How it may affect you and your business

Arbitration and mediation clauses are becoming more and more prevalent in today’s business contracts. As a result you owe it to yourself and your company to know how these clauses can affect you. While arbitration and mediation are both forms of Alternative Dispute Resolution (ADR), the similarities stop here and you should be aware of how they are different and how they can affect you. The goal of this article is to provide you with a cursory overview of both mediation and arbitration, how they can affect you and your business, and the costs associated with them.

Arbitration and Mediation: What are they?

Arbitration and mediation are two forms of alternative dispute resolution whereby two or more parties with conflicting positions may choose to bypass the traditional judicial system in an effort to resolve their differences. Although they are both forms of ADR, they are two separate and distinct processes and you should be aware of the differences. These differences have the potential to drastically affect the outcome of your dispute.

Arbitration is the reference of a dispute to an impartial (third) person chosen by the parties to the dispute who agree in advance to abide by the arbitrator’s award issued after having a hearing at which both parties have an opportunity to present a case. Mediation is the intervention of a third person between two parties with a view to persuading them to adjust or settle a dispute.

The primary difference between arbitration and mediation is that arbitration is binding and mediation is not. In arbitration, the parties involved must adhere to the decision of the arbitrator, whatever it may be. Conversely, in a mediation, the mediator is only present to facilitate discussions among the parties, aid in identifying issues, and help the parties resolve their dispute in an amicable fashion. Mediators do not make decisions as to the final resolution of the dispute nor do they have any binding authority.

Are Arbitration and Mediation Clauses Binding? Generally, arbitration and mediation clauses are binding. When one party seeks to compel arbitration based upon a clause in a contract, the courts use a two-prong approach in making their decision. First, they determine whether a valid, enforceable arbitration agreement exists. Second, if the clause is valid, they must determine whether the claim asserted falls within the scope of the agreement.

As a general rule, mediation clauses in contracts will be binding upon the parties. However, you must keep in mind that mediation, unlike arbitration, is a consensual process and there can be no binding resolution to a dispute unless all parties involved agree. Therefore, if one party feels as if they are being forced into mediation the possibility of settlement is less likely.

Arbitration and Mediation: What do they cost?

Although one may suffer from a bout of "sticker shock" when first seeing the costs associated with mediation and arbitration, the costs associated with litigation could far exceed those for arbitration or mediation. In addition to reduced costs, other benefits associated with arbitration and mediation are: quicker results, avoidance of publicity, and confidentiality.

Mediation is often viewed as the cheaper of the two forms of dispute resolution. The American Arbitration Association (AAA) charges an initial fee of $150 per party. The parties must then pay a $75 per hour administrative fee for the length of the mediation. In addition to the fees charged by the AAA, the parties must also pay the mediator his published rate for mediating the dispute and often for his time spent in preparation. This rate can range from $100 to $1000 per hour.