Arbitration and mediation are popular forms of alternative dispute resolution mechanisms to litigation based on consensus between the parties.
What is Arbitration?
Arbitration is a formal and private dispute resolution process whereby parties agree to submit their dispute to one or more arbitrators who are independent and usually experts in the subject matter of the dispute.
The agreement to arbitrate shall be in writing and is generally found as a dispute resolution clause in the contract between the parties. The arbitration award, i.e., the decision of the arbitrators, is final and binding on the parties and may be enforceable or challenged in Court in accordance with local laws.
What is Mediation?
Unlike arbitration, mediation is a less formal but private dispute resolution process whereby the parties to a dispute participate on a voluntary basis.
Mediation is assisted by a trained and neutral third party (i.e., a mediator) who assists in identifying the issues, exploring solutions, facilitating communication between the parties, and in potentially reaching an agreement.
The mediator usually leads the process subject to the rules agreed by the parties (if any). The mediator does not adjudicate the dispute and merely facilitates the resolution of the dispute between the parties.
What is the Main Difference Between Arbitration and Mediation?
While both are popular alternative dispute resolution procedures, the binding and adjudicatory nature of arbitration sets it apart.
Unlike in mediation, the parties to an arbitration submit their dispute to the arbitrator whose decision is binding on the parties, similar to a judgment issued by the Courts.
In mediation, on the other hand, the mediator merely facilitates the dispute resolution process and the ultimate decision to reach a settlement remains with the parties.
Advantages of Arbitration
The private setting in arbitration ensures confidentiality and can be particularly useful for commercial disputes involving business dealings, corporate strategy, trade secrets, etc.
Binding and enforceable award
An arbitral award is binding on the parties and gives rise to the defence of res judicata in subsequent proceedings. The award can be enforced in accordance with local laws.
Faster than traditional litigation
Arbitration is in general speedier than court litigation. Arbitral awards are not subject to appeal and can only be set aside under limited circumstances in accordance with local laws.
Attractive for multi-jurisdictional disputes
Arbitration has more procedural flexibility. Parties have the freedom to agree on the seat of the arbitration, the administering institution, and the procedural rules. It is more attractive for disputes with an international nature.
Disadvantages of Arbitration
Different cost structures
The fees of arbitration (including arbitrators, administrative fees payable to the administering institution, tribunal secretary, venues, counsel, etc.) can be higher than those in traditional litigation.
In particular, if the governing law of the dispute is different from that of the seat of the arbitration, it is likely that the parties have to seek legal advice in both jurisdictions.
Lack of precedents
Disputes often arise from the interpretation of procedural rules. As arbitration proceedings are private and confidential, decisions and awards rendered by the arbitrators are not published and therefore no precedents can be relied upon or referred to in order to ascertain the position of the parties.
Advantages of Mediation
Quick and effective resolution
Unlike litigation which can span over years, disputes can generally be resolved through mediation in a matter of weeks.
In Hong Kong, parties are encouraged to attempt mediation and the Courts can make an adverse costs order against a party who unreasonably fails to engage in mediation.
The costs involved in mediation are considerably lower when compared to litigation or arbitration.
Unlike litigation which may be open to public, mediation takes place in a private and confidential setting.
Unlike the contentious nature of litigation, or even arbitration, the focus of mediation is to facilitate an amicable settlement.
Disadvantages of Mediation
The voluntary, non-binding nature of the process can result in the parties being non-committal unless and until the parties enter into a binding settlement agreement.
Time and cost consuming
Consequentially, where either party is not committed to settling the dispute, the process can cause unnecessary delays and increased costs for the party seeking to mediate in good faith, who may have to litigate or arbitrate the matter after all.
Frequently Asked Questions
1. What comes first, arbitration or mediation?
There is no specified order. Parties may opt for a hybrid approach where one procedure precedes another or where some issues are dealt with by arbitration and others by mediation.
It is important to bear in mind that if the parties have agreed to arbitrate, the Hong Kong courts will normally order the parties to honour such agreement so that they are unable to litigate the matter in Courts.
Mediation, on the other hand, can be conducted in conjunction with litigation.
2. Is it a good idea to agree to arbitration or mediation in advance?
A prior agreement is preferable to avoid any disagreements about the dispute resolution mechanism or limit the scope of such disagreement in the future.
It can help parties retain control and flexibility and can also help preserve commercial relationships following a dispute.
It is important to ensure, however, that the agreement is tailored to the parties’ needs and the likely disputes that could arise.
To commence an arbitration, the parties must have an arbitration agreement in writing. There are standard clauses to be adopted on the websites of prominent arbitration institutions.
3. Which takes longer, mediation or arbitration?
There is no fixed duration to enable a meaningful comparison. The length of time would depend on the complexity of the issues to be resolved and the approach and agreement of the parties. Generally, a mediation is faster and more efficient as it is less formal.
Most mediations are scheduled for either a half-day or a full day. If the first attempt is not successful, the parties are free to agree on making another attempt later on.
Arbitration proceedings are more structured, and the time to be spent on an arbitration depends on many factors. Reference can be made to the statistics published by the prominent arbitration institutions.
For further information, please contact:
Kenix Yuen, Partner, Gall