- settlement of a dispute after a hearing of opposing arguments, by an arbitrator, rather than a court of law. If binding arbitration is accepted, the parties involved agree to follow the arbitrator’s decision, which is binding only on the parties to the dispute, and is not a legal precedent, as is a judicial ruling. In deciding complex issues, arbitration can be a more expedient way of resolving disputes than formal litigation and adjudication before a court of law.
- in the securities industry, a method for settling disputes between member firms, or between member firms and nonmembers. Securities arbitration generally follows rules set by the National Association of Securities Dealers, the Municipal Securities Rulemaking Board, and the securities exchanges. The opinion of a three- to five-member board of arbitration is considered final and binding. Arbitration of disputes involving broker-dealers and their customers is often part of a brokerage agreement, but can often limit a brokerage client’s right to sue a broker-dealer.
submitting a controversy to an impartial person, the arbitrator, chosen by the two parties in the dispute to determine an equitable settlement. Where the parties agree to be bound by the determination of the arbitrator, the process is called binding arbitration.
dispute resolution mechanism designed to help aggrieved parties recover damages. In arbitration, an impartial person or panel hears all sides of the issues as presented by the parties, evaluates the evidence, and decides how the matter should be resolved. Arbitration is final and binding, and is subject to review by a court only on a very limited basis.
process of settling disputes through a neutral third party agreed upon by each side in the dispute. In most cases, arbitration is decided by private firms established to provide this service and is an alternative to filing suit in the public courts.
Example: Many real estate sales contracts contain a provision that requires all disputes to be submitted to arbitration. Such a provision means the parties waive their right to sue for satisfaction in the public judicial system.