Arbitration usually results from an arbitration paragraph in an agreement. Often, one or both parties signed the agreement, perhaps many years earlier and never realized there was an arbitration clause or they have totally forgotten that there was an arbitration paragraph. Frequently, the parties will get into a dispute related to the agreement and, when they are unable to resolve the dispute amicably, one party will file a law suit. The other party then sends the complaint to its lawyer together with the underlying agreement. The lawyer looks at the complaint and then studies the agreement whereupon (s)he finds the arbitration clause. A motion is filed in court to dismiss the complaint because the parties had agreed to arbitration. The judge will look at the agreement and immediately dismiss the complaint. In other words, when there is an arbitration clause in an agreement, with rare exceptions, the courts will defer to the agreement.
The arbitration clause itself often specifies how the arbitration will be conducted. For example, it may say that the arbitration will be before a single arbitrator and that arbitrator should be chosen by some third-party organization. Or it may say there should be three arbitrators, each party choosing one and the two arbitrators chosen by the parties will then choose the third arbitrator.
The arbitration clause may also specify the ground rules. For example, it may indicate that the arbitration will be conducted in accordance with the rules of the American Arbitration Association (AAA). It may also specify where the arbitration will be conducted.
Irrespective of what the arbitration clause specifies, the parties can always change the rules, if they can agree. Often, they will want to limit the nature and amount of discovery that will be permitted, they can also decide that the arbitrators’ decision will only give their bottom line decision, without any explanation. Alternatively, the parties can require that the arbitrators give a reasoned explanation supporting the bottom line
In any case, the arbitrators must abide by the rules specified by the parties, either in the arbitration clause or by subsequent agreement.
Because the parties are in control of the rules, they can ensure that the process will be less expensive and more expeditious that going to court.