Pendulum Arbitration Overview

Pendulum arbitration is a type of arbitration that is considerably faster and less expensive than conventional arbitration. It is widely and successfully used in some jurisdictions (particularly in the United States) and particularly in some areas (particularly industrial relations). It has not been much used in construction law disputes in Australia, but such experience as there is suggests that it offers real advantages in this area, and could and should be used much more often.

Like any other form of arbitration, pendulum arbitration is a method of dispute resolution which parties may choose to use. If the parties do choose pendulum arbitration, then the result (like any other form of arbitration) is finally binding and the award may be registered as a judgment. Unlike conventional arbitration, however, the award is as proposed by the parties. At the conclusion of the hearing, each party passes to the arbitrator a draft award in a sealed envelope, and the job of the  arbitrator is to adopt the one which most closely corresponds with his analysis of the justice of the matter. Normally – and in the form in which I offer it – the arbitrator does not give reasons. Because of these features, the process can take place much more rapidly than a conventional arbitration, with exchange of written material followed by a one-day hearing, and the arbitrator’s award comes immediately thereafter.

Pendulum arbitration is possible both of international and domestic disputes. In Australia, domestic disputes are governed by the various Commercial Arbitration Acts; those Acts permit the parties to agree what form their arbitration is to take. In NSW Racing v Tab[1] the Supreme Court of New South Wales found that there was no reason why the parties should not be held to the pendulum arbitration agreement (the judge referred to it as “last best offer” or “baseball”) that they had agreed.[2]

Construction disputes are notoriously expensive to resolve by litigation or arbitration, whether they are concerned with how much should be paid for the work, who is responsible for delay, and/or what compensation is recoverable from who for the rectification of defects. Legal and expert witness costs are even higher where, as is often the case, a dispute involves two or even all three of these elements. It is not only in small value cases that these costs are liable to exceed the amount of the dispute; the same is true of disputes about millions of dollars. Various professional bodies have attempted to address this problem by seeking to streamline arbitration processes, but those attempts have, in the construction context, been resoundingly unsuccessful.

Pendulum arbitration is not, of course, the only effective approach to the resolution of construction disputes:

  • dispute review boards, or dispute avoidance boards as they are often known in Australia, are a highly effective way of preventing issues on construction projects from developing into full-blown disputes. However, they are tailored for very large projects where the dispute board is appointed at the outset of the project;
  • mediation has a reasonably high success rate, but it may well be unsuccessful were at least one of the parties wants either to deep pocket the other, or to “have his day in court”;
  • adjudication has been very successful in many common law jurisdictions around the world. In Australia, the shortcomings of the security of payment legislation – different in every State and Territory – mean that many disputes are not amenable to adjudication, there are far too much opportunities for challenge on technical grounds and in any event parties who feel that they have not had a fair hearing are always at liberty to treat the result is no more than “stage one” of the dispute process.

Pendulum arbitration is not suitable for the resolution of every construction dispute. It may not be suitable for parties who are convinced that the dispute cannot be effectively resolved without discovery of documents and/or cross-examination of witnesses (there are a few such cases, although they are much rarer than may be thought). It is likely to be unwelcome to the wealthy litigant who sees exorbitant legal expense as an advantage by which he can drive his opponent off the field.

But it may well be the best option for disputants who cannot agree on a money figure to resolve their dispute, but can agree that it is absurd to spend more on legal costs than the case is worth. And who want their dispute quickly, cost-effectively and finally resolved.


See also my Questions & Answers page.





[1] [2002] NSWSC 742.

[2] The relevant passage is as follows:

33           The plaintiff advanced a number of reasons why it ought to be permitted to abandon the arbitration procedure in this case in favour of the courts. The plaintiff submitted that  the nature of the dispute resolution procedure set out in the agreement was unsatisfactory. Clause 24.3(f) provides that each of the parties to the dispute must “make a written submission as to how the dispute should be resolved” to the arbitrator.  Clause 24.3 (h) and (i) state that the arbitrator must “make a determination in relation to the dispute and in doing so, must adopt the submission made by the party (to the dispute) that most closely accords with the arbitrator’s opinion in the matter.” The submission that is adopted by the arbitrator is deemed to be the decision of the arbitrator: clause 24.3(i).

34           This kind of clause is sometimes referred to as a “last best offer” or “baseball” clause, so-named because of its use in the United States of America in resolving professional baseball players’ salary disputes.  In that context, each party submits a proposed monetary amount to the arbitrator. At the conclusion of the hearing, the arbitrator chooses one award without modification. A variation, referred to as “night baseball” arbitration, requires the arbitrator to make a decision without the benefit of the parties’ proposals and then to make the award to the party whose proposal is closest to that of the arbitrator.  In either form, the arbitrator does not have the authority to compromise between the parties’ positions, which provides an incentive to each party to make its final offer more reasonable than the other’s. The object is to move the parties towards the position of the other, to the extent where it may be possible to bridge the remaining gap by negotiation.

35           The plaintiff now seeks to bypass the baseball arbitration in favour of declaratory relief by a court, in an effort to avoid what it suggests may be an arbitrary result.  The plaintiff submitted that the agreement has a long way to run, and that the continued use of arbitration as a means of dispute resolution is unsatisfactory in the long term. The agreement is dated 11 December 1997 and governs the relationship for 99 years.

36           Both the parties are commercially experienced and were capable of protecting their own interests in the negotiation of the agreement. I see no reason why the plaintiff should not be held to the form of dispute resolution which it agreed to when negotiating a long term agreement only a few years ago.

40           In my view there is no sufficient reason why the matter should not be referred to arbitration.