Mediation vs. arbitration: the difference and which is preferable

Service page: Commercial contracts lawyer: drafting, review and enforcement.

Mediation: the parties decide, not the arbitrator

You have a dispute. You decided not to go to court. Now someone suggests mediation, and someone else arbitration. The two routes sound similar, but the difference between them is huge. In mediation, you control the outcome. In arbitration, someone else decides for you, and you can hardly appeal.

Mediation is a voluntary process. A neutral mediator helps the parties communicate and reach agreement, but the mediator decides nothing. If the mediation fails, both parties leave without legal harm and can go to court. An agreement signed in mediation is a contract in every sense and can be enforced, and things said in the mediation will not be used as evidence in civil legal proceedings (section 79C(d) of the Courts Law). This allows an honest conversation that is not always possible in court.

Arbitration: binding private adjudication

Arbitration, by contrast, is private adjudication. The parties choose an arbitrator (usually a lawyer or a retired judge) who conducts a court-like process and gives a binding decision. The Arbitration Law, 5728-1968 governs the process in Israel and allows an arbitration award to be enforced like a court judgment.

The main danger in arbitration: very limited appeal. Unhappy with the arbitrator’s decision? Your options to challenge it are very narrow. The court may set aside an arbitration award only on the grounds listed in section 24 of the Arbitration Law, for example the absence of a valid arbitration agreement, exceeding authority, denial of a proper opportunity to present arguments, or an award contrary to public policy. And an appeal is possible only if the parties agreed to it in advance (sections 21A and 29B).

Mediation or arbitration: how do you decide?

Choose mediation when: you want to keep the business relationship after the dispute, the issue is personal or emotional, you are not sure of your legal position, or flexibility matters more to you than a ruling that picks one side. Remember: in mediation nobody “loses”. You reach a settlement that both sides can live with.

Choose arbitration when: you want a final and quick decision, the issue is professionally complex and needs an arbitrator with specific knowledge of the field, or it is important to you that the dispute stays private and is not exposed in a public judgment. A warning: the decision can almost never be appealed, so make sure you are comfortable with that risk.

Arbitration clauses in contracts: the hidden dangers

Many people sign contracts with arbitration clauses without realizing that they are giving up the right of access to the courts. Once you have signed an arbitration clause, if you file a lawsuit and the other side asks for it before arguing the merits of the case, the court will stay the proceedings, unless it sees a special reason why the dispute should not be heard in arbitration (section 5 of the Arbitration Law). This is true even for disputes you never imagined would happen. This is why drafting and reviewing commercial contracts treats the dispute resolution clause as an essential term and not as a technical annex.

Note: arbitration clauses have found their way into employment contracts, consumer contracts and even app service agreements. They are not always valid. Section 4(8) of the Standard Contracts Law, 5743-1982 creates a presumption of unfairness for a term in a standard-form contract that denies or limits the customer’s right to raise certain claims before the courts, or that provides that every dispute between the supplier and the customer will be decided in arbitration. In other words, a sweeping arbitration clause in a standard-form contract is itself presumed unfair. The court or the Standard Contracts Tribunal may cancel or change an unfair term. Section 4(10) adds a specific presumption of unfairness: a term that refers a dispute to arbitration when the supplier has more influence than the customer over the terms of the arbitration, including the choice of the arbitrator, the place of arbitration and the rules of procedure. This applies even if the supplier proved that referring the dispute to arbitration is not in itself unfair.

What should you ask for in a mediation/arbitration clause in a contract?

If you must sign such a clause, make sure of the following points: clear identification of the institution that will run the process (for example a recognized mediation or arbitration institution, or the Israel Bar Association), equal payment by both sides, the option of bringing a lawyer, and a location that both sides can reach.

Enforcing a mediation agreement: not only as a contract, but also as a judgment

An agreement reached in mediation is a binding contract in itself, but there is a stronger way to enforce it, and it is set in the law. Section 79C(g) of the Courts Law [Consolidated Version], 5744-1984 provides that when the parties have reached a mediation settlement, the mediator informs the court, and the court may give the settlement the effect of a judgment. Section 79C(h) extends this even to a case where no claim was filed at all: parties who settled a dispute in a mediation conducted under the law can apply to the court that has jurisdiction to hear a claim on the subject of the dispute and ask it to give the settlement the effect of a judgment. The practical difference is large: a settlement that has received the effect of a judgment can be enforced through enforcement proceedings (Execution Office), while an “ordinary” agreement that was breached requires a new lawsuit for breach of contract. The Labor Court has a parallel mechanism in regulation 9 of the Labor Court Regulations (Conciliation), 5753-1993 (תקנות בית הדין לעבודה (פישור), התשנ״ג-1993): see mediation at work: settling an employee–employer dispute.

Example: a dispute between two partners in a family business

Two partners in a family business fall out over the division of profits. If they choose court, the proceedings may last years, cost a fortune, and expose the family dispute in public. If they choose mediation, a mediator will try to bridge the gaps, while the partners still control the outcome: for example, a different division, buying out one partner’s share, or continuing the partnership on updated terms. A process that fails in mediation does not stop them from going to arbitration or to court later. If they go straight to arbitration, an arbitrator with experience in company law will decide for them, and the process will be faster and more confidential than court, but the outcome will be set by someone else and will not always reflect what both sides would have been willing to accept of their own accord.

Mediation in small claims: why bother?

The Small Claims Court is meant to resolve disputes of up to NIS 39,900 in a simple, quick way, without lawyers. But even there, the proceedings can last months and cause both sides distress out of proportion to the amount.

Mediation offers another route: a conversation run by a qualified mediator, aimed at agreement, not victory. Often both sides walk away sooner, with less bitterness.

What does the law say about mediation in small claims?

In small claims too, the court may, with the parties’ consent, refer the claim to mediation (section 79C(b) of the Courts Law). In other words, you do not have to agree to the referral. Even without a referral by the court, either party can initiate mediation before the claim is filed, or in parallel.

A signed mediation settlement can be submitted to the court, and the court may give it the effect of a judgment (section 79C(g)–(h) of the Courts Law).

The advantages of mediation

• Speed: a single mediation session can end within hours, compared with months of court proceedings.
• Low cost: the cost of mediation is usually lower than the cost of running the proceedings to a judgment.
• Control: the parties choose the solution; the court does not impose it.
• Keeping relationships: suitable for neighbors, repeat customers or family members.

Disadvantages and limits Mediation is not right for every case. If the other side refuses to take part, there is no way to force mediation in small claims. Also, in a dispute where the facts are deeply contested, it is sometimes better to let a judge decide. In most cases the dispute is prevented one step earlier, by reviewing an agreement before signing, even in small deals.

The stages of the mediation process

• Contacting a mediator
• Setting a date and place; usually it can also be done on Zoom
• The mediation session: each side presents its position, and the mediator tries to bridge the gaps
• Signing an agreement, if agreement is reached
• Submitting the agreement for the court’s approval if you want a binding judgment

What happens if the mediation fails?

A failed mediation does no harm. You can file the claim in court as usual. Things said in the mediation will not be used as evidence in civil legal proceedings (section 79C(d) of the Courts Law).

Court, arbitration or mediation: what is the difference, and which is better for you?

Under Israeli law, a commercial dispute has three main methods: court, arbitration and mediation. Each method involves different costs, different timetables and different outcomes, and it is not always clear in advance which is the right way.

The choice is sometimes already made in the original contract (if it has an arbitration clause), and sometimes made after the dispute has broken out. The Arbitration Law, 5728-1968 governs arbitration, and the Courts Regulations (Mediation), 5753-1993 (תקנות בתי המשפט (גישור), התשנ״ג-1993) govern mediation, and both are real alternatives to court proceedings.

Filing a claim in court: when is it the right choice, and what does it cost?

The classic route for resolving commercial disputes is through the courts. In Israel, commercial disputes are heard in the Magistrates’ Court (claims of up to NIS 2.5 million) or in the District Court (above that); disputes in company law and securities law are heard in the Economic Department of the District Court. Filing a commercial lawsuit involves filing a statement of claim, paying a court fee, and sometimes keeping to a strict timetable. The court will examine the evidence presented by both sides and give judgment based on Israeli law.

The advantage of the courts is that this is a state forum whose judgment is binding and can be enforced immediately through enforcement proceedings. The judgment can be appealed to a higher court, but an appeal may also take years more. A significant disadvantage of the court route is the time it takes, the high cost of the proceedings, and the fact that the matter is open to the public (news, the press, etc.).

How much does each method cost, and which is faster?

Court involves high legal costs (legal fees, court fees, professional opinions) and proceedings that may last years, and even longer if an appeal is filed. Arbitration usually lasts months, and the arbitrators’ fees can be high in large disputes. Arbitration may be more expensive for the parties (arbitrators charge by the hour) but often takes less time (usually a few months to a year). Mediation is usually the cheapest and fastest, sometimes ending after a few sessions, but it is not binding and may not reach a solution.

The practical rule: if the business relationship matters to you, try mediation first. If a large amount is involved and you need a binding decision, arbitration. If the previous method failed or there is no arbitration clause, court.

What should you check before choosing a method?

The first thing to check: does the original contract set a method of resolution? A clause saying “every dispute will be resolved by arbitration” is binding, and if you file a lawsuit directly in court, the other side can ask for a stay of proceedings under section 5 of the Arbitration Law.

More questions to ask before choosing: how much is the dispute worth? Are you continuing to work with the other side? Is there clear documentary evidence? Is there urgency (for example, ongoing damage that must be stopped at once)? The answers will decide the most effective route.

What not to do when a commercial dispute breaks out

The most common mistakes: sending an angry email to the other side that will later become evidence against you. Waiting too long: there is a limitation period. Signing a settlement agreement without a lawyer “to save money”. Trying to reach an oral agreement without documenting it. All of these are common, and all of them can harm your position.

What to do from the first moment: document everything in writing. Keep every invoice, contract, piece of correspondence and receipt. Send every formal communication by letter with confirmation of delivery. And if the other side offers a settlement, check with a lawyer before you agree.

Practical steps: what to do today

Step 1: read the original contract and look for an arbitration or mediation clause. Step 2: collect all the relevant documents: invoices, emails, work instructions. Step 3: ask for initial advice from a lawyer who deals with commercial disputes. Step 4: consider whether to send a formal warning letter to the other side before filing a lawsuit; sometimes this is enough. Step 5: if the warning letter does not help, decide between arbitration (if agreed), mediation (if the relationship matters), or a lawsuit.