Most people and even many attorneys confuse arbitration and mediation. Mediation is a process where a impartial mediator helps steer the parties towards a settlement they voluntarily agree to. Arbitration, on the other hand, is where a neutral party acts as a judge in a dispute and makes the decision on the outcome.
The advantage to arbitration is lower cost, less time to a decision and use of a subject matter expert to decide the case. Formal rules of evidence do not apply. Complexity of discovery is at the discretion of the arbitrator (or agreed to by the parties) and generally will try to balance relevance against cost and expediency. An arbitration may be held over several scheduled session, so any expert witnesses do not need to be paid to wait for their turn at trial. An arbitration is not subject to the lead times of a court trial, so it is usually adjudicated quicker than a trial. Since the parties pick the arbitrator(s), they can choose someone with subject matter expertise as opposed to drawing a random judge with an unknown background.
The disadvantage to arbitration is that the decision of the arbitrator is final (assuming that the parties have not agreed in advance to non-binding arbitration). There are very limited grounds to appeal an arbitrator’s award.
Arbitrations offer a little more flexibility than a trial as well. In addition to a conventional (or open) arbitration where the arbitrator makes an award without restrictions, there are a few different types of arbitration:
- Final offer (or baseball) arbitration: Where each party puts one final offer on the table and the arbitrator can choose only between the two offers. This encourages the parties to make fair offers, otherwise
theirs is less likely to be chosen.
- Night baseball arbitration: Similar to regular baseball arbitration except that the arbitrator does not know the offers that have been exchanged between the parties and the arbitrator’s “award” is converted to the closest offer.
- High-low (or bracketed or bounded) arbitration: The parties pre-determine a maximum and minimum award, which may or may not be disclosed to the arbitrator. If the award of the arbitrator falls outside the max-min range, it is adjusted to the max or min. If it falls within the range, the award will stand as is.
- Tripartite (or panel) arbitration: Instead of a single arbitrator making the decision, each party chooses an arbitrator and then those two arbitrators choose a third arbitrator. The three person panel then votes
and majority rules. Arbitration panels are generally used when larger amounts are in dispute.
- Mediation-Arbitration (Med-Arb): This starts out as a mediation. If no settlement is reached, the mediator becomes an arbitrator and decides the case. There are advantages to this is that the mediator is already familiar with the facts of the case and time and money can be saved by the parties in not re-presenting it. The disadvantage to this structure is that the parties may be less forthcoming to the mediator during the mediation stage of the process, which inhibits getting to a mediated resolution. In New Jersey, the parties must agree to the neutral acting as an arbitrator after serving as mediator (Minkowitz v. Israel).
- Arbitration-Mediation (Arb-Med): The reverse of a Med-Arb, where the neutral hears the arbitration case first and renders a decision that is not divulged to the parties and then sealed. The arbitrator then
tries to mediate a settlement. If the mediation is unsuccessful, the arbitration decision is unsealed and presented to the parties as the award. The advantage of arb-med is that the parties are not inhibited from being open with the mediator as in med-arb. However, since the decision has been made, the mediator could inadvertently tip his or her hand (through body language) and make mediation less effective.
- Non-binding arbitration: Similar to binding arbitration, other than the parties reserve the right to reject the award of the arbitrator and pursue litigation. In essence, the arbitration becomes advisory.
- Incentive arbitration: A variant of non-binding arbitration where the parties agree to a penalty if one of them rejects the arbitrator’s decision then resorts to litigation, and does not improve their situation by
some pre-specified percentage or formula. Penalties may include payment of attorneys’ fees incurred in the litigation.