Mediation is essentially a structured settlement negotiation in which the parties meet with a neutral third party -- the mediator -- in an effort to reach a settlement. The mediator does not decide the dispute, but attempts to help the parties reach a settlement acceptable to both sides. Mediation is typically confidential, and statements or settlement offers made during mediation cannot be used in later court or arbitration proceedings. Mediation is a very flexible procedure, and can be used at any time, before a dispute is in court or arbitration, while a dispute is in court or arbitration, or even while a case is on appeal. Many courts will require the parties to mediate if they have not already voluntarily agreed to do so. Mediation has a high success rate in resolving disputes.
Arbitration is a procedure in which a dispute is presented to an arbitrator or arbitrators (lawyers or industry experts) for a decision. The arbitrator(s) decide the case. Arbitration, as practiced in the U.S., tends to proceed much like a civil court trial. The arbitrator(s) receive evidence and hear the case. Witnesses are examined and cross-examined. The arbitrator(s) issue a decision that is called an award. It is very difficult to appeal or overturn an arbitration award. Matters typically get into arbitration one of two ways: (1) the parties may have entered into a prior contract containing an arbitration clause providing that any disputes will be resolved by arbitration, or (2) if a dispute arises and the parties have not previously agreed to submit the dispute to arbitration, they can still agree to do so through entering into a submission agreement. Whether arbitration is preferable to court proceedings is a subject of debate and often depends on the parties' circumstance
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If you would like further information, particularly on mediation, check out my mediation website, http://www.watkinsmediation.com. The American Arbitration Association ("AAA") has a very good website that contains copies of its arbitration rules (the AAA has different rules for different types of arbitrations), and other information at http://www.adr.org. JAMS, another arbitration provider, also has a website with information, at http://www.jamsadr.com. The CPR Institute promotes non-administered arbitration and also has an excellent website at http://www.cpradr.org.