Binding and Non-binding Arbitration – What is the Difference?

Posted on 04/03/2017 · Posted in Arbitration

Arbitration is a form of alternative dispute resolution (‘ADR‘) that is actively encouraged by the courts, and an increasingly popular route chosen by corporations and individuals seeking to resolve disputes because of the flexible, practical and cost effective alternative it offers to formal litigation.

The right to refer a dispute to arbitration, or an arbitration clause, as they are formally called, are found in all types of agreements these days: from employment and securities trading agreements to many kinds of consumer contracts, including those for credit cards, home repairs, health insurance, telephones, and selling and financing cars.

As more and more disputes are approached – and settled – through the arbitration route, the role and responsibilities of the arbitrator hold more importance than ever. An arbitrator’s role is similar to a judge’s in that he or she is an impartial and independent third party who listens to and evaluates the evidence put forward by each of the disputing parties before making a final decision, also known as an ‘award’.

In binding arbitration, disputing parties waive their right to a trial and agree that they will be bound by the arbitrator’s final decision. Binding arbitration is suitable for business disputes in which two parties need to resolve internal conflicts in order to expedite an outcome. Say for example, a construction company had agreed to carry out building work for a retailer but had misinterpreted the terms of their contract for the form that payment would take. It is within the contractor’s interest to get those stores open as quickly as possible, and it is within the construction companies’ interest to get paid. As such, binding arbitration suits both parties as the continuation of the work is invaluable to both of them, which could not be done without the resolution of the misunderstanding.

In general, in binding arbitration the arbitrator’s decision can then not be appealed against, except in very unique circumstances such as when fraud or an infringement of public policy can be proven. It should be noted that, even when appealed, courts tend to respect the arbitrator’s expertise and judgement. This is a way of validating and upholding arbitration as a trusted alternative to litigation. Particularly in Britain there has been a move towards state support of alternative dispute resolution methods. One of the main principals of the 1996 Arbitration Act was to minimise the need for courts to intervene in disputes handled by ADR methods.

In the United States many consumer contracts now contain binding arbitration clauses. It is within the consumer’s right to ‘opt out’ of binding arbitration clauses. However, many companies offering goods and services will demand binding arbitration on a ‘take it or leave it’ basis. It is always important to understand the terms of one’s agreement before signing the contract.

However, not all arbitration has to be binding, and parties can agree upfront before proceedings begin if they wish to pursue a non-binding arbitration.

Good company and good discourse are the very sinews of virtue”
Izaak Walton

Non-binding arbitration is a type of arbitration in which the arbitrator still makes a decision on the outcome of the dispute, but this decision is not binding, and no enforceable award is issued. In non-binding arbitration, each disputing party is at liberty to reject the decision of the arbitrator and instead request a formal trial.

But why invest time and money into a non-binding arbitration? There are still multiple benefits to non-binding arbitration, as even though it may not lead to a full settlement, it can help create guidelines for parties to follow or that can help them avoid conflict in their future dealings, thus preserving a healthy and positive working relationship that might otherwise further deteriorate in an all-out court battle. Parties may also treat non-binding decisions as an assessment of the strengths and weaknesses of potential court proceedings, but with the ultimate aim of reaching a mutually acceptable settlement.

Non-binding arbitration is most common in the United States and Canada, but is a useful alternative to binding arbitration for disputes which are less complex or in cases where parties simply require some guidance. Say, for example, the parties in question are squabbling over what equates to a fairly small amount of cash, one may consider arbitration to be a more suitable route to resolving the disagreement than going to court. In such small cases one might ask whether any help is needed at all? However, when communication has deteriorated between two parties, often, a third unbiased individual may be the only answer to salvaging the relationship.

Non-binding arbitration is often the preferred type in child custody cases, helping both parties to formulate realistic goals and create an amicable environment for the future. It is also used in a wide variety of business disputes, so much so that it is a legal requirement in Florida to submit a dispute to arbitration to understand each side’s differences before going to court. Both binding and non-binding arbitration have their merits, and it will depend on the specifics of the case as to which route is the most appropriate.

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Expert Evidence is a professional firm concentrating on the four main areas of dispute resolution; acting as expert witnesses in financial litigation, mediation, arbitration and adjudication. The firm has a civil, criminal and international practice and has advised in many recent cases. Areas of specialisation include banking, lending, regulation, investment, and tax.

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Disclaimer – Please confirm any of the above views with your solicitor. Expert Evidence takes no responsibility or provides any guarantee that the views above are correct for your particular case or jurisdiction.