As arbitration becomes more and more prevalent as a means for settling disputes, various “custom” forms of arbitration have become increasingly popular. One such variant is referred to as “high-low arbitration.”
In high-low arbitration, the parties (not the arbitrator) set a maximum and minimum award threshold. These limits might be known by the arbitrator, but the parties usually will not reveal their agreement to the arbitrator in an effort to take out some extra insurance that the final arbitration award will be a fair one.
According to United States Arbitration & Mediation, an alternative dispute resolution company:
Many parties like the "high/low" arbitration format. In a high/low arbitration, the parties specify that the award will be no higher than a certain amount and no lower than another amount. The arbitrators are not usually made aware of the parameters of the high/low, and make their awards based on the evidence. Any award which is not within the parameters of the high/low is then reduced or increased in order to conform with the parameters. High/low parameters are set forth in an independent contract that the parties make prior to the arbitration.
While high-low arbitration is certainly not the norm, it is increasingly popular in personal injury cases. The plaintiffs like knowing that even if the arbitrator awards nothing, that award will be adjusted up to the agreed-upon minimum, while the insurance companies like knowing that they have put a cap on their liability exposure.
High-low arbitration will only take place when the parties agree to the format, and further agree on the parameters.
EXAMPLE: Nick is a business owner who purchased manufacturing equipment from Lukas’ company. The purchase agreement included a clause whereby the party bringing an action related to any matter arising from the purchase could choose to arbitrate, and that if he so chose, the other party would be compelled to participate in the arbitration. If the party bringing the action chose to bring his action in court, however, the defending party could not compel arbitration.
When the machinery is delivered late, and some of it is not in working order due to mishandling during delivery (i.e., it’s broken), Nick gets irritated. When he also discovers that Lukas has switched older models of the machines for the models they had agreed on, Nick decides to take action. He doesn't want to sue because it will take too long to get a court to hear the case, but he is afraid that an arbitrator might award him so little that he won’t be able to recover from the loss. He therefore suggests arbitration to Lukas but tells Lukas that he will only seek arbitration (since it’s Nick’s choice here under the purchase agreement) if Lukas agrees to high-low arbitration. They settle on the outside boundaries for an award, and Nick commences the arbitration proceedings.
This all sounds very nice and amiable, but it is important to remember that these are adversaries with conflicting interests. While they might have been able to negotiate cooperatively, with or without a mediator, there is no cooperative arbitration!
There is a very practical danger with suggesting high-low arbitration and then negotiating the high and the low; the negotiations might fail. If negotiations do fail, to what extent have you now tipped your hand to your adversary in terms of how little you’re really willing to take, or how much you’re really willing to pay?
Such a divulgence of information is not damaging only in negotiation or mediation – your opponent’s knowledge of your limits can also hurt you in arbitration. As Dauer points out,
“Unless that negotiation is very likely to be successful, counsel should consider carefully whether articulating limits doesn’t reveal the “upset points” of the client’s willingness to settle. The negotiation may take some considerable skill.” -Dauer at 8-31
Therefore, as we near the end of our Alternative Dispute Resolution course, with only one more chapter to follow, we find ourselves back to considering the negotiation concerns and strategies outlined in earlier chapters.