Arbitration: Binding and Non-Binding Dispute Resolution Explained
When mediation fails and going to trial feels too expensive, slow, or public, arbitration offers a middle path. Arbitration is a private, adjudicatory process in which the parties present their case to one or more neutral arbitrators who issue a decision—called an award—that may be binding on the parties. Unlike a judge or jury, the arbitrator is chosen by the parties or by a designated appointing authority, giving the parties control over who decides their dispute.
Arbitration has become the default dispute resolution mechanism in countless commercial contracts, employment agreements, consumer contracts, and international business transactions. The Federal Arbitration Act (FAA), enacted in 1925, established a strong federal policy favoring arbitration. In Southland Corp. v. Keating (1984), the Supreme Court held that the FAA preempts state laws that disfavor arbitration, and in AT&T Mobility LLC v. Concepcion (2011), the Court held that the FAA preempts state rules prohibiting class action waivers in arbitration agreements.
How Arbitration Differs from Mediation and Litigation
Many people conflate mediation and arbitration, but they are fundamentally different processes. In mediation, the neutral facilitator helps parties negotiate their own settlement but has no power to impose a decision. In arbitration, the arbitrator acts as a private judge who hears evidence and arguments and issues a binding ruling. Arbitration is more formal than mediation but less formal than court litigation.
The Arbitration Agreement
Arbitration is a creature of contract. No one can be compelled to arbitrate unless they have agreed to do so. The arbitration agreement may be a stand-alone contract or a clause within a larger agreement. The agreement typically specifies the scope of disputes subject to arbitration, the number of arbitrators, the method of selecting arbitrators, the location of the arbitration, the governing procedural rules, and whether the award will be binding.
Institutional vs. Ad Hoc Arbitration
Institutional arbitration is administered by a private organization such as the American Arbitration Association (AAA), JAMS, or the International Chamber of Commerce (ICC). The institution provides procedural rules, administrative support, a roster of qualified arbitrators, and fee schedules. Ad hoc arbitration is conducted without an administering institution; the parties design their own procedures and select their arbitrator directly. Institutional arbitration is more common in the United States, while ad hoc arbitration is more common in international disputes.
The Arbitration Process
Pre-Hearing Phase
The pre-hearing phase of arbitration resembles limited civil discovery. The arbitrator typically issues a scheduling order setting deadlines for the exchange of documents, witness lists, and pre-hearing briefs. Discovery in arbitration is generally narrower than in court litigation. The AAA Commercial Arbitration Rules and JAMS Comprehensive Arbitration Rules limit discovery to the production of documents and the identification of witnesses, though the arbitrator may authorize depositions or interrogatories for good cause shown.
The Hearing
The arbitration hearing is the evidentiary proceeding in which both sides present their case. Hearings are held in conference rooms rather than courtrooms. The rules of evidence are relaxed—arbitrators typically admit evidence that a court would exclude, giving it whatever weight they deem appropriate. The parties present opening statements, call witnesses (who testify under oath), introduce exhibits, and give closing arguments. Most arbitration hearings are shorter than trials, typically lasting one to five days.
The Award
After the hearing, the arbitrator deliberates and issues a written award. The award must be in writing and signed by the arbitrator. It does not need to include findings of fact or conclusions of law unless the parties have agreed otherwise. A binding arbitration award is final and subject to very limited judicial review.
Confirming and Challenging Awards
Under the FAA, a party may apply to a federal court for an order confirming the arbitration award, which converts the award into a judgment enforceable by the court’s contempt powers. Grounds for vacating an award under FAA Section 10 are extremely narrow: corruption or fraud, evident partiality or misconduct by the arbitrator, the arbitrator exceeded their powers, or the arbitrator refused to hear material evidence.
The Supreme Court in Hall Street Associates, L.L.C. v. Mattel, Inc. (2008) held that the grounds for vacating an arbitration award under the FAA are exclusive and cannot be expanded by contract. This means that even if the parties agree that the award can be reviewed for errors of law, the federal courts will not enforce that agreement. This limited judicial review is one of arbitration’s key trade-offs: finality in exchange for limited recourse.
