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arbitration

A process for settling disputes between securities firms or between securities firms and their customers in which the parties submit their differences to the judgment of an impartial third party or parties. Many brokerage firms require their customers to sign an agreement for binding arbitration to resolve disputes. The agreement requires the customer to accept the arbitrator's decision and to waive the right to subsequent legal action. Pressure from the SEC and a 1990 court decision now allows investors the option of using an independent arbitration panel in place of a securities-industry panel. Compare mediation. See also NASD Dispute Resolution, Inc.

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Arbitration

An extrajudicial means of resolving a dispute in which the parties agree to make their cases before an impartial person or panel. There are generally three arbitrators, but there may be up to five. Importantly, the parties in arbitration agree to allow the decision to be binding and to forego the right to an appeal.

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Arbitration. Arbitration is a way to resolve conflicts between parties or individuals, and may be considered a middle ground between the more cooperative, informal nature of mediation and the more expensive, involved, and lengthy process of litigation.

Usually, when you open a brokerage account, you sign an agreement to use arbitration to resolve possible conflicts with the firm and waive the right to sue for damages in court.

Arbitration is binding, which means you can't appeal the decision or try for a different result by going to court. Most investment-related arbitration claims are handled by either NASD, the main self-regulatory body that supervises brokers, or the New York Stock Exchange (NYSE).

In arbitration, a trained impartial arbitrator or panel of arbitrators reviews the evidence, decides on the outcome, and sets any award. While arbitration is usually less expensive than litigation, arbitration and attorney fees make it a more expensive option than mediation.

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arbitration

A method of nonjudicial or alternative dispute resolution (ADR) which long existed at common law but has recently gained renewed vigor because of the Federal Arbitration Act and the U.S. Supreme Court's pronouncements that the Act applies to all disputes involving matters in interstate commerce. Virtually every construction contract, architectural agreement, and mortgage loan document today contains an arbitration clause and is deemed to involve interstate commerce because of the nationwide impact of those industries.The American Arbitration Association maintains a Web site at www.adr.org.

The process relies upon aggrieved parties agreeing to one or more disinterested persons hearing their complaints and defenses and then coming to a conclusion establishing the rights and responsibilities of the parties and their damages, if any. In theory, at least, the arbitrators are skilled and knowledgeable in the particular field of the dispute and allowed to factor into their decisions their own knowledge and experiences. This is in contrast to the modern jury system, in which the law seeks to obtain a jury absolutely ignorant of any details of the industry or dispute, and willing to come to a conclusion based solely on the evidence presented by the lawyers.

• Pros. The process is usually much more informal than a traditional trial, allowing a leveling of the playing field when consumers attempt to represent themselves against lawyers representing the other side. In some markets, for some types of disputes, you can reach a hearing and resolution faster and more cheaply than in the court system. For others, a shortage of trained arbitrators for complex cases means the dispute might actually take longer. There are no formal rules of evidence, and the arbitrator simply factors in issues such as hearsay when deciding how much weight to give evidence, rather than excluding it entirely. Discovery is usually very limited in consumer cases so that extensive time and money is not spent searching for documents to produce, attending depositions, and other such matters. The final judgment is confidential and not publicly reported anywhere unless
it is a money judgment not paid within the required time period, in which case the winner may record his or her arbitration award in the public records and attempt to enforce it.

• Cons. As a practical matter the arbitration award cannot be appealed or overturned, even if the arbitrator made obvious mistakes of law that directly resulted in a wrong decision. There are exceptions, but they are exceedingly technical, generally disfavored by appellate courts, and usually require a level of sophistication at the hearing level not enjoyed by most consumers. That is because, for most of the few allowable grounds of appeal, you must know those grounds and all their technicalities in advance and make tactical decisions at the hearing level that will preserve your rights to appeal. This lack of appellate rights was considered a trade-off for the ability to have an arbitrator knowledgeable about your field and supposedly able to reach a more fair decision than a jury. In reality, this rarely works out.