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What Is the Difference Between Mediation and Arbitration

written by: •edited by: Ginny Edwards•updated: 5/20/2011

Business owners beware—especially if you have contracts with clients, service agreements, sales agreements and even if you plan on purchasing an existing business. Disputes often end up in court, but there are ways around these legal battles through mediation and arbitration.

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    The Importance of These Clauses

    Almost all types of sales and service contracts or agreements have some sort of indemnification clause or remedies in case of a dispute. If an entrepreneur wants to purchase an existing business, you should also make sure the buy/sell agreement includes both a mediation and arbitration clause.

    They say contracts are made to be broken, however, when you have arbitration and mediation clauses in all your important contracts, chances are you can skip a lawsuit and let a mediator and/or arbitrator make a binding decision on the dispute.

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    Free Sample of Mediation & Arbitration Clauses

    Mediation In our Entrepreneur Media Gallery, you’ll find free samples of mediation and arbitration clauses that you can utilize for your legal or binding contracts. To protect you and your company, however, any mediation or arbitration clauses inserted into your contracts should be reviewed by a qualified attorney.

    Although it’s important to include these clauses, what is the difference between mediation and arbitration if you do find yourself in a legal dispute?

    Image Credit (Wikimedia Commons)

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    The Mediation Process

    Conference room For example purposes, let’s say you want to buy an existing bookstore and the current owner tells you he has approximately $10,000 in book inventory and $15,000 in accounts receivables that you will inherit when you purchase the bookstore. You both agree on a sales amount of $50,000 and sign a buy/sell contract that has a mediation and arbitration clause.

    Once you’re the new owner, you realize that the book inventory is really only $5,000 and the accounts receivables are all uncollectible because they are 120+ days overdue. Instead of filing a lawsuit, if you have a mediation clause in your buy/sell, you must notify the seller in writing per the conditions of the buy/sell that you wish to take the mediation avenue to solve the dispute.

    A mediator can be an attorney, a retired or current judicial person, or even a business professional, however, both your attorney and the seller’s attorney must agree to the mediator to keep it fair.

    In the mediation phase, your attorney and the opposing counsel submit a brief overview of the dispute at least 3 days in advance to the chosen mediator.

    On the day of the mediation, both parties are placed in separate rooms (usually in a borrowed conference room) with their attorneys and the mediator goes back and forth and attempts to mediate the dispute. If the mediator can get both parties to agree, then the mediation is final and there is no need for arbitration. Mediation agreements are created and signed and both parties follow the directives of that mediation and go along their way; hopefully satisfied with the outcome. If mediation had been successful in the case of our bookstore example, perhaps the seller agreed to lower the sales price of the bookstore to $30,000 to make up for the inventory and overdue accounts receivables.

    If mediation is not successful, the arbitration process must begin.

    Image Credit (Wikimedia Commons)

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    The Arbitration Process

    Testifying at Arbitration The difference between mediation and arbitration is significant. First off, an arbitrator must be agreed on by both parties—arbitrators are usually retired judges or attorneys that have no interest in the case and can be partial.

    Once the arbitration process is requested and an arbitrator has been chosen, it usually takes approximately 3 months until the actual arbitration. First, attorneys from both sides gather pertinent documents to make their case and even depose witnesses and the disputing parties.

    Depositions and document and exhibit gathering can be expensive, but it is less than a legal court battle. Each attorney works with their clients to gather the data and create an exhibit book.

    Each party submits their exhibit book along with a summary of their case to the arbitrator at least 3 days prior to the arbitration process.

    Unlike mediation, where the opposing parties are in different rooms and the mediator goes back and forth, with arbitration, both parties are present with their attorney and the arbitrator in the same room. Any outside witnesses are kept outside the arbitration until they are called to testify.

    Also unlike mediation, the opposing parties leave it up to their attorneys to make their case and question all persons in the room who are in dispute. They may also use rebuttal testimony and the only exhibits the arbitrator will allow are the ones offered in advance in the exhibit books. Any new evidence that either party or their attorneys feel is prudent to the case will be disallowed by the arbitrator.

    For this reason alone, it’s imperative that if you become involved in the arbitration process that you include all the exhibits you can, even if you think they aren’t pertinent.

    After all testimony is heard, both attorneys are allowed to make closing statements and the arbitrator will make a written (and binding) decision on the dispute within 7 to 10 days. The decision is binding on both parties and delivered to the attorneys of each.

    In the case of the bookstore, say the arbitrator thought that the buyer should have been more prudent in completing an actual inventory of the books and the overdue receivables; the arbitrator may rule here that because the buyer wasn’t diligent in their efforts to find out everything about the business, that they must indeed pay the entire amount agreed upon on the buy/sell.

    Image Credit (WordSellInc)

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    Arbitration Is Binding

    Arbitration Is Binding If you have a dispute that can’t be worked out in mediation and you find yourself in the arbitration process, keep in mind that arbitration is binding on both parties. That means whatever the arbitrator says is what you must honor.

    Mediation and arbitration are becoming more popular avenues for disputes between parties to be solved. If you choose to have both a mediation and arbitration clause in your contracts or agreements or even a buy/sell, make sure you have an attorney look at the written clause to ensure the arbitration process is binding.

    Lawsuits can cost thousands if not hundreds of thousands, where the mediation and arbitration process is often much less and can range in legal costs (depending upon the size of the case) between $25,000 and $100,000.

    Image Credit (MorgueFile)