What is Arbitration?

Articles > Small Business

What is Arbitration?

November 26, 2020         Daniel Katz

Arbitration involves the appointment of an independent adjudicator who makes binding decisions in relation to workplace disputes. Arbitration is a form of an alternative dispute resolution, along with mediation and expert determination. Though arbitration has its limitations, it is increasingly becoming a popular form of resolving workplace disputes all over the world. 

Arbitration generally arises by virtue of a dispute resolution clause in a contract. These clauses are readily used in commercial contracts across Australia. These clauses confirm that, in the instance of a dispute, the parties will agree to pursue arbitration opposed to litigation. 

Additionally, it is important to note that arbitrators can be appointed by:

  • the parties in dispute;
  • existing tribunal members; or
  • an external party to the company such as a court or institution.

Advantages of Arbitration 

One major advantage of arbitration is that it is an extremely efficient procedure, both with regards to time and cost. In particular, a court action can take months and is unlikely to be resolved in a single court hearing. In this, there is a major economic benefit to arbitration. This is because the process is arranged quicker and earlier than court actions. This, in turn, means that the dispute will be resolved faster.

Additionally, the finality of the arbitrator’s decision is also a major benefit of this process. Specifically, as the right to appeal is essentially non-existent, the cost of future court hearings is non-existent.

Lastly, the fact that both parties must decide upon an arbitrator, will mean that the arbitrator is just and fair. When taking court action, the parties do not choose the judge. Here, it is possible that the judge will not act with impartiality.

Conversely, the arbitration process allows parties to negotiate and determine, collectively, who they would prefer to act as arbitrator. This will contribute to the foundation of trust within the hearing process.

Disadvantages of Arbitration 

Despite the numerous advantages of Arbitration, there are also several disadvantages.

Despite the cost benefits arising out of the finality of the arbitrator’s decision, neither side will be able to appeal it. This is problematic if the arbitrator has made an error in judgement. 

Secondly, the economic benefits from this process merely represent the opportunity cost of not undergoing a litigious process. In reality, the costs charged by arbitrators have been steadily rising over time. Here, the fact that both parties must pay the fee is economically disadvantageous to those involved.

To Sum Up

Arbitration is becoming an increasingly popular process used by corporations around the world. In particular, the flexibility of this process is an extremely attractive feature for businesses. With that being said, it is important to balance out the economic advantages and disadvantages of the arbitration process.

If you need any assistance in resolving a dispute, our commercial lawyers are here to help. Just call us at 1300 337 997.

About Daniel Katz

Daniel is a legal intern at OpenLegal, placed in our legal content team. He is currently studying a Bachelor of Laws at the University of Technology Sydney. Daniel's interest lies in economics and media/startup law.