Another commonly confused set of terms are Mediation and Arbitration. Today, I will try to bring some clarity to this issue, as part of "What's the Difference?" week.
Alternative Dispute Resolution
Mediation and arbitration are the most common forms of alternative dispute resolution, meaning that they are used in place of the litigation process (that is, taking a dispute to court). In the U.S., litigation is assumed in business disputes. But the parties to the dispute can agree on a different process. Typically, any process that is outside the litigation process must be agreed on in writing; usually this happens in a contract or agreement between the parties.
Mediation is a method of resolving misunderstandings. In a dispute, a third party, known as a "mediator," is brought in to assist the parties in reaching a settlement. In many cases, the mediator may propose solutions he or she does not have authority to make a binding decision. The mediation process is private and confidential, as opposed to trials, which are public. It takes less time to mediate a dispute and with much less expensive (both parties share the cost). The greatest advantage to mediation is the high likelihood of continuing the business relationship, since the dispute has been settled with consideration of both parties.
Arbitration, on the other hand, is a more formal approach to alternative dispute resolution. An arbitrator is appointed with the agreement of both parties, and he or she hears both sides of the dispute. The rules of evidence differ from court trials, and attorneys may not be representing the parties. After hearing both sides, the arbitrator makes a decision; most often that decision is binding upon both parties. Like mediation, arbitration is less time-consuming and less expensive than litigation. In binding arbitration, the parties usually have no appeal option, unless an appeal has been included in an arbitration clause.
For more information, read about Arbitration vs. Litigation.