What’s the difference between an arbitration clause and a mediation clause? Do I need them for my small business?

A mediation clause says the owners will take serious disputes to a mediator, either before filing suit, or shortly after. The mediator doesn’t make a decision, but tries to see if there is room for compromise. Sometimes it’s easier to listen and talk to an outsider, and mediators often meet with the parties separately. Some mediators will ask for confidential positions from each side; without disclosing the confidences, the mediator will see if there is any room for resolution. But if there is no agreement, litigation moves forward,

An arbitration clause says the parties agree to hire a private judge (or judges) to decide. You might designate an outside arbitration forum, or decide on a way to pick one or more arbitrators. Groups like the American Arbitration Association can make decisions using their own rules, which are theoretically designed to resolve disputes quickly and affordably. In reality, