Canada: NFP Q&A: Clarifying Arbitration vs. Mediation vs. Litigation

Question:  What is the difference between arbitration and mediation?
Wendy:
  Arbitration is a method of finally determining a dispute.  The end result is an award which is similar to a Court Order in that it is final and binding upon the parties and can be enforced against the parties in the same way as a judgment of the Court.  In an arbitration, a neutral third party – the arbitrator – hears the evidence and makes a decision as to who is right and who is wrong. 

In a mediation, on the other hand, the neutral third party – the mediator – makes no such determination, but rather focuses on trying to assist the parties to come to a negotiated mutually satisfactory settlement or compromise of the matters in dispute.  Sometimes, the mediator is successful, in which case, the dispute is over.  Sometimes the mediator is not successful, in which case the dispute continues on.

Question:  When would an organization want to choose mediation over arbitration and litigation?
Wendy: 
There is little doubt that a negotiated resolution which takes into account the interests and goals (both business and otherwise) of the parties and avoids the continued expense and risk of a negative decision imposed upon the parties is more efficient, less expensive, less public and less time-consuming than litigation or arbitration.

Question:  What are some of the main things that organizations need to keep in mind in determining whether to choose arbitration over litigation?
Wendy:  Arbitration does offer some significant benefits: the parties get to choose a person knowledgeable in the field and in law to act as their arbitrator.  The parties can customize the process to suit their particular dispute so that it can be resolved in a more cost effective and efficient way.  Arbitration is also a private process which allows disputes to be determined outside of the media and the public eye.

Question:  Are arbitration and mediation less costly than litigation?
Wendy:  It is hard to say.  Arbitration in one sense is more costly because the parties have to pay for the cost of the arbitrator, as well as legal counsel.  On the other hand, it can be a rather quicker process than litigation, which does reduce the cost.  A negotiated result arising from a mediation is typically much less costly than litigation, but not every mediation leads to a negotiated settlement, in which case, the cost of the mediation, which can be quite high, might well seem like a waste.  But even in these circumstances, mediation actually is not a waste because, typically, the parties learn a great deal of information about each other's case, which can subsequently lead to a mutually satisfactory settlement.

Question:  Can organizations simply state that the parties will go to arbitration in the event of an unresolved dispute?
Wendy:  Parties can do that but it is not recommended.  It is very important that the arbitration clause be drafted carefully so that it is clear to the parties how the arbitration clause is going to work and what disputes the arbitrator has jurisdiction over, how the arbitrator is to be selected, what laws govern the arbitration and govern how the dispute is to be resolved, etc.  A poorly drafted arbitration clause can lead to multiple disputes about whether it is enforceable and how it applies, any of which can lead to complex and difficult litigation in the courts, further increasing the expense for all involved.  It is well worth the effort for both parties to spend some time thinking through what disputes might arise and how they want their disputes arbitrated so that the expectations of the parties are clear and unhappy surprises are avoided.

Question:  Any last words for organizations to consider in their commercial agreements in this area?
Wendy: 
It is worthwhile for organizations contemplating a significant project to spend some time thinking about how best they can go about identifying and resolving disputes quickly at the earliest stage, preferably before the parties embark upon the arbitration or litigation process.  There are various mechanisms which can be built into the dispute design in the agreements, which will enable the parties to identify areas of possible dispute at an early stage and escalate such issues to higher levels within the respective organizations for guidance and direction as to how such disputes can be avoided on a go-forward basis.  Such mechanisms do not always have to depend upon a dispute being identified.  For example, one can build in periodic meetings between various levels of people involved in the project, the purpose of which is to work together on areas of difficulty and iron out problems before they become potential sources of litigation.

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