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Arbitration in industrial relations refers to a process where an impartial third party, often called an arbitrator, makes a legally binding decision to resolve a dispute between employers and employees. This procedure typically arises when negotiations have failed to reach an agreement through other means, such as direct discussions or mediation.

The importance of arbitration lies in its capacity to provide a definitive resolution to conflicts, thereby avoiding prolonged disputes that can disrupt workplace harmony and productivity. In many labor relations contexts, arbitration is defined within legal frameworks, meaning the decisions made by the arbitrator must be followed by both parties, ensuring that outcomes are enforceable under law.

This process contrasts with other options, such as voluntary negotiation methods or suggestions for resolving disputes, which may not carry the same level of obligation or legal authority. It is crucial to recognize the role that arbitration plays in maintaining industrial peace by providing a structured mechanism for addressing grievances when informal dispute resolution efforts have failed.