Originally from American Review of International Arbitration - ARIA

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During the last thirty years, a new form of arbitration has emerged in the United States. Called final offer, or last-best offer, arbitration, the dispute resolution procedure limits an arbitrator to choosing the final offer made by one of the parties.[1] It is designed to motivate each party to negotiate in good faith and genuinely attempt to compromise in order to create a final offer that an arbitrator will select as most reasonable.[2] The theory predicts that good faith bargaining and the risk of losing will facilitate settlements.[3]

Various private and public sector disputants in the United States have adopted final offer arbitration (“FOA”) to resolve contract-based disagreements. The most publicized use is by Major League Baseball (“Baseball”), which adopted FOA, or salary arbitration, as a means to set salaries for veteran players.[4] Currently, several states also use FOA to settle disputes with unionized public employees.[5] In 1994, the IRS and Apple Computer chose FOA to resolve a $114 million tax disagreement.[6]

Although those who have used FOA have found it to be an effective process, few outside of Baseball and public sector collective bargaining relationships have adopted it.[7] International arbitrants have ignored it altogether.[8] As a dispute resolution procedure that encourages settlement, preserves relationships and is time and cost effective, FOA could be ideal for many disputants. This note explains the advantages and disadvantages of FOA, offers guidance to domestic and international disputants who wish to implement it and describes disputes that can readily benefit from it.