How to Resolve Business Disputes with Arbitration or Mediation

Mediation and Arbitration Explained
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Confused about Mediation and Arbitration? 

The two processes of mediation and arbitration are often confused. They are two different processes, alternative ways to resolve conflicts between individuals, families, groups, and businesses. We'll look at both mediation and arbitration, how each works, and how they are different. 

In today's business world, more and more contracts include arbitration and mediation as alternatives to litigation (court settlement of disputes). Some business contracts and employment agreements even require mandatory arbitration.

Before you sign a contract which includes one or more of these two types of dispute resolution or you agree to resolve a business dispute using one of these processes, you should know more about them and the similarities and differences between them.

How Does Mediation Work?

Mediation is a method of resolving misunderstandings. In a dispute, a third party mediator is brought in to assist the parties in reaching a settlement. In many cases, the mediator does not have the authority to make a binding decision. Some benefits of mediation over litigation are:

  • It is private and confidential, as opposed to trials, which are very public.
  • The mediator is objective and helps the parties explore alternatives. Sometimes the parties separate and caucus (talk separately) with the guidance of the mediator. 
  • The process of mediation is sometimes used in place of litigation, but more often it's used to resolve disputes before they get to the point where litigation or arbitration is required. 
  • The process is less expensive than a long and costly trial. Both parties share in the cost of a mediator.
  • The possibility of continuing the business or personal relationship later is much greater because the dispute has been resolved with consideration of both parties.
  • The mediator may be able to propose creative solutions or accommodations.

According to the American Arbitration Association (AAA), about 85% of mediations result in a settlement. If the parties cannot agree through mediation, they can proceed to arbitration or litigation. 

How Does Arbitration Work?

Arbitration is the process of submitting a dispute to an impartial person for final and binding determination. In an arbitration process, the legal rules of evidence don’t apply and there is no formal discovery process.

Arbitration is included in many business contracts, as either an alternative or mandatory dispute resolution process. 

The arbitrator may ask for relevant documents, and the arbitrator submits an opinion after reviewing the case. Both sides have an opportunity to present their case, but there are usually no witnesses or other court processes or documents. As with mediation, the process can be scheduled and resolved quickly, and it is much less adversarial than litigation.

Disputes between business in different countries can be settled by international arbitration. in these disputes, an intermediary like the International Chamber of Commerce can find an arbitrator and facilitate the discussions between companies. Most of these cases are handled online. 

Arbitration vs. Mediation - How They are Different

  • Arbitration is a hearing process in which parties bring their dispute to someone for a decision. Mediation is a facilitation, negotiation process in which a trained mediator works to bring the parties to an agreement. In mediation, there may not be a formal dispute, but just a possible dispute. In arbitration, there is a usually a formal complaint in process. 
  • Mediation is informal; arbitration is formal.
  • The goal of mediation is to resolve misunderstandings, while the goal of arbitration is to come to a decision in a dispute.
  • The mediator has no power to force the parties to come to a decision; the arbitrator makes a mandatory and (usually) binding decision.
  • In a mediation, either party can withdraw at any time; in an arbitration, once it begins there is usually not a possibility of withdrawal.

A Quick Comparison Chart for Arbitration and Mediation

Arbitration Mediation
Person in Charge Arbitrator Mediator
Formal/Informal Formal Informal
Goal Decision on a Dispute Resolve Misunderstandings
Instead of a Trial? Yes No
Who Makes Decision Arbitrator Parties may decide
Mandatory? Maybe No
Enforcement of Decision Arbitrator decision usually binding Parties don't have to end the process with agreement

As you can see, there is a place for both of these processes in business dispute resolution.