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Resolving Business Disputes: Mediation, Arbitration & Litigation

— March 5, 2021

Mediation and arbitration are known as Alternative Dispute Resolution (ADR)—and involve finding a mutually acceptable resolution outside of a courtroom.

In most situations, negotiation is always the best course of action for resolving business disputes. Even business negotiations that are particularly tense can turn into a productive negotiation, while strong relationships are maintained. In the legal arena, an attorney with strong negotiation skills is likely to be very successful. There are, however, instances where even the best negotiator cannot resolve a situation. When negotiations are at a stalemate, mediation, arbitration, or litigation may be brought into the mix. 

Alternative Dispute Resolution & Business Disputes

Mediation and arbitration are known as Alternative Dispute Resolution (ADR)—and involve finding a mutually acceptable resolution outside of a courtroom. Alternative Dispute Resolution is often used in business disputes, as well as disputes involving employment, family issues, housing disputes, environmental issues, personal injury claims and more. There are pros and cons of each resolution method as detailed below:

Mediation – Mediation involves a mediator—a third party to the dispute who is neutral regarding the outcome. The mediator will facilitate discussions between those involved in the business dispute, attempting to resolve the conflict via negotiation. A mediator is not a judge, rather he or she is a facilitator, with a goal of helping the parties reach a mutually acceptable decision. 

During mediation, the parties are not required to settle the matter, and even when mediation is court-ordered, it largely remains a voluntary process. 

Mediation is relatively informal, however, when mediation is unsuccessful, the next step may be arbitration or litigation. Agreements reached in mediation are binding only when they are set forth into a written contract that is signed by both parties. 

Family business disputes or those among business partners often respond well to mediation, although mediation can also be used successfully to “level the playing field” in a situation where there is an uneven power dynamic. 

On the negative side, if one party is unwilling to negotiate, mediation will not be successful. In some cases, mediation is not a cost-effective method, and in cases where an agreement would require court enforcement, then mediation is probably not the best choice. 

Arbitration – Arbitration is most commonly used in industries such as construction, labor, and securities, although it can be used in virtually any industry. It is more formal than mediation, with similarities to a trial. That being said, the rules of evidence in arbitration are much simpler than in a courtroom. As an example, the discovery process is more limited, and, in some cases, hearsay may be admissible.

Man and woman in meeting; image by Headway, via
Man and woman in meeting; image by Headway, via

An agreement between the parties usually spells out the arbitration process terms. These terms may include the location of the arbitration, the fees involved on both sides, the number of arbitrators, and any special rules applying to the specific arbitration. 

One benefit of arbitration over litigation is that the process and the decisions do not automatically become public record as most litigation does. While an arbitrator can be an attorney, they can come from any field applicable to the dispute. 

Arbitration fees are usually higher than those of mediation, as the arbitrator will be paid hourly, but the cost of arbitration is often less than the cost of a full-blown trial and appeal. When both parties agree to be bound by the decision of the arbitrator, then that decision is legal and binding—with no appeals allowed. 

A significant drawback to arbitration is that you must rely on the skill and the experience of the arbitrator to sort out the evidence—there is often a lack of formal evidence process such as discovery, and in many cases, no interrogatories or depositions are taken. If the arbitrator decides the case unfairly or incorrectly, you will likely be stuck with the results, as the process favors finality over a just result.

Litigation and Business Disputes

When negotiation and Alternative Dispute Resolution tactics have failed, the final method of resolution is litigation, or taking the case to court to be heard by a judge and jury (or, in some cases, only a judge). It is the most formal, traditional method. If you are involved in a business dispute, it can be extremely helpful to discuss the situation with an experienced Houston business attorney.

When litigation is used, the dispute is presided over by a judge and/or jury, and the process involves the full rules of evidence. Litigation is a public process with most judges unwilling to seal the aspects of the litigation process without an extremely compelling reason. Litigation includes discovery and disclosure of all evidence, as well as the opportunity to call and cross-examine witnesses. Litigation also offers the option of appealing an unfavorable decision. The costs of litigation are typically higher, and the time involved in litigation is almost always more than that of mediation or arbitration. 

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