When a $340,000 payment dispute arose on a hospital renovation project, the mechanical contractor had a choice: push for arbitration as the contract required, or suggest mediation first.
They chose mediation. Four hours later, they walked out with a $310,000 settlement check — about 91% of what they claimed. The GC agreed to pay to avoid the time and expense of arbitration.
If they'd gone straight to arbitration, that same dispute would have taken 8-12 months and cost $50,000+ in legal fees.
Understanding when to mediate versus when to arbitrate can save you time, money, and relationships. Let me break down the differences.
What Is Mediation?
Mediation is a voluntary, non-binding dispute resolution process where a neutral third party (the mediator) helps the disputing parties reach a mutually acceptable agreement.
Key characteristics:
**Voluntary:** Both parties must agree to participate, and either can leave at any time.
**Non-binding:** The mediator can't impose a decision. Any agreement must be accepted by both parties.
**Facilitative:** The mediator helps the parties communicate and find common ground but doesn't decide who's right.
**Confidential:** What's said in mediation typically can't be used in later proceedings.
**Flexible:** Parties can be creative in finding solutions that a court or arbitrator couldn't order.
What Is Arbitration?
Arbitration is a binding dispute resolution process where a neutral third party (the arbitrator) hears evidence from both sides and renders a decision.
Key characteristics:
**Binding:** The arbitrator's decision is final and enforceable, with very limited grounds for appeal.
**Adversarial:** Each party presents their case, and the arbitrator decides the winner.
**Structured:** While less formal than court, arbitration follows procedural rules.
**Private:** Unlike court proceedings, arbitration is private and confidential.
**Faster than court:** Typically resolves in months rather than years.
Side-by-Side Comparison
Let me put these side by side so you can see the differences clearly:
| Factor | Mediation | Arbitration |
|--------|-----------|-------------|
| Binding? | No | Yes |
| Who decides? | The parties | The arbitrator |
| Cost | Lower | Higher |
| Duration | Hours to days | Months |
| Relationship impact | Preserving | Straining |
| Creativity | High | Limited |
| Precedent | No formal record | Creates record |
| Appeal | N/A (no decision to appeal) | Very limited |
When Mediation Works Best
Mediation is particularly effective when:
Ongoing Relationships Matter
If you want to keep working with this GC or owner, mediation preserves the relationship better than fighting it out in arbitration.
There's Room for Compromise
When neither party is 100% right, mediation lets you find middle ground without someone being declared the loser.
Time Is Critical
Need resolution in days, not months? Mediation can happen quickly.
The Dispute Is More About Communication
Sometimes disputes arise from misunderstandings rather than fundamental disagreements. Mediation excels at clearing these up.
Confidentiality Is Important
Both parties want to resolve quietly without a record that could affect future relationships.
Creative Solutions Could Help
Maybe the GC can't pay the full amount now but could offer future work, or early payment on another project, or some other arrangement that an arbitrator couldn't order.
When Arbitration Is Necessary
Arbitration becomes necessary when:
The Other Party Won't Negotiate
If they refuse mediation or take unreasonable positions, you need someone to impose a decision.
Significant Legal Questions Exist
Complex contract interpretation or legal issues that need formal determination.
Precedent Matters
If you want a record of the decision that might influence future disputes (even though arbitration decisions technically aren't precedent).
The Contract Requires It
Many construction contracts specify binding arbitration for disputes over a certain threshold.
The Other Party Has a History of Bad Faith
If you don't trust them to honor a mediated agreement, a binding arbitration award has more teeth.
The Costs Involved
Let's talk money, because this often drives the decision.
Mediation Costs
Arbitration Costs
The cost difference is dramatic. For many disputes, arbitration costs more than the amount in dispute.
The Mediation-First Approach
Here's what I recommend to most subcontractors: try mediation before arbitration.
Even if your contract requires arbitration, you can usually agree to mediate first. Many arbitration providers (like AAA) have mediation programs that pause arbitration while mediation is attempted.
The advantages:
1. If mediation works, you save the time and cost of arbitration
2. If mediation fails, you learn more about the other side's position before arbitration
3. Insurance companies often push for mediation, so the other side may be receptive
4. No downside — you can still arbitrate if mediation fails
Choosing a Mediator
For construction disputes, look for mediators with:
Construction Industry Experience
They should understand progress billing, change orders, scope disputes, and the reality of construction projects.
Legal Background
A former construction attorney or judge knows how to evaluate the legal strength of positions.
Reputation for Results
Ask for settlement rates. Good construction mediators settle 70-85% of cases.
Appropriate Fee Structure
Mediators typically charge $400-$800 per hour for construction cases. Much more or less may be a red flag.
Choosing an Arbitrator
For arbitration, you'll often choose from a panel provided by an organization like AAA or JAMS. Prioritize:
Technical Expertise
They need to understand construction means and methods, not just contract law.
Fair Reputation
Talk to lawyers who've appeared before them. Does the arbitrator favor one side or rule fairly?
Availability
A great arbitrator who can't hear your case for 6 months may not be the best choice.
Decision-Making Style
Some arbitrators tend to "split the baby." Others make clear winner/loser decisions. Know what you're getting.
Preparing for Mediation
To get the best results from mediation:
Know Your Best Alternative
What happens if mediation fails? Know your BATNA (Best Alternative To Negotiated Agreement) — it defines how much you should compromise.
Prepare a Mediation Statement
A brief (5-10 page) summary of your position, key facts, and desired outcome. The mediator reads this before the session.
Bring Decision-Makers
The person at mediation must have authority to settle. Saying "I need to check with my boss" kills momentum.
Be Prepared to Compromise
If you're not willing to move from your position, you're wasting everyone's time.
Consider Opening Offers
Your first offer sets the tone. Make it reasonable enough to keep negotiations moving.
Preparing for Arbitration
Arbitration is more like a trial, so preparation is more intensive:
Document Everything
Gather contracts, change orders, correspondence, photos, invoices — everything relevant.
Identify Witnesses
Who can testify to support your case? Expert witnesses may be needed.
Understand the Rules
AAA, JAMS, and other providers have specific procedural rules. Know them.
Budget Appropriately
Arbitration is expensive. Make sure the amount at stake justifies the investment.
Hire Experienced Counsel
An attorney experienced in construction arbitration is essential for significant disputes.
What Happens at Each Process
Mediation Day
Arbitration Proceeding
Frequently Asked Questions
Can I mediate if the contract requires arbitration?
Yes. Parties can always agree to mediate before arbitrating. Most arbitration organizations encourage this.
Is a mediation settlement enforceable?
Yes. A signed mediation settlement agreement is a binding contract. It can be enforced in court if breached.
Can I appeal an arbitration decision?
Generally no. Courts will only overturn arbitration awards for very limited reasons (fraud, arbitrator misconduct, arbitrator exceeding authority).
Who pays for mediation/arbitration?
Usually split between parties, unless the contract specifies otherwise or the winner is awarded costs.
How long does each process take?
Mediation: typically one day. Arbitration: typically 4-12 months from filing to decision.