Arbitration and mediation are two very different processes that allow parties to resolve disputes outside of court. Mediation involves a facilitated negotiation, whereas arbitration involves a third party decision maker.
What is mediation?
Mediation is an alternative dispute resolution process where the parties engage in negotiation to resolve the issues in dispute. An independent third party, the mediator, will assist the parties to identify the key issues in dispute and consider options and alternatives to settle the matter.
Mediation can be voluntary, court ordered or required as part of a dispute resolution clause in a contract.
The mediator acts as an independent third party who facilitates the discussion between the disputing parties. They will explain how the mediation will take place, identify the real issues in dispute by asking questions to the parties and help develop options to resolve the dispute.
In most mediations, the parties will be physically separated - as in, they will sit in different rooms, with the mediator speaking with one party at a time, shuffling between parties through the course of the mediation.
As an independent third party, the mediator can provide innovative solutions that the parties may not have considered prior to the mediation. However, they will not give advice, take sides or make decisions.
In commercial disputes, and depending on the size of the matter, mediators are often retired judges or other senior lawyers.
A mediation usually occurs over the space of a single day. However the parties are able to adjourn a mediation and reconvene on another date if they agree that it may result in a resolution.
What are the advantages of mediation?
Some of the key advantages of mediation include:
- it is much less formal and more cost effective than arbitration or litigation;
- it is confidential;
- the parties can offer creative settlements that go beyond usual monetary offers. This allows both parties to make offers that protect their commercial interests which can facilitate a win/win outcome;
- compared with litigation or arbitration, it is extremely inexpensive;
- it happens over a relatively short space of time.
Even where mediation does not resolve the matter, the process can clarify the issues in dispute which will help keep costs down if the matter goes to arbitration or litigation.
Mediation may not be suitable where the commercial relationship has broken down and there is a real sense that one of the parties is not willing to negotiate.
The obvious disadvantage with mediation is that it's not guaranteed to produce an outcome. It depends on both parties being willing to negotiate, and their ability to reach an agreement that will be acceptable to both of them.
What is arbitration?
Arbitration is a process of dispute resolution where an independent adjudicator makes a binding decision on the issues in contention based on the evidence presented by the parties.
In a practical sense, arbitration is quite similar to litigation - except that arbitrations are conducted outside of court.
Arbitration usually arises as a result of a dispute resolution clause in a contract. It can also arise where the parties voluntarily decide to go to arbitration (for example, to keep the matter private).
The arbitrator is chosen by agreement between the parties. If the parties are unable to agree on a specific arbitrator, they will often agree on an independent person or body to appoint the arbitrator.
Unlike mediation, arbitration has a more structured and formal process. For example, in arbitration:
- there is a hearing, just like in a court case;
- there can be a lengthy pre-trial process, involving pleadings, discovery and the preparation of written witness statements;
- parties may be cross examined during the trial;
- the arbitrator will usually issue a detailed written decision after the hearing.
An arbitral decision can normally be registered in court, and then enforced like a court judgment. There are circumstances where an arbitrator's decision can be appealed, however this will sometimes depend on the nature of the error involved.
Although the arbitration is very similar to litigation, arbitration offers a more flexible and efficient process. It can often be finalised in a much shorter time frame than litigation.
Arbitrators have a legal background and will usually have expertise in the area that is the subject of the dispute. The arbitrator will decide:
- how the process will run (although often the parties will agree be bound by specific arbitration rules, such as the Resolution Institute Arbitration Rules; and
- the outcome of the dispute.
What are the advantages of arbitration?
Some of the key advantages of arbitration include:
- unlike mediation, it is certain to result in a resolution of the dispute. This is because there will be a final binding award made by an independent third party;
- it is sometimes more efficient and cost effective than litigation;
- unlike litigation, arbitration remains confidential; and
- the process is flexible and can sometimes be determined by the parties.
While arbitration can sometimes be cheaper than litigation, often it will end up costing roughly the same. The parties will still have to pay legal fees (and usually the other party's fees if they are unsuccessful), the adjudicator’s fees and other incidental costs (such as transcript fees and room hire costs).
Depending on the nature of the dispute, it is rare for a commercial arbitration to be concluded in less than 6 months. At the same time, it is not uncommon for an arbitration to run for more than a year (just like litigation).
Arbitration can provide an effective means of resolving a dispute where mediation or negotiation has failed, and where the parties would prefer for the dispute to be kept outside the public domain.