Arbitration vs Mediation – which way to turn when negotiations fail?
When business negotiations fail, there are several options businesses can take when considering the next steps in the process.
The most common option a business may take to resolve a business dispute is to take the matter to litigation through the national courts, however this procedure can be costly and the process lengthy, with scope to appeal judgements.
There are alternative dispute resolution procedures that a business should consider when seeking to resolve a dispute. In this article I will be focusing on commercial arbitration and mediation procedures, the key differences between the two compared to litigation and when to use arbitration or mediation.
“Do I believe in arbitration? I do. But not in arbitration between the lion and the lamb, in which the lamb is in the morning found inside the lion.”
What is Arbitration?
Arbitration is a party appointed procedure, governed by contract, in which a dispute is resolved by an independent and impartial panel or sole Arbitrator. The parties also agree that the decision made by the Arbitrator is final and binding.
Arbitration differs from litigation because it is informal. Most arbitrations occur in a conference room rather than a courtroom, the rules of procedure and evidence are flexible which includes rules of discovery and practice which have developed from both civil and common law jurisdictions.
The main benefits of arbitration are as follows:-
Arbitration is consensual
The process can use ad-hoc or institutional rules (e.g. ICC, LCIA, ICSID, ICDR)
An independent arbitrator or a panel of arbitrators are appointed
The parties can choose the arbitrator
The arbitrator will be chosen for their expertise
Arbitration is a confidential procedure
It is a process of adjudication
The decisions awarded are legally binding
Arbitral awards are recognised and enforced internationally under the New York Convention 1958
Some of the biggest advantages of Arbitration is that it is legally binding, the process is confidential, and arbitral awards can be recognised and enforced internationally in other jurisdiction national courts.
It also provides the opportunity for cost savings, shorter resolution times, and privacy enabling a more satisfactory process with expert decision maters.
International Treaties and domestic law
The primary source of Arbitration in the UK is under the Arbitration Act 1996 which governs both domestic and foreign arbitral proceedings. The Act does not differentiate between domestic and foreign proceedings.
The New York Convention has been in force in the UK since 1975. Recognition and enforcement of arbitral awards are limited to awards made in other contracting states, subject to the ‘reciprocity reservation’.
Other international treaties the UK is a signatory to are The Convention on the Settlement of Investment Disputes (ICSID) Convention since 1967, The Energy Charter Treaty 1994 (ECT) since 1998 and most recently the United Nations Convention on Transparency in Treaty based Investor State Arbitration (2017).
Arbitration has five advantages over litigation. The process is:-
Much faster than using the national court procedure
Less formality than litigation, parties have substantial autonomy and control over the process that will be used to resolve their dispute
Parties can appoint an arbitrator or panel of arbitrators with relevant expertise as opposed to the litigation procedure where the Judge is appointed by the State and therefore no such opportunity arises
It is less expensive compared to traditional litigation where time is spent in the discovery phase
Arbitral awards can be recognised and enforced internationally through the New York Convention 1958
Arbitration gives the parties substantial autonomy and control over the process that will be used to resolve their disputes, this is useful in international commercial arbitration as it enables parties to use an alternative system to the litigation process. This is in particular an advantage where one party fears the other has a “home court advantage”, the arbitration process offers a more neutral forum providing each side a fairer dispute resolution procedure.
“In the middle of difficulty lies opportunity”
What is Mediation?
Commercial Mediation is a party appointed procedure where a neutral independent trained Mediator is appointed by the parties.
Mediation enables the parties to find common ground by exploring directly their own outcome and settlement. If informal negotiations have failed, mediation is a process that can be used. This method works well if the parties decide to mediate right away to allow a Mediator to facilitate discussions before filing a court action. If the parties do not agree a settlement in a Mediation then the parties can still resort to Litigation or Arbitration.
The main advantages of Mediation are as follows:-
Mediation can be used at any stage of the process either before or during court proceedings until the date of judgement.
Mediation can be conducted alongside litigation or arbitration proceedings, or these proceedings can be ‘stayed’ to enable parties to mediate specific issues.
It is entirely voluntary on a “Without Prejudice” basis, therefore parties cannot use what has been discussed during the procedure later in any future Litigation
It is a faster process than Court Litigation, therefore potentially saving costs and time
Allows parties to take a step back from the Litigation and consider matters from a more objective prospective
It is cost effective compared to Litigation or Arbitration,
Offers a flexible process that allows parties to explore directly their own outcome
Parties have opportunity to preserve their business relationships for the future
Parties are likely to comply with the Settlement agreement as the agreement has been designed by them directly
Mediation can potentially improve business relationships as parties have the opportunity to discuss face to face issues that can be resolved
A Mediator's primary role is to facilitate discussions between the parties through a defined structure. Mediation is a flexible non-binding procedure, if the parties reach agreement, then a Settlement Agreement is drafted that is legally binding.
International treaties and Domestic law
The UK is not a signatory to any treaties that refer to mediation. EU Directive 2008/52/EC (The Mediation Directive) does not apply to the UK. Instead, the UK has opted to partly implement the Mediation Directive by enacting the Civil Procedure Amendment Rules 2011 to promote amicable settlements between parties in cross border disputes. CPR 1.4 (2) (e) further requires the court to engage in active management of cases, which includes appropriate encouragement of alternative dispute resolution procedures, especially mediation.
Although there are no mandatory provisions applicable to mediation in the UK, the pre-action protocols emphasise cooperation between the parties in order to identify the main issues between them. Failure to cooperate may lead to costs penalties being imposed by the courts regardless of whether a party’s claim is successful or not.
Advantages of Mediation compared to Litigation
The process is flexible, facilitated by an independent Mediator
Compared to Litigation mediation is faster and cost effective
Parties are able to discuss matters directly enabling parties to discuss the issues
The process is voluntary
Parties are potentially able to retain future relationships
The process is confidential
The Settlement Agreement is legally binding
Comparison between arbitration and mediation
Arbitration differs from mediation in that the arbitrator imposes a resolution, unlike a mediated settlement that must be agreed between the parties.
Below is a table with the main comparisons between the two procedures
Comparison between Arbitration and Mediation
Arbitration offers an inestimable range of advantages that come with choice, in particular the ability to tailor the process to the dispute.
If the parties have no agreement to Arbitration or Mediation in the existing agreement, then preliminary steps need to be made by both parties to file a submission agreement before proceeding with either mechanism.
Whether Arbitration or Mediation is suitable for your dispute depends on the individual facts and what outcome the parties want to achieve.
If parties want to retain a relationship then as a first step Mediation may be a better option to use, although a mixed use of Mediation and Arbitration can be an effective procedure to get to the root of the dispute. There is no one procedure that fits all solution.
Which process to use depends entirely on the individual circumstances. Bespoke advice should be obtained from an expert to determine the next steps to take in the process.
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Avinder Laroya is a Partner at Serenity Law LLP, she is an expert in International Dispute Resolution. If you enjoyed this article you can subscribe to my blog here
Serenity Law LLP is a boutique London commercial law firm providing commercial legal services such as company commercial, real estate, litigation and employment services to UK and international clients.