When business disputes arise, many companies assume they’ll be headed to court. But in today’s commercial landscape, an increasing number of contracts include arbitration clauses, which require parties to resolve disputes privately, outside the courtroom. There are also many instances when voluntarily engaging in mediation or arbitration has advantages over litigation.
Below is a breakdown of commercial arbitration and mediation: what each is, how it works, and what your business should consider before entering into or enforcing an arbitration agreement.
What Is Arbitration?
Arbitration is a form of alternative dispute resolution (ADR) where parties agree to submit their legal disputes to a neutral third party—known as an arbitrator—instead of litigating in court. Arbitration is often faster and more private than traditional litigation, and the decision is usually final and binding. Businesses frequently include arbitration clauses in vendor or supply agreements, franchise relationships, employment contracts, joint ventures and partnerships, shareholder and LLC operating agreements.
What is mediation?
Mediation is also a form of ADR but differs from arbitration. In mediation, a neutral third party (i.e., the mediator) helps the parties communicate, understand each other’s perspectives, and reach a mutually agreeable resolution. It’s a voluntary, confidential, and often less formal and costly process than going to court or arbitration. There is no trial or presentation of evidence. Typically, each party submits a mediation statement to the mediator outlining their positions, evidence, why they will win, and what they’re willing to settle for. The mediator works from there to resolve the dispute.
Arbitration Advantages.
- Confidential
Unlike court proceedings, arbitration hearings are private and typically confidential. Many people don’t realize this, but anything filed in a Court is available for the public to review (unless filed under seal or protection). This can be especially valuable in disputes involving sensitive financial data, trade secrets, or reputational concerns. - Faster Resolution
On average, arbitration moves more quickly than litigation for several reasons. The first is because the judges in arbitration are less busy and more accessible, so they can resolve disputes that arise in the case more easily. There is also typically limited discovery, no jury, and fewer procedural hurdles. In simple contract language interpretation cases, arbitration offers a wonderful alternative. - Final and Binding Decisions
Most arbitration decisions (called “awards”) are final and enforceable in court—yet very difficult to appeal. Courts routinely accept arbitration awards and enforce them like a Court judgment thanks to the American Arbitration Act. This can streamline resolution, but limits your options if the arbitrator makes a mistake. - Arbitrator Selection
Parties usually choose the arbitrator(s), allowing them to select someone with industry knowledge or legal expertise relevant to the dispute. This can have a massive advantage over Court judges who may not be as familiar with the type of dispute.
Should Your Business Include Arbitration or Mediation Clauses?
Arbitration is not always the best fit for every business or every dispute. We discussed some advantages above. Some potential downsides include: limited ability to appeal wrong decisions, less discovery can harm your case, and arbitrator fees can be high (compared to free cost of Court judges). Additionally, arbitrators and mediators often offer a “split the baby” compromise decision. Mediators especially want the case to settle even if it’s closer to the middle than the parties’ positions justify. The effectiveness of arbitration often depends on the nature of the dispute, the drafting of the arbitration clause, and your legal strategy going in.
Enforcing and Challenging Arbitration Agreements
Illinois and federal courts strongly favor the enforcement of valid arbitration and mediation agreements. However, businesses can challenge such clauses on grounds like lack of mutual assent or consideration, ambiguity, unconscionability, procedural unfairness, and waiver of arbitration by litigation conduct.
Arbitration vs. Mediation vs. Litigation
Feature | Arbitration | Mediation | Litigation | |
|---|---|---|---|---|
Private? | Yes | Yes | No (court records) | |
Binding? | Usually | No (voluntary) | Yes | |
Appeal rights? | Limited | Not applicable | Yes (through courts) | |
Time/cost? | Moderate | Low | Often high | |
Understanding the difference between these options is crucial when drafting contracts or responding to a dispute.
