Arbitration is a binding process and differs from mediation in that the parties have agreed to be bound by the decision of the neutral. In essence, the arbitrator serves as the judge and jury. The three main benefits of arbitration are:
- The arbitrator has experience and expertise in the subject matter;
- The process is faster, cheaper, more efficient, and more user-friendlier than litigation in the court system; and
- The binding nature of the process allows parties and counsel to know that the matter will be finally and fully resolved (as opposed to facing the prospect of endless appeals).
The parties may agree to give the neutral discretion over the award, or they may select to modify the neutral’s decision by utilizing specific types of arbitration:
The most frequently utilized arbitration option is a high/low agreement which is negotiated between the parties prior to the commencement of the arbitration hearing. At the option of the parties, the high and the low may or may not be disclosed to the arbitrator. When this approach is utilized the parties limit the parameters of the award by agreeing to a ceiling (a dollar amount above which the claimant cannot recover, i.e. the high), and a floor (the amount the claimant is guaranteed to recover, i.e. the low). If the neutral’s decision falls within the negotiated range, the award stands as decided. If the award is above the high or less than the low, it is molded to comply with the high/low agreement.
The following hypothetical illustrates the workings of an agreed high/low with a $25,000 low and a $100,000 high:
- If the award is less than $25,000, it is automatically molded up to $25,000.
- If the award is in excess of $100,000, it is automatically molded down to $100,000.
- If the award is between $25,000 and $100,000 it stands as decided by the neutral arbitrator.
This approach is uniquely appealing to both sides since it limits the maximum exposure of one party while customarily assuring the other party of a minimum recovery.
Med-Arb is a unique combination of mediation and arbitration. It is customarily utilized in cases where the parties seek a mediated resolution, but want to be assured that the matter will be resolved even if the mediation does not produce a settlement. Generally, the parties initially proceed in the same manner as in mediation. The mediator facilitates negotiations between the parties with the expectation of reaching an amicable agreement between them. If the matter is unable to be resolved in that fashion, the mediator, acting in an adjudicatory capacity, issues a final decision which binds the parties in the same manner as an arbitration award. This procedure is sometimes referred to as binding mediation.