Most of you know arbitration and mediation as two different kinds of alternative dispute resolution. Some of you have even participated in one or perhaps both. But what exactly are they? How do they differ? And which one is the best fit for your business needs?

Arbitration = Private Litigation

Arbitration is essentially private litigation that results in a binding, final decision. Instead of a judge or jury deciding your case, the parties select a neutral arbitrator who renders a decision. The parties typically agree to arbitrate based on a clause in an agreement, usually long before a dispute arises.

Advantages: When deployed correctly, arbitration can be cheaper and faster than litigating in court. Arbitrations also typically afford the parties a higher level of confidentiality than is otherwise available in a court of public record. And to some degree, arbitrations can be less formal.

Disadvantages: Ironically, a bad arbitration clause can be worse than none at all. A poorly drafted arbitration clause can inflict enormous expense and delay on the parties as they fight over what it means, and the cost of such a battle can negate the entire purpose of arbitration. Additionally, arbitration awards are appealable only in very narrow, specific circumstances. So if the arbitrator rules against you, virtually any appeal will be a very tough, uphill battle with a slim chance of success. We’ll discuss these dynamics in more detail in a future post, Are You Sure You Want an Arbitration Clause?

Mediation = Facilitated Negotiation

Mediation is a process where the parties to a dispute meet to negotiate and explore whether they can agree on a resolution. A neutral mediator, usually selected by the parties, facilitates the parties’ negotiations, but he has no authority to force the parties into settlement, nor is it his job to predict how a judge or jury might ultimately rule on the matters in dispute. Instead, a mediator’s role is to assist the parties as they seek their own, voluntary resolution of their dispute.

Advantages: Perhaps the biggest benefit of mediation is control. Parties who mediate retain control of the outcome of their case, instead of handing that control to a judge or jury. When parties feel like they control their own destinies, they also tend to feel a higher sense of satisfaction with the eventual resolution. As Shakespeare said, “He is well paid that is well satisfied.” And of course, a successful mediation will resolve a dispute at a fraction of the cost of a full-blown trial.

Disadvantages: Mediation is often not a productive exercise until the parties have already expended significant time and money litigating. Many business disputes start out with muddled issues and murky facts. Until the issues are crystallized and the facts are illuminated, parties are understandably reluctant to mediate. Why negotiate when you do not fully know either your own or your adversary’s strengths and weaknesses? Mediation also tends to be an ineffective tool when the dispute itself is binary, i.e. where only one of two outcomes is possible. When the outcome must be either “whole hog or none,” that doesn’t leave much space to compromise.