“The Seven” – Arbitration Agreements

After a dispute between Kramer and Elaine regarding whether Elaine must compensate Kramer with her bicycle for him fixing her sore neck, the two agree to have Newman arbitrate their disagreement. Is Newman’s decision binding? Can Elaine appeal the decision?

Arbitration is a form of alternative dispute resolutions (ADR) where the parties agree to select a third party arbitrator to rule on their dispute. The parties can agree in advance to adjudicate any disputes they may have through arbitration rather than through the judicial court system, or they can agree after the dispute has already happened to resolve the issue through arbitration. Although this form of dispute resolution has been disfavored historically, in recent decades it has become much more popular as a quicker and cheaper alternative to the court system that is often overburdened, prohibitively expensive, and thereby slammed shut to some people.

The first question that needs to be answered here is whether Elaine and Kramer actually agreed to use Newman as an arbitrator instead of seeking a resolution to their dispute through the court system. The answer is not so simple. Both the Federal Arbitration Act and New York law call for a “written” agreement between the parties in order for them to submit to arbitration, and although Elaine and Kramer did orally agree to use Newman as an arbitrator, they never actually wrote it down. However, despite the language in the law, courts have said that oral agreements can bind the parties to arbitration proceedings instead of the regular courts. Elaine and Kramer certainly made an oral agreement to adjudicate through arbitration, and since New York courts have ruled that oral agreements to utilize arbitration are enforceable, Newman’s decision is going to be binding on Kramer and Elaine (for a primer on written vs oral contracts, and what constitutes a binding oral agreement please see The Puffy Shirt).

***EDITOR’S NOTE: At one point, Jerry suggests that Kramer and Elaine use an “impartial mediator.” Newman does not act as a mediator, rather he acts an arbitrator.

Next up, can Newman even serve as an arbitrator? The Federal Arbitration Act allows for anyone to serve as an arbitrator, and one need not have any legal knowledge or judicial experience in order to serve as an arbitrator. While the American Bar Association (ABA) does provide some guidelines on what kinds of qualities an arbitrator should have, they are not binding. Besides, Newman possesses these qualities anyway even though he is “someone whose heart is so dark, it cannot be swayed by pity, compassion, or human emotion of any kind.”

The next question to decide is whether Newman conducted the arbitration hearing properly. Arbitrators have near limitless power to conduct hearings in anyway as they see fit, and while there are no true due process/constitutional rights required in an arbitration proceeding, the ABA does provide guidelines for how the hearing should be conducted. For instance, the parties should each be given the opportunity to be heard, and the arbitrator should act impartially (a point Jerry picks up on when he says “unfortunately, my friendship to each of you precludes my getting involved”). While we aren’t shown the hearing, we can infer that Newman did allow both Elaine and Kramer to be heard, as he says “well, you’ve both presented very convincing arguments,” and that he was even handed, as he says “each of you seemingly has a legitimate claim to the bicycle.”

The final question to consider is whether Newman must base his decision on any common law principles or statutory law. The answer is no. Newman is not bound to come to his decision based on substantive Federal or New York law, rather he is free to render sweet justice based on his own wisdom. Which in this case he certainly does.

But can Elaine appeal Newman’s decision? There are limited circumstances where Elaine will be able to appeal Newman’s decision, outlined in the Federal Arbitration Act. They are:

1. Where the arbirtation award was procured through fraud.
2. Where the arbitrators was corrupt or clearly partial to one party.
3. Where the arbitrator engaged in misconduct, such as in refusing to hear pertinent evidence.
4. If the arbitrator exceeded his powers.

It’s unlikely that Elaine would be able to demonstrate that Newman was guilty of any of these in his role as the arbitrator, and a judicial court will “confirm” his award of the bike to Kramer. There was no fraud in the proceedings, there’s no evidence of any misconduct or that he refused to hear certain pieces of evidence, and he didn’t exceed his powers because he limited his ruling to the dispute of the bicycle. And, if Newman is going to be partial to any party, it’s probably going to be the side that get’s him a lot of Elaine.

Therefore, “Kramer, the bike is yours!”