While there are many different ways to solve legal disagreements, taking matters to court has traditionally been the most common. However, many businesses are choosing to settle their disputes out of court as a cheaper and more efficient solution. Alternative dispute resolution (ADR) has proven to be popular in the international commercial world, with the two most common forms being commercial arbitration and mediation. In this article we will examine the fundamental differences between arbitration and mediation.

Nature of Procedure

Arbitration is a substitute for court where the parties hire lawyers or other professionals to function as an arbitrator. The parties present their arguments and evidence before the arbitrator with the intention to have the third party solve their dispute.

Mediation similarly engages a third party to steer the process but varies from arbitration by being more collaborative. The aim is instead to try and find a middle ground and solution to the disagreement. That is, both parties will compromise but ideally find something acceptable to which they can both agree.

Basis for the Procedure

Arbitration

Arbitration requires an agreement to arbitrate between the parties, known as an arbitration agreement. An arbitration agreement is usually a reasonably short clause incorporated into the business agreement between the parties, also known as an arbitration clause.

Although the parties typically have a written agreement before a dispute arises, the parties can also agree to settle their dispute through arbitration after the dispute has arisen.

Mediation

Mediation also has a precondition that the parties have agreed to mediate. The nature of mediation demands collaboration from the parties. This means an arrangement is difficult to enforce if one party refuses to participate. Occasionally, a business agreement will make mediation a mandatory requirement.

It is not uncommon for a business agreement to contain a clause which states that the parties should first attempt mediation, and only if they reach no resolution through meditation are they allowed to proceed to arbitration or court.

How it Works

Arbitration

The arbitration clause should specify how an arbitration occurs. This normally includes:

  • what law to apply;
  • where to hold the arbitration;
  • the number of arbitrators; and
  • if any institutional arbitration rules (for example the Rules of the International Chamber of Commerce) should supplement the arbitration agreement.

Usually, the party who would like to commence arbitration sends the other party a request for arbitration. The tribunal is then established and is made up of either one or three arbitrators. From this point in time, the arbitrators steer the process and make decisions. After a few exchanges of briefs which contain the position of the parties and their evidence, the parties make their case to the tribunal.

Sometime after the hearing, the tribunal hands down their decision, known as an arbitral award. The award is final and binding upon the parties. If the losing party does not follow the decision, the successful party can enforce the award through the regular court system.

Mediation

Mediation is different from arbitration in that it is the parties who:

  • are always in charge of the procedure; and
  • determine the conditions for the mediation.

Both parties have to agree on the mediator and the mediator will simply act as an independent intermediary.  Normally, this involves a meeting between the parties and the mediator. During this meeting, the mediator attempts to understand each party’s:

  • positions;
  • goals; and
  • objections.

The mediator will try to assist the parties in finding a satisfactory settlement of the dispute that suits both parties. Typically, the outcome needs to be one of the compromises required to solve the dispute. If the mediation is successful and the parties reach an understanding, then a settlement agreement can confirm the outcome.

Why Many Businesses Choose ADR

Arbitration

Arbitration is attractive to commercial businesses as it is a confidential and efficient procedure that offers the parties flexibility and expertise needed to solve the dispute. Benefits include that it is:

  • confidential: In contrast with the openness and transparency of the regular court system, an arbitration is confidential. This means that the arbitrators and parties are not able to disclose anything about the case, which might be an important consideration for businesses looking to safeguard information;
  • international: An award is enforceable in more than 150 countries under the New York Convention. This stands in contrast to a traditional court judgment, which can be difficult to enforce outside the country which passed the decision. As such, arbitration is particularly attractive to international companies that might have to chase assets outside their home country;
  • expertise: The parties can appoint arbitrators with special competence and skills to decide on their case. This means that the parties can make sure that the arbitrators have the relevant understanding for their specific case. For example, arbitrators could be experts in construction or intellectual property; and 
  • efficient: Arbitration is a one instance procedure, meaning that the decision is final and there is no right to appeal like in court. The parties are also not dependent on the availability of judges, making arbitration typically faster than litigation.

Mediation

Mediation is a fast, business-friendly and cost-efficient alternative to try to reach an agreement. It has many benefits, including that it’s:

  • fast: A mediation meeting is generally quick to organise and hold. Usually mediation concludes in less than a day and requires minimal preparation;
  • cost-efficient: As the mediation is normally concluded within a day, the expense of the proceedings are comparably low as the parties will pay for their own costs besides the fee for the mediator;
  • autonomous: Unlike Court and arbitration, the parties compromise and reach an agreement themselves. There is no third party making decisions which involves one winner and one loser. Both parties collaborate to reach the most satisfactory outcome; and
  • business-friendly: As the mediator focuses on finding a resolution that is acceptable to all involved, the parties can quickly return to business as usual if an agreement can be reached. Given the collaborative nature of mediation, the parties do not have to sacrifice their business relationship to find a solution.

Key Takeaways

Arbitration and mediation are both alternatives to traditional court procedures. They also share the characteristic of having a neutral third party overseeing the procedure.

There are a variety of differences between arbitration and mediation. Importantly, mediation is dependent on the parties coming to a mutual agreement. Arbitrators, however, can end a dispute without any agreement. As such, arbitration is comparable to a trial in court with an arbitrator functioning as a judge. In contrast, mediation is more of a negotiation with assistance from a neutral third party.

If you’re facing a commercial dispute or looking for advice in drafting an arbitration or mediation clause, get in touch with LegalVision’s dispute resolution lawyers on 1300 544 755 or fill out the form on this page.

Johan Lundstedt
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