In arbitration, a neutral party, called the arbitrator, issues a decision after hearing each party's position. Arbitration offers an efficient means of resolving a dispute, with a greater degree of finality than mediation.
The following are examples of different types of arbitration:
In non-binding arbitration, the arbitrator makes a decision but either party may void the decision by serving notice within a specified period. If notice is not served within that period, the decision becomes binding. The purpose of this type of arbitration is to give the parties an idea of what a neutral third party believes to be a reasonable resolution, without requiring either party to accept the decision.
In binding arbitration, the arbitrator makes a decision that is final and enforceable. The purpose of binding arbitration is to provide a final resolution of the dispute.
There are a number of different types of binding arbitrations, including straight arbitration, Hi-Lo arbitration, and baseball arbitration.
Straight Binding Arbitration:
This type of arbitration involves the arbitrator assessing the strengths and weaknesses of each party's case and arriving at a reasonable decision which is both binding and enforceable.
This type of arbitration may be used if the dispute involves the payment of money. Before the arbitration begins, the parties agree on a maximum dollar amount and a minimum amount. The arbitrator is not told the maximum (Hi) or minimum (Lo) figures.
After hearing all the facts and arguments, the arbitrator issues a decision.
- If the amount awarded is between the Hi and Lo figures, or is equal to the Hi or the Lo figure, then the amount of the award is binding.
- If the amount awarded is greater than the Hi figure, then the binding amount is equal to the Hi figure.
- If the amount awarded is lower than the Lo figure, then the binding amount is equal to the Lo figure.
The purpose of Hi-Lo arbitration is to guarantee a minimum amount to the party seeking payment, but to limit the exposure of the party against whom payment is sought, while giving each party the chance of receiving a more favorable result.
In baseball arbitration, each party offers a resolution of the dispute and the arbitrator chooses one of the offers, which becomes a binding decision. The purpose of baseball arbitration is to encourage each party to make a reasonable offer to resolve a dispute, because the less reasonable a party's offer is, the less likely it is that the arbitrator will choose that offer.