Small business owners sometimes get into disputes that need to be settled using either arbitration or mediation. Both of these processes are considered alternative dispute resolutions (ADRs), and both involve asking a third party to help with settling a disagreement, but that’s where the similarities end. Read on to find out what business owners need to know about both arbitration and mediation to choose the best ADR technique.

What Is Arbitration?

The arbitration process works a lot like conventional forms of litigation. An arbitrator will act as a judge, take testimony from both parties, then decide how to resolve the dispute. It’s like going to court, but with less formality and lower expenses for both parties.

The Pros of Arbitration

Small companies with limited resources generally prefer arbitration for these reasons:


  • Arbitration is less expensive than lawsuits.
  • The process can be completed in months, rather than years.
  • There’s no right to discovery unless required in arbitration provisions.
  • Many arbitrators have specialized experience.
  • There’s no way to appeal a binding arbitration ruling.
  • The cost of hiring an arbitrator is usually lower than that associated with going to court.

The Cons of Arbitration

Not all small businesses like arbitration. Some businesses are opposed to this ADR technique because it:


  • Takes weeks to initiate
  • Can lead to loss of secrecy in the absence of TROs (temporary restraining orders)
  • Can go poorly in the absence of an appropriate arbitrator
  • Can wind up being appealed to the courts

What Is Mediation?

Mediation involves hiring a neutral evaluator, called a mediator, to help two parties reach a resolution outside of court. It’s a less formal proceeding than arbitration, though successful mediation will still end in an enforceable settlement agreement. Many businesses prefer mediation as the first step towards dispute resolution.

The Pros of Mediation

Small businesses tend to prefer mediation over arbitration for several reasons. Mediation:


  • Is the most inexpensive solution
  • Allows parties to arrive at a settlement without being told how to resolve the dispute
  • Is less likely to create bad blood between two parties

The Cons of Mediation

Like arbitration, mediation also comes with some distinct drawbacks. They include:


  • The lack of a binding method for ending the dispute
  • The possibility of disputes getting drawn out
  • The possibility of moving from mediation to arbitration or litigation in the absence of a suitable compromise

What’s the Best Choice?

Most experts consider mediation to be a better alternative for small business owners. However, there are some cases where arbitration, or even formal litigation, presents a better option. Business owners should consider all their options before deciding how to proceed when handling a serious dispute.