Pros & Cons of Arbitration and Dispute Resolution Clauses

There are pros and cons to arbitration and alternative dispute resolution clauses, which are prevalent in contracts of all descriptions.  Both processes are intended to provide a less costly and time-consuming way of resolving disputes using a neutral party.  There are some significant caveats, however.  The quicker and less formal factual discovery process is largely within the discretion of the umpire or arbitrator, and court rules of evidence and procedure don’t apply.

While the ADR Act allows a decision to be set aside on the basis of an error in applying the law, this is not the case with arbitration awards unless the arbitration clause so provides.  The qualifications and knowledge of the umpire or administrator are important and unless addressed in the arbitration clause the parties may not have control over this issue.

In New Jersey, there are two separate statutes governing alternative dispute resolution and arbitration. There is also a Federal Arbitration Act which is intended to provide maximum enforceability of arbitration agreements.  The ADR Act, as described below, was passed in 1987 in an attempt to correct some of the shortcomings of arbitration.  

The New Jersey Alternative Procedure for Dispute Resolution Act (N.J.S.A. 2A:23A-1 et seq.) (“ADR Act”) applies in two circumstances:  (i) where a written contract includes an advance agreement to settle disputes under the ADR Act or (ii) where the parties to a dispute agree in writing to use ADR, whether the controversy arose under a contract or not.   Such an agreement constitutes a waiver of trial by jury and a waiver of rights to appeal, except as the ADR Act allows.  An “umpire” is designated in accordance with the means specified in the contract, or if no such means is specified, by initiating a summary action in Superior Court to have an umpire appointed,  The umpire has complete authority to decide all issues of fact and law. The courts will not consider any intermediate appeals unless there is a showing of manifest denial of justice or a party’s interests will be irreparably harmed.

Following a 60-day discovery period, the parties submit a written statement of their factual and legal position.  The umpire holds a hearing.  The rules of evidence that govern court actions do not apply and umpires are charged with “assuring the informality of the proceedings.”  The umpire also can decide whether any expert witnesses are necessary. An award is issued by the umpire within the time set by the agreement or is no such time is set, by the Superior Court.   Within 45 days thereafter, a party can apply to Superior Court for the award to be vacated, modified or corrected.  There are very limited grounds for court review of the facts as determined by the umpire.  If the Court finds that the umpire incorrectly applied the law, the court has the power to modify the award.

The Arbitration and Award Act (N.J.S.A. 2A:23B-1 et seq.) became applicable to all agreements to arbitrate dated after 2003.    It applies to all agreements to arbitrate contained in a “record.”   If there is a dispute over whether an agreement to arbitrate existed, the Superior Court makes the determination; however, the Court cannot refuse to order arbitration due to a claim lacking merit or failing to state a valid claim.  An arbitrator may award “such remedies as the arbitrator deems just and appropriate under the circumstances”, and the award cannot be appealed on the basis that a court could not or would not grant the same relief, except for punitive damages or other “exemplary relief” and attorneys fees which can only be awarded if they could be awarded in a similar legal action.

There is no formal discovery in an arbitration; this is within the discretion of the arbitrator.  While pre-trial discovery can be frustrating, the intent is to allow a full development and sharing of the factual background between the parties (which in itself facilitates settlement) rather than having the parties have to guess at the evidence that will be presented by the other party, without an opportunity to prepare.

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