What is Binding Arbitration? A Binding Arbitration clause is a clause which states that the parties mutually agree to settle the dispute which may arise between them in the future through arbitration. Binding Arbitration also means that the parties give up their rights to go to litigation or trial in case of future dispute and also the right to appeal against the arbitration award.
Is binding arbitration better than Courts? Binding arbitration is better than courts only in the case when disputants have a similar level of power, financial capacity, need confidentiality, and a special experience to settle the dispute.
Each dispute is unique in nature, therefore, it is not recommended to generalize. Some contracts are biased and in some cases, it is better for one or either party to go directly to litigation.
Also, arbitration and other ADR methods do not enforce rights but attempt to reach a settlement. Some disputes are not arbitrable or may involve severe compromise of rights which might result in injustice, for example: arbitrating a dispute between an Employer and Employee on maternity leave, which is clearly governed by law.
To understand Alternative Dispute Resolution better, you may review Alternative dispute resolution (ADR) and it’s advantages and disadvantages and Alternative Dispute Resolution: Does It Save Time and Money? and Writing a Construction notice of dispute. Free sample letter and What is an Arbitration Agreement? What is its purpose?
Difference between Binding and Non-Binding Arbitration
An arbitration proceeding is mostly for a civil dispute and not for disputes which are criminal in nature. Disputes arising out of an employment contract, business contract, child custody disputes, property disputes are few examples of a civil dispute which can be decided through the arbitration process.
It is generally considered advantageous for the parties if there is a binding arbitration clause as it is time-saving, less expensive, and flexible.
The parties in case of a small misunderstanding between them can get their dispute settled through a third person who is an arbitrator and the arbitrator is also decided by the parties.
With the growth of arbitration as a dispute settlement mechanism, the burden on the courts has also been reduced. This, in turn, saves the time of the court and disputing parties too.
The word binding means being legally obligated to do something and non-binding is when you are not obligated. Therefore, an award or the decision by a binding arbitration is final and non-appealable whereas in case of non-binding arbitration the parties are not bound by the award or the decision.
If the parties are not satisfied by the award of the arbitrator, they are free to move to court for litigation or any other form of dispute resolution mechanism.
The differences can be understood by comparing the two under various characteristics:
- Binding – As the name also suggests, Binding arbitration is the one the decision of which is final on the parties and non-binding is one when the decision is not binding and the parties have the ability go litigation.
- Complexity – The process of arbitration under binding arbitration clause is more complex than compared to non-binding clause. As the award is binding on the parties the process involves trial similar to a court trial.
- Expensive – The binding arbitration is more expensive than that of non-binding arbitration as the process is more time taking in case of binding, so the cost of the proceeding also increases.
- Speedy – The binding arbitration is more time taking as the process to decide is complicated and the dispute itself is complex, whereas in non-binding the dispute can be even settled in one meeting.
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Real-life examples of binding ADR methods (binding mediation) can be encountered in most e-commerce platforms such as Alibaba.
Why an Arbitration Clause is Non-Binding in Some Contracts?
Generally, most contracts have a binding arbitration clause and in very rare cases it is non-binding.
A question comes to mind “why does non- binding arbitration clauses exist? why not just keep it always binding?”
An arbitration clause is kept non-binding at times due to certain reasons or benefits, such as:
- The parties get external guidance or directions to follow in dealing with the dispute.
- The relationship between the parties is not deteriorated due to going to court.
- The reputation of the parties is also not affected as the arbitration proceedings are done in private place.
- The parties get a clear picture of their differences before going to the court.
The benefits depend on the type of contract and also on the nature of the dispute.
For example, in Florida it is compulsory to take the dispute to non-binding arbitration before going to the court in order to understand the differences properly.
It is beneficial when there is a small dispute between the parties or when they need guidance or external opinion to settle their differences.
Pros and Cons of Binding Arbitration
As the arbitration clause is mostly binding and only in very few cases it is non-binding, therefore the benefits are similar to that of a contract with an arbitration clause.
The Pros of Binding Arbitration:
- Fast – As the process is ususally faster than Litigation, therefore the parties prefer to put the clause in the contract or an agreement. Also, as the award is binding the parties have no option to appeal as in case of non-binding. This also makes the binding arbitration faster.
- Appointment of Arbitrator/s – The binding arbitration is mostly in complex contracts where the knowledge of an expertise is required. The parties can appoint the arbitrator/s as per the nature of the dispute and the level of expertise required.
- Flexible – The binding arbitration clause is also flexible for the parties as the parties are free to choose the arbitrator of their choice and the say of the parties is also there. It is also flexible because laws of evidence are not followed strictly. The parties have more control on the arbitration proceedings.
- Less Expensive – The process of binding arbitration is less expensive as the award is binding on the parties and the parties have to abide by the same. In case of non-binding arbitration first the parties spend on arbitration and in case of no satisfaction (usually the case) refer the same dispute to litigation which increases the expenses of the parties.
- Privacy / Confidentiality – Some disputes may involve sensitive topics which the parties will want it to be not leaked in public. The binding arbitration process involves the disputes to be heard at a private place or an office and only the parties in dispute are present. The non-binding arbitration clause if referred to litigation can be open to public which in turn can affect the reputation of the parties and/or make private financial aspects public.
The Cons of Binding Arbitration:
- Unawareness– The contracts which are created by banks, credit card issuer or cell phone companies have the binding arbitration clause which the parties unknowingly sign and becomes bound by it. The parties unconsciously give away their right to go to courts and also the arbitration award cannot be appealed.
- Injustice – The parties when unknowingly sign the contract with binding arbitration clause, the other party is not in advantageous position as it might compromise rights entitled by law. This results in injustice to the other party as for example, it will not be able in future to join a class action suit against the Company.
- Too expensive – It is very common now a days of putting a binding arbitration clause in a Contract, which means even if it is a small dispute or a dispute involving a minimal amount it has to be referred to arbitration. For example a small misunderstanding between parties that could have been resolved amicably or by less advsearial methods such as mediation, the binding arbitration makes it compulsory for the parties to go for arbitration. Consequently, the process becomes expensive for the parties, which could have saved money otherwise.
- Biased – The binding arbitration is biased in favor of the company in case of consumer contracts and employer in case of employment contract. This also results in injustice.
- Informal Evidence – The procedure of evidence is informal in binding arbitration as it does not strictly follow the laws of evidence.
More about Pros and cons here.
Thus, we see that the binding arbitration clauses are mostly used in the contracts and by service providers such as Fiverr dispute center as compared to non-binding arbitration which is rarely found.
Before entering into an agreement, both parties must carefully understand the contract agreement’s scope of works, obligations, and risks associated. Depending on all these factors, they should strive to stipulate the most realistic and practical approach, either by choosing arbitration, other ADR methods, or litigation.
In addition, each party must be aware of the process of handling disputes within the contract in order not to waste time and cost due to procedural errors and nuisances.
You might be also interested to explore the arbitration and mediation hybrid “Mid-Arb” in Can arbitrators mediate? All you need to know about Mid-Arb, Arbitration and Mediation.
Hint: Our worldwide map for arbitration costs can assist you in estimating your arbitration fees.