How to Resolve Business Disputes with Arbitration or Mediation

Mediation and Arbitration Explained
Mediation and Arbitration Explained. Gary Waters/Getty Images

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 agreementseven require mandatory arbitration.

Mediation and Arbitration are ways to settle business and personal disputes instead of using litigation (taking someone to court).

Mediation is an informal process that gets the two parties together with a mediator. Agreements may be binding on the two parties, meaning the agreement may be taken to court.

Arbitration is a formal process, usually binding on the parties. An arbitrator hears the arguments of both sides and makes a decision that's usually binding (both parties must act as the decision requires).

Either of these dispute resolution processes may show up in a contract. Before you sign a contract that 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 with a neutral person managing the process. Mediation is less rigid than litigation or arbitration, so it allows for more flexibility in the process.

A mediator is brought in to manage the discussion, speaking privately with each party or getting the two parties together for discussion. The mediator helps the parties come to a voluntary, uncoerced decision. The mediator does not have the authority to impose a settlement on the parties. 

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 mutually acceptable resolutions. 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 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.
  • Mediation can be less costly than going to court, because it is quicker and less formal.

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. It's really a simplified version of a trial with limited discovery and simplified rules of evidence.

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 thanlitigation.

How International Arbitration Works

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 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.
  • 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. Any agreement is binding.

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

Cost of Mediation vs. Arbitration

The cost of mediation and arbitration include:

Case filing fee: $300 per case for mediators through the American Arbitration Association (AAA). Arbitration filing requires a fee of variable amount. The AAA has an hourly fee, in addition to the fee charged by the arbitrator.

Cost of mediator or arbitrator: These costs vary depending on the type of case, the level of expertise needed, and the complexity of the case. The arbitrator will charge on time spent. You and the other party will share these costs, including mediator or arbitrator travel and lodging costs.

Other costs might include the preparation of documents, but nothing needs to be filed with a court. If you have your attorney help you with a case, that would be an additional cost.

You don't need an attorney for mediation, but you may want one for an arbitration.