Arbitration vs. Litigation vs. Mediation: What New Jersey Businesses Should Know Before Signing a Contract

Arbitration resolves disputes privately before an arbitrator whose decision is usually final, while litigation resolves them in court with full rights of appeal. Whether a business ends up in arbitration or litigation is often decided when it signs the contract, long before any dispute arises.

Key Takeaways

• Arbitration is private, typically faster, and usually final, with very limited grounds to challenge the award.
• Litigation is public and often slower, but it offers broader discovery, the right to appeal, and the potential to set precedent.
• Mediation is a voluntary negotiation guided by a neutral mediator who does not decide the dispute. It can happen before a lawsuit or alongside one.

When facing a contract dispute, carefully consider your legal options. Your choice will often impact your legal rights and your bottom line.

Many contracts call for alternative dispute resolution (ADR) either as a prerequisite to litigation or as an alternative to court proceedings altogether. Arbitration is often confused with mediation, and each works very differently from litigation. You should understand the distinctions, as well as the advantages and disadvantages of each dispute resolution mechanism.

What Is Arbitration?

Arbitration is a legal procedure in which a dispute is submitted to one or more neutral arbitrators, who typically make a binding decision. A sole arbitrator resolves some disputes, while a panel of arbitrators may decide others.

In any case, the parties to an arbitration must agree to elect arbitration over litigation. More often than not, parties decide to arbitrate before a dispute occurs by incorporating it into their contract. However, the parties may also agree to proceed to arbitration after a dispute arises.

What Is Litigation?

The term “litigation” refers to the process of formally resolving disputes through the court system. The litigation process involves filing and answering a complaint, a discovery phase involving the formal exchange of evidence, motion practice, and ultimately a bench trial or jury trial.

While litigation is often required to resolve legal claims, the process is expensive and time-consuming. Further, unless parties reach an amicable resolution through mediation during litigation, all parties face the uncertainty of a trial. Juries are inherently unpredictable. A compromise reached by the parties, who know the facts of their own dispute, is almost always preferable to leaving the outcome to a jury.

How Is Arbitration Different from Litigation?

Arbitration and litigation are both formal legal proceedings governed by specific rules. In binding arbitration, the arbitrator’s award is generally final.  While arbitration and court proceedings both generally involve document exchanges, motions, and hearings, arbitration typically takes a more streamlined approach. Businesses often prefer arbitration clauses over traditional litigation. Arbitration is generally considered to be more efficient and cost-effective. However, litigation’s broader discovery process may better reveal the nuances of each side’s position, which can matter in complex cases.

Below are a few other key distinctions:

• Private Proceeding: Arbitration is a private proceeding. The proceedings take place outside the public view, which can help keep the process and the award confidential, depending on the parties’ agreement and the forum’s rules.
• Greater Flexibility: Unlike court proceedings, which are governed by specific rules that apply to all cases, the parties to an arbitration can often use their arbitration agreement to tailor the procedure to their specific needs.
• Ability to Choose Arbitrators: In arbitration, the parties also have input regarding who will decide their dispute. Depending on the parties’ arbitration agreement and the arbitration tribunal, this may include the ability to select an arbitrator they want or strike one they don’t want. In contrast, parties in court have no say in which judge is assigned to their case.

While arbitration has several advantages over litigation, litigation may be preferable in some situations. Unlike court decisions that can be appealed to higher courts, it is extremely difficult to challenge an arbitration award. Litigation can also produce published appellate decisions that serve as binding precedent, which adds value for businesses addressing recurring issues. Both procedures offer advantages, but parties often bind themselves to arbitration through an arbitration clause at the outset of a business relationship.

Is Arbitration the Same as Mediation?

While the terms “arbitration” and “mediation” are sometimes used interchangeably, they are very different processes. Parties can generally withdraw from mediation at any time. A mediator helps to guide the parties to a voluntary compromise, which is then formalized into a settlement agreement. Unlike a judge, jury, or arbitrator, the mediator’s job is to help the parties find common ground rather than make any binding decision about the dispute.

Mediation often occurs during litigation, typically after the parties have had an opportunity to engage in discovery and better understand the claims. It can also take place before a lawsuit is filed, and many contracts require it as a first step.

The parties typically select the mediator and the format, determine the issues to be mediated, and decide how much time to devote to mediation. Mediation encourages the parties to work together to find a mutually beneficial resolution and, when possible, avoid the costs of additional litigation and trial.

We Can Help Determine Your Best Dispute Resolution Strategy

No one-size-fits-all approach exists for resolving contract disputes. While arbitration may make sense in one situation, litigation may be the better option in another. Factors that may influence the decision include the arbitration clause in the parties’ contract, the nature of the legal dispute, the industry involved, the parties’ ongoing relationship, and their willingness to reach an amicable resolution.

Given the stakes involved in selecting a dispute resolution strategy, it is imperative to work with an experienced attorney who can analyze your case and determine the best path forward before you enter into a contract that narrows your avenues of redress. At Scarinci Hollenbeck, our Litigation Practice Group includes skilled negotiators and litigators who will aggressively protect your rights in any proceeding. To discuss whether arbitration, litigation, or mediation is right for your business, contact Graham K. Staton.