Mandatory Arbitration in Consumer and Employment Contexts
Mandatory arbitration clauses in consumer contracts and employment agreements have become highly controversial. Critics argue that mandatory arbitration deprives individuals of their day in court, favors repeat-player businesses over individual consumers and employees, and suppresses the development of public law through judicial precedent. Supporters counter that arbitration is faster, cheaper, and more accessible than litigation and that the procedural informality benefits individuals without lawyers.
The Supreme Court has largely upheld mandatory arbitration clauses, including class action waivers. In Epic Systems Corp. v. Lewis (2018), the Court held that employment agreements requiring individual arbitration of wage and hour claims, with a waiver of class or collective actions, are enforceable under the FAA. However, the Court in New Prime Inc. v. Oliveira (2019) held that transportation workers engaged in interstate commerce are exempt from the FAA’s arbitration mandate under Section 1’s “workers engaged in foreign or interstate commerce” exception.
Consumer Arbitration: Criticisms and Reforms
Mandatory arbitration clauses in consumer contracts—buried in the fine print of credit card agreements, cell phone contracts, and streaming service terms of service—have become a flashpoint in American arbitration law. Consumer advocates argue that these clauses deprive individuals of meaningful access to justice by requiring arbitration in a forum chosen by the company, limiting discovery, and prohibiting class actions. The Consumer Financial Protection Bureau (CFPB) conducted a study in 2015 finding that very few consumers pursue individual arbitration claims, suggesting that mandatory arbitration effectively eliminates accountability for companies that engage in widespread low-value misconduct.
In response to these concerns, some states have attempted to restrict mandatory arbitration in consumer contexts, but the Federal Arbitration Act’s preemptive effect has largely defeated these efforts. The Supreme Court’s decision in AT&T Mobility v. Concepcion (2011) held that the FAA preempts California’s Discover Bank rule, which had prohibited class action waivers in consumer arbitration agreements when they would exculpate small-value claims. Following Concepcion, businesses rapidly adopted class action waivers in their arbitration clauses, effectively immunizing themselves from class-wide liability. Legislation such as the proposed Arbitration Fairness Act, which would prohibit mandatory pre-dispute arbitration agreements in consumer, employment, and civil rights cases, has been introduced in multiple Congresses but has not been enacted.
International Arbitration
International commercial arbitration is the preferred method for resolving cross-border business disputes. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958), adopted by over 170 countries, provides a uniform framework for enforcing international arbitration awards across national borders. The UNCITRAL Model Law on International Commercial Arbitration has been adopted by more than 80 countries and serves as the procedural template for most international arbitrations.
The major international arbitration institutions include the International Chamber of Commerce (ICC) in Paris, the London Court of International Arbitration (LCIA), the Singapore International Arbitration Centre (SIAC), and the International Centre for Settlement of Investment Disputes (ICSID). Each institution has its own rules, cost structure, and geographic specialization.
Frequently Asked Questions
Can an arbitration award be appealed? An arbitration award cannot be appealed on the merits in the same way a court judgment can be. The appeals process in civil cases does not apply to arbitration awards. However, a party can ask a court to vacate the award on one of the limited grounds in the FAA—corruption, partiality, misconduct, or excess of authority.
Is arbitration cheaper than going to court? Arbitration can be cheaper for simple disputes because it avoids the expense of full discovery and extended motion practice. However, arbitration is not always cheaper—the parties must pay the arbitrator’s fees (typically $300 to $800 per hour) and the administrative fees of the arbitration institution. In low-value disputes, arbitration costs can exceed the amount at stake.
Who pays for the arbitrator? The parties typically split the arbitrator’s fees equally, though the arbitration agreement may allocate costs differently. Some consumer arbitration agreements require the business to pay the arbitrator’s fees, making arbitration free or low-cost for the consumer.
What is the difference between binding and non-binding arbitration? In binding arbitration, the award is final and enforceable by the court (subject to limited vacatur grounds). In non-binding arbitration, either party may reject the award and demand a trial de novo (a new trial in court). Non-binding arbitration is used primarily in court-annexed programs where the parties want an advisory opinion before committing to settlement or trial.