The Management File: The Pros and Cons of Mediation and Arbitration


Litigation for damages can be a lengthy and stressful process. A search for compensation quickly becomes a battle in which lawyers charge high rates to squeeze every penny out of the defendant or bind a case up in legal technicalities.

There are options available to those who would rather stay away from the courtroom, though. Alternate dispute resolution (ADR) provides conflicting parties a chance to settle cases and receive payment for damages out of court. For many, ADR methods provide the chance to handle issues without all the stress and expenses that come with hiring a team of lawyers.

Mediation Defined

Mediation is a legally binding method of ADR wherein two parties sit down with an appointed mediator and attempt to agree on the terms of a settlement. Once an agreement is reached, the parties must uphold its terms. Though each party is free to seek legal advice from as many lawyers as they desire, the mediator is the only necessary third party involved. The appointed mediator serves only to help process the discussion and help the parties reach common ground; no official legal dispute takes place.

Mediation has rapidly grown in popularity for many reasons:

  • Using a single third party makes claims handling much cheaper.
  • Mediation is often much quicker than litigation. In some cases, mediation can be completed in a few hours.
  • Mediation scheduling is more flexible.
  • Both parties must agree to the terms; neither side can claim their terms were unfair.
  • The process is private and is not subject to public inquiry or dispute.
  • Mediators help move a discussion forward, suggesting ideas and perspectives.
  • Mediation is friendlier than litigation. Parties work together, not against each other. This factor usually allows businesses to stay partnered after settlement occurs.

With all the benefits of a mature discussion, mediation is an ideal approach for many offended individuals and businesses. However, if two parties are strongly divided, the drawbacks of mediation can be seen:

  • Since both parties must agree on the terms of the mediation, if either side is being unreasonable, negotiation may drag out longer than litigation.
  • The disputes and compensations in mediations must remain private. Neither party can seek public disclosure of the matter under discussion.
  • The terms of the agreement may be difficult to enforce.
  • The party with more money is often able to make a non-negotiable offer, knowing the other party will eventually run out of funds and be forced to accept the terms.

For many cases, especially ones that businesses wish to deal with quickly and quietly, mediation is usually the best option. In some areas though, two parties may need judgment made on fault without having to deal with full litigation. In these instances, arbitration is a more appropriate alternative.


A mix between litigation and mediation, arbitration is a form of ADR where two parties agree to let an independent third party make a decision as to responsibility and compensation. Usually chosen from a list, an arbitrator (or three if a “panel arbitration”) listens to both sides of an issue, observes evidence, considers settlement, and makes a legally binding decision; an arbitrator acts much like a judge-for-hire.

Like mediation, arbitration also has several reasons it has grown in popularity:

  • Arbitration can be done quickly, and more cheaply than litigation.
  • Arbitration scheduling is more flexible.
  • Arbitrators can be chosen based on expertise in a particular field.
  • The process is private and not subject to public inquiry or dispute.

However, arbitration does not always work and has flaws in a few areas:

  • The arbitrator may be biased. Some companies actively appoint the same arbitrator repeatedly, possibly causing them to develop favoritism.
  • An arbitrator’s decision is legally binding; after it is rendered, it becomes difficult for either side to appeal the issue in court or discuss the arbitration.
  • Filing for arbitration and paying an arbitrator often has a higher initial cost than litigation fees. Depending on the circumstances, it may be cheaper to litigate.

The most unique benefit to this ADR method is the arbitrator’s knowledge. Disputing parties can pick their arbitrator based on related expertise. These arbitrators can make decisions with practical thinking, often understanding the impact of damages or the intent of action better than an average judge.

Like mediation, arbitration is also private. Many businesses, particularly auto dealers, will require a buyer to sign a contract stating that any contention will be handled through arbitration. This protects the dealer’s reputation by keeping problems out of the public’s eye in court.

Arbitration often requires legal expertise for both sides. Lawyers are not required in the same way as in court, but it is usually necessary for both parties to appoint legal counsel if they hope to make their case properly.


Both mediation and arbitration can be effective means of ADR when used in the right situation. If both parties have an understanding of blame and necessary compensation, mediation can lead to a solution much faster and cheaper than litigation. In the case where the extent of damage is debatable, arbitration with an experienced arbitrator can assign definitive liability and quantity of compensation. In both these cases of ADR, businesses will have the advantage when dealing with individuals.

Litigation provides a transparent, unbiased resolution for when two parties cannot agree on an offense. Though mediation might be the ideal means to handle a situation, litigation through the court system will always be a necessity for some cases. The process of litigation is long and expensive, but it provides a chance for an accusation to be publically acknowledged or denied.

If used appropriately, mediation or arbitration can provide a swifter, more efficient approach to concluding legal issues. In all cases, these ADR methods should at least be considered before litigation takes place.

When liability claims arise, always check with your insurance before making any kind of mediation or settlement, even if it is within your deductible. Contact Gaspar Insurance Services to learn more about how ADR gets handled by your policy.