Nonbinding Arbitration What Is It

Friday, August 17, 2012

Nonbinding Arbitration What Is It

Non-binding arbitration is a form of conflict resolution in which both parties submit their arguments to an impartial arbiter who hears their arguments, evaluates the available evidence, and then renders an “award” or “opinion” based on the merits of the case. Unlike “traditional” or “binding” arbitration, the arbiter's ruling is not legally binding on either party and those parties may then exercise any one of the several options that may be available.

1. The parties may proceed, or be ordered, into binding arbitration.

Although non-binding arbitration can be used by mutual consent of both parties, many federal regulatory agencies, such as the Department of Labour and the Securities and Exchange Commission (SEC), can order binding arbitration to settle disputes. Furthermore, many commercial contracts will contain an “arbitration clause” in which both parties agree to settle their disputes in binding arbitration rather than in court.

Binding arbitration has, in great part, become the preferred medium for resolving disputes in the financial markets over which the SEC exercises authority. There have, however, been numerous complaints regarding SEC policies on appeals from what was supposedly a binding agreement, with the complaint that the party with the “deeper pockets” tends to appeal more often than the less-moneyed side. For a more detailed treatment of these and related concerns, see Suzanne Barlyn's “(Non) Binding Arbitration.”

2. The parties may proceed to litigation and present their cases in a court for a final determination.

In the absence of statuary or administrative demands regarding arbitration, the logical step beyond non-binding arbitration is litigation. Litigation can be more attractive than non-binding arbitration in that litigation will, unlike non-binding arbitration, at least yield some verdict which then can be appealed to a higher court. 

The disadvantage to litigation is that an individual or small business owner will usually not have the financial resources available to a larger competitor and could be forced into a situation where trial postponements and other such legal manoeuvrings would essentially “starve out” the financially weaker side.

3. The parties may seek a mutually-acceptable mediated settlement, using the opinion of the arbiter as a “starting point.”

This is probably the best application of non-binding arbitration in that it forms a foundation upon which an amicable settlement of differences can be built. Such settlements are obviously desirable in cases where the contesting parties may have substantial differences yet wish to remain on at least civil terms in future relationship, such as business partners that have decided to form separate but related  business ventures or in cases of ownership of intellectual property rights.

From the above it can be seen that all forms of contact resolution have their stronger and weaker points. The decision on which technique to be used in a given situation will thus depend on the perspective of each side and, in the absence of obligated or mandated requirements, must include consideration of factors such as financial and administrative costs and the possibility of future dealings with the other party.

In summary, at first glance, non-binding arbitration would appear to be the least-attractive form of non-judicial conflict resolution. It leads to no real solution to the issues being contested. However, if non-binding arbitration is viewed as a “dry run” or “informal” evaluation of the strengths of each party's arguments, it can lead to other attempts at settlement and thus, potentially, result in a relatively less costly out-of-court disposition of the matters at hand. 

It can therefore be argued that the effective use of non-binding arbitration depends on both the complexity of the issues being contested and the willingness of both sides to reach accommodation.

About the Author:

The article is written by Martin Peters. He regularly writes for Veterans Law Group.

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