or mistreating its investment, a system that has produced awards of billions against Russia, Venezuela and Argentina and a political backlash against corporations suing states over environmental and health laws. Sport has its own court, the Court of Arbitration for Sport in Lausanne, which decides doping cases and Olympic eligibility. Labour disputes are arbitrated in many countries, and the arbitration of consumer and employment claims, in which an individual has agreed in a standard contract to arbitrate rather than sue, is the American practice at the centre of the controversy.
The criticism
The objections fall on the mandatory kind. A phone contract, a credit card agreement or an employment contract that requires arbitration is not negotiated, and the customer or employee who has signed it has given up the court, the jury, the public record and, in the United States since 2011, the class action, in return for a private proceeding before an arbitrator whom the company's industry pays for repeatedly and the individual once; studies find that employees win less often and less money in arbitration than in court, and that most claims covered by such clauses are simply never brought. The secrecy that suits companies hides patterns of wrongdoing, as the arbitration of sexual harassment claims did until American law exempted them in 2022. Investment tribunals are criticised for letting three private lawyers overrule a parliament. Defenders reply that courts are slow and expensive, that arbitration gives small claims a hearing they would otherwise never get, and that the remedy for bad clauses is to regulate them, which Europe largely does and America largely does not.
The takeaway
Arbitration is a private, binding method of settling disputes in which the parties, by agreement, appoint their own tribunal, follow agreed rules and accept an award that courts will enforce almost everywhere under the 1958 New York Convention and overturn only for fraud, bias or excess of power. It dominates international commerce for its enforceability, neutrality, expertise and privacy, extends to investor claims against states and to sport, and is contested where individuals are made to accept it in standard contracts and lose the court, the jury and the class action.