There are two types of arbitration. One of them arises from an arbitration provision which is inserted into a contract. This type of clause usually provides that, in the event a dispute arises as to the contract, it must be settled through an arbitration process rather than by a lawsuit.

These clauses usually state that the American Arbitration Association will conduct the arbitration under it’s own rules. Under these rules the institution of the arbitration process is a very simple matter, often requiring no more than the sending of a letter.

The second type of arbitration is the kind done through the court system itself. It involves an attempt, by the court, to avoid an actual trial of a dispute which has already been turned into a lawsuit.

In New York courts, for instance, it will occur in one of two ways: If a contract dispute, including a claimed breach of warranty, involves less than $6,000, before it may be tried before a judge there must be a compulsory arbitration.

If either party is unhappy with the decision they may have the arbitration totally thrown out and get a standard trial before a judge simply by filing a notice and paying a small fee. If, however, the action is in a state or federal court, the road to arbitration may be just the opposite.

In those cases, in many courts, the parties in dispute may voluntarily agree to submit to an arbitration in place of a trial and are then bound by the result and are, in fact, asked to sign a waiver giving up their right to an appeal from the arbitrator’s decision.

The following case involves this last, small claims court, type of arbitration. A consumer, the plaintiff, had sued a carpet cleaning company, the defendant, claiming it had defectively and negligently cleaned her beige Haitian cotton product and had somehow caused it to turn orange.

The lawsuit was brought to small claims court and was for money damages in the sum of $3,280, the alleged cost of its replacement. On May 8, the date of the scheduled trial, the parties agreed to submit to an immediate, binding arbitration. (The alternative to this would have most likely been waiting all day or evening for their turn for a trial before the judge).

At the hearing, the cleaner apparently admitted the water cleaning process used by his employee (steam) was not the proper method for that type of product. He further admitted his em ployee should have used a combined process of vinegar, foam and vacuuming.

He also claimed the discoloration was not permanent and could be removed by proper cleaning. After listening to both arguments, the arbitrator handed down his decision. In an attempt to do justice he ruled that: “Defendant will reclean the item and, if not done satisfactorily, he is to report back on July 20.”

Sure enough on July 20, both sides appeared back in court, this time before the judge. Anyone who has ever had this type of problem with a customer could have easily predicted, short of replacing the product, there was no way for the cleaner to satisfactorily reclean it.

After testifying that 70% of the agreed discoloration had been removed, the defendant asked for one more chance to attempt to remove it all. However, the plaintiff claimed the whole cleaning attempt was ridiculous, the arbitrator’s decision should be thrown out and she should get her trial and damages in the form of money.

The judge agreed with her stating, “However laudable the motives of the small claims arbitrator may have been in securing substantial justice, her powers were limited to granting of a monetary award not exceeding $5,000, the jurisdictional limit of that small claims court.”

He then granted the consumer’s motion to vacate the arbitrator’s award and proceeded to conduct his own trial. He found, as a result of the evidence presented that the claimant had paid $3,280 for the product three years earlier and an additional $2,400 for the cleaning service which caused its damage.

He noted that although it has been restored to 70% of its original color, the claimant was seeking to recover $3,280, her claimed cost of its replacement. The judge replied, “Although the cost of replacement may, in certain circumstances, be an appropriate remedy, it is not the proper measure here. The standard measure of money damages based upon diminution of value is appropriate here.”

Thus the judge found, considering its age and damage, the product was worth $500 less to the homeowner than if it were not partly orange. He then gave the claimant judgement for that sum of $500 against the cleaner. It could have been much worse.