What is Arbitration?

Arbitration

Disputes can be resolved out of court through arbitration

Anyone who has ever been involved in litigation understands the long, gruesome process of getting their case to trial, but not many know that our judicial system allows alternative methods for resolving disputes. Arbitration is a substitute for a proceeding in court and is a form of Alternative Dispute Resolution (ADR). It involves a neutral third party, the arbitrator, who makes a decision after he considers arguments and evidence from both sides. For a case to get to trial it could take anywhere from six months to three years, but arbitration allows a speedy and relatively inexpensive means to resolving a dispute.

Arbitration can be either voluntary or mandatory. Mandatory arbitration usually comes from a statute or a contract that the parties entered into, where they agreed to take all disputes to arbitration. Parties that agree to arbitration are bound by the agreement and must satisfy any award determined by the arbitrator.

Importantly, arbitration can be as formal or as informal as the parties agree. The parties can either choose an informal procedure or they can choose to have the procedure governed by California Code of Civil Procedure Section 1289.

There are different forms of arbitration. It is important to understand each form in order to make an informed decision about which method suits your situation.

Binding Arbitration

As stated above, arbitration is a proceeding whereby a neutral third party makes a decision about your case after considering arguments and evidence from both sides. Binding arbitration means that the arbitrator’s decision is final and binding. Courts in most jurisdictions will enforce the awards and there is little or no option for appeal.

Additionally, arbitration is subject to the legal doctrines of Res Judicata and Collateral Estoppel. Res judicata means that if a final judgment on the merits of the case is made, the same parties cannot later bring an action involving the same claim, demand or cause of action. Collateral estoppel meansthat when an issue in the case has been determined by a valid judgment, that issue cannot be relitigated between the same parties in future litigation. Thus, a final judgment in binding arbitration really is the end of the dispute for the parties.

Non-Binding Arbitration

Non-binding arbitration is where the arbitrator makes a determination of the rights of the parties to the dispute, but this determination is not binding upon them and is not enforceable in court. The decision is more of an advisory opinion of the arbitrator’s view of the merits of the case.

Many times parties use non-binding arbitration as a first step to settlement negotiations. Non-binding arbitration allows the parties to go into negotiations with a credible ruling on their respective positions with little cost and no risk on the merits.

In fact, non-binding arbitration is similar to mediation in that the arbitrator will act as a middle man, except that the arbitrator is not involved in trying to settle the case like a mediator. The arbitrator remains totally removed from the settlement process and will only give a determination of liability and, if appropriate, an indication of the amount of damages.

Should non-binding arbitration fail to resolve the dispute, the parties are still able to go to court. The award and reasoning in a non-binding arbitration is inadmissible in any subsequent action in the courts or in another arbitration hearing.

Baseball arbitration

Baseball arbitration is another type of binding arbitration. Each party to the arbitration submits a proposed monetary award to the arbitrator. After a final hearing, the arbitrator will choose one award from the submitted awards. The arbitrator will not make any modifications to the award.

Baseball arbitration allows the parties to limit the arbitrator’s decision. It gives each party to the arbitration an opportunity to offer a reasonable proposal to the arbitrator with the hope that his/her award will be accepted.

Baseball arbitration can be one of two types: night baseball arbitration or day baseball arbitration. In both, the parties shall submit their last best award to the arbitrator. In day baseball arbitration, the arbitrator is aware of the award and chooses the award that is considered the most appropriate. Whereas, in a night baseball arbitration, the awards submitted by the parties are kept confidential from the arbitrator. After the arbitrator makes his decision, the award that is mathematically closest to the arbitrator’s award is considered the binding award.   Night baseball arbitration is mostly chosen when the parties have a strong belief about the reasonableness of their submitted award.

High/Low Binding Arbitration

In High/Low binding arbitration, the parties agree to an upper and lower limit to the award. The low number represents the lowest amount the Plaintiff is willing to accept and the high number represents the highest amount the Defendant is willing to pay. If the decision by the arbitrator is any number between the upper and lower limit, the decision is binding on the parties. If the arbitrator’s decision is outside of the limits, then the decision is not binding and the parties may proceed to court. The high and low numbers are typically confidential and not shared with the arbitrator.

The advantage of High/Low binding arbitration is that it allows the parties to reduce the risk of extreme decisions by the arbitrator by agreeing before hand on numbers that are acceptable to them. Additionally, the plaintiff can be certain that he or she will recover at least the number at the low and the defendant caps his or her losses at a number he or she can deal with.

A lot of times, High/Low arbitration makes sense when a plaintiff faces the possibility of a defense verdict and needs to cover some of his or her expenses, such as medical costs. For a defendant, High/Low arbitration makes sense if the defendant needs to cap his or her losses at what his or her insurance will cover.

Conclusion

As discussed above, arbitration (in its many forms) can be an inexpensive alternative to resolving disputes. It is a method that is encouraged by our judicial system and one which everyone should consider as a potential option (if available). For more on the ins and outs of arbitration, contact the Irvine business and litigation lawyers at Brown & Charbonneau, LLP at 714 505-3000

To learn more, please download our free report on Mediation and Arbitration in California.

Please see our article Differences Between Mediation, Arbitration, and Litigation