However, these dispute resolution mechanisms are quite different. Many business contracts call for one or the other, so it is important for businesses to understand the distinctions. The most important distinction from mediation is that arbitration decisions are binding on the parties, unless they have agreed otherwise.
In mediation, a neutral third party is called on to help negotiate the differences in the parties’ positions in order to lead to settlement of all or some of the issues in dispute. The job of the mediator is to help the parties find common ground rather than make any binding decision regarding the dispute.
Mediation offers several advantages over litigation. Like other alternative dispute mechanisms, it is less costly and time-consuming than going to trial. Mediation is also fairly informal and therefore allows the mediator to propose creative solutions.
Even though mediation is not binding, it is still very successful in resolving disputes to the satisfaction of both parties. According to the American Arbitration Association (AAA), about 85% of mediations result in a settlement. Similar successes are being reported in the both FINRA and in the New York federal court where I serve as a mediator.
During arbitration, a neutral third party is appointed to resolve the business dispute. Much like a judge, the arbitrator’s decision is generally final. The process is much more formal than mediation, but still offers many advantages over litigation. Arbitrations are often held before a panel of three arbitrators, making it more costly than mediation.
Like mediation, arbitration often leads to a faster resolution. Although more costly than mediation, the legal fees for arbitrations are usually substantially lower than court proceedings that go to trial, because discovery and motion practices are more extensive under court rules than in arbitration. However, court filing costs are usually several hundred dollars, whereas arbitration filing and session fees are much higher.
Although arbitration generally involves evidentiary hearings with sworn testimony of witnesses and the submission of documents, strict court rules of evidence don’t apply and there is no required discovery process, other than the forum rules. As such, arbitration is far less formal, faster and, therefore, it is usually far less costly than court proceedings.