Learn more about what arbitration is in business.
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Arbitration is one way adverse parties can solve their disputes. It differs from traditional litigation because it does not involve a judge or jury. Instead, parties agree to appoint a neutral third party to listen to their cases. That third party is called the arbitrator. Arbitration has several significant differences compared to mediation. In this piece, we’ll provide a brief arbitration definition and review its advantages and disadvantages.
Arbitration’s business definition is “a procedure in which a dispute is submitted, by agreement of the parties, to one or more arbitrators who make a binding decision on the dispute.” Arbitrations are just one of three avenues a business can use to resolve a dispute with another corporate legal entity, partner, customer, or government authority.
Aside from arbitration, small businesses can also use litigation and mediation to resolve disputes. Litigation refers to situations where parties resolve their disputes in court before a judge (and possibly a jury). Litigation has traditionally been the most common way of dispute resolution. In mediation, parties voluntarily employ a mediator to help them define the issues of a dispute and explore settlement options. Although there’s some common ground between these three methods of dispute resolution, there are substantial differences.
Arbitration differs from litigation in several ways. In an arbitration, the parties pick the arbitrator. In litigation, the judge is assigned to hear the parties’ evidence and resolve the dispute. But arbitrators, like judges, listen to the facts and make an award in favor of one party. Another difference is that arbitration is consensual; it can only begin if both parties consent. By contrast, a court can compel a business to participate in litigation.
Arbitration differs from mediation because mediators do not have the power to resolve a dispute. Instead, mediators help the parties understand the core issues of the dispute. Mediations are also more informal and do not have a formal discovery process.
Like anything else in the world of business, arbitration has its advantages and disadvantages. But the nature of those benefits and downsides look different depending on whether you are comparing arbitration to mediation or litigation.
Arbitration is more straightforward than litigation. As a result, it’s faster, less expensive, and more efficient. Arbitration also provides increased privacy to the parties. Finally, arbitration is flexible, meaning it can be appropriate for both simple disagreements and complex ones.
While usually less expensive than litigation, arbitration costs more than mediation. Furthermore, there’s less transparency in arbitration than there is in litigation. There is also no jury in arbitration. Lastly, arbitrators can result in somewhat more unpredictable outcomes than litigation.
Arbitration is one of three major ways that parties can resolve their disputes. It is less formal than litigation but still uses a neutral third party to resolve a dispute.
It can be difficult for a business owner to choose how to resolve disputes. Yet deciding whether to arbitrate or litigate a dispute is just one issue that business owners face. It’s also critical to file the appropriate paperwork, pick the proper business structure, and apply for the right business licenses and permits.
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Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.