Litigation v mediation: which is right for your business dispute?

Disputes are an inevitable reality of commercial life. Whether they arise from contractual disagreements, partnership conflicts, or customer complaints, knowing how to effectively address the issues they present is crucial for maintaining a business’ health and reputation.

Two common dispute resolution procedures are litigation and mediation. Each has its own advantages and disadvantages, and understanding these can help you choose the best path for your situation. This article explores the differences between litigation and mediation, providing insights from an Australian legal perspective.

Understanding litigation and mediation

What is litigation?

Litigation is the process of resolving a dispute through the judicial system. It involves one or more parties filing a claim or application, that claim or application being defended, the parties then engaging in a series of legal procedures, and ultimately presenting the case to a judicial officer for determination, as well as any appeals which might flow from the primary decision.

Key features of litigation:

• Formal: litigation follows strict procedural rules and timelines governed by civil procedure laws.
• Public record: court proceedings are generally conducted in public hearings and can expose sensitive information.
• Binding: The court’s ruling is legally binding, meaning parties must comply with the judgment.
• Possibility of appeal: If a party is dissatisfied with a decision (whether interlocutory or final), they may have the option to appeal the decision.

What is mediation?

Mediation is an informal process by which a neutral third-party is engaged to facilitate discussions between disputing parties in an attempt to help them reach a negotiated settlement of their dispute. Unlike litigation, the mediator is not a judge and does not rule on the merits of the disputing parties’ positions.

Key features of mediation:

• Without prejudice and flexible: Mediation sessions are conducted on a without prejudice and confidential basis, allowing for a more relaxed environment where parties can communicate openly, and flexibility in how the mediator seeks to bring the parties to a negotiated settlement
• Confidential: Mediations are conducted in private, thereby protecting sensitive business information from public scrutiny.
• Collaborative: Mediation encourages cooperation between parties, fostering a more amicable resolution, including the possibility of putting outcomes on the table which cannot be awarded by a judicial officer in litigation.
• Non-Binding: A mediator does not impose a decision; any agreement reached at mediation is only binding on the parties if both parties consent to that agreement being binding on them.

Pros and cons of litigation

Advantages of litigation:

• Legal precedent: Litigation can establish legal precedents that may benefit future cases.
• Definitive: A judicial officer’s ruling provides a clear and enforceable resolution of the dispute.
• Rules of evidence: Litigation allows for formal discovery processes, where parties exchange evidence, and evidence will only be relied upon where it is admissible.
• Includes mediation: Most litigious actions involve mandatory, court-supervised mediation as a pre-trial procedure, giving the parties a chance to resolve their dispute by agreement before it is put to a judicial officer to deliver a binary decision.

Disadvantages of Litigation:

• Costly and time-consuming: Litigation can be expensive due to legal fees, court costs, and the time involved in the process. We can help you weigh up the commercial ROIs before you begin the process as we’re always mindful of right-sizing any legal action before we commence with our clients.
• Stressful: The adversarial nature of litigation often creates stress for the parties, straining relationships and often causing sleepless nights!
• Unpredictable outcomes: The outcome of litigation is, despite what anyone says, always uncertain, as it relies on the judgment of a human mind, which may not align with your expectations.

Pros and cons of mediation

Advantages of mediation:

• Cost-effective: Mediation typically costs less than litigation, as it requires fewer resources and can be resolved more quickly.
• Preserves relationships: The collaborative nature of mediation can help maintain and even strengthen relationships between disputing factions.
• Flexible solutions: Parties have more control over the outcome, allowing for creative solutions that may not be available through litigation.

Disadvantages of mediation:

• No guaranteed resolution: Mediation relies on both parties agreeing to a solution; if no agreement is reached, further action (such as commencing or continuing with litigation) may be necessary.
• Non-binding: A mediator does not have the authority to impose a decision, which may be problematic if one party is uncooperative, unreasonable, or unwilling to engage with the mediation process.

Factors to consider when choosing between litigation and mediation

When faced with a business dispute, consider the following factors in determining the most appropriate resolution method:

Nature of the dispute

• Complexity: If the dispute involves complex legal issues or requires a formal legal ruling, litigation may be more appropriate.
• Interpersonal relationships: If preserving a working relationship is crucial, mediation may be the better option.

Desired outcomes

• Need for precedent: If establishing a legal precedent is important, litigation might be the right choice.
• Creative solutions: If you seek flexible, tailor-made solutions, mediation may offer more options.

Cost and time constraints

• Budget: Assess your budget. Mediation is generally more cost-effective and faster than litigation.
• Time sensitivity: If a quick resolution is necessary, mediation will often be more expedient than litigation, where mediation will likely again be on the agenda before reaching a trial.

Case Studies: Real-life scenarios

Case Study 1: Successful mediation

A small tech startup in Leederville faced a dispute with a vendor over contract terms. The services contract between them included a mandatory mediation dispute resolution clause which required mediation before litigating any dispute arising under the contract. With the help of a skilled mediator, they reached a compromise that allowed for adjustments in the contract without damaging their business relationship. This solution not only preserved the partnership but also led to improved terms for both parties.

Case Study 2: The costs of litigation

A manufacturing firm in Welshpool found itself embroiled in a legal battle with a former JV partner over profit distribution. The company chose litigation, expecting a clear resolution. However, the process dragged on for more than three years, incurring significant legal costs and damaging their reputation within the industry. Ultimately, the court ruled in favour of the defendant JV partner, leaving the company who commenced the litigation hugely out of pocket, with a ruined industry reputation. 

Making the right choice for your circumstances,

Navigating business disputes can be challenging, and choosing the right resolution procedure is crucial.

Ultimately, the decision should be informed by the nature of the dispute, desired outcomes, and the dynamics at play.

In many cases, seeking the advice of a legal professional can provide clarity and guide you towards the most suitable solution for your unique situation. By getting in touch with one of our knowledgeable commercial dispute lawyers, you can resolve disputes effectively, allowing your business to thrive even in the face of challenges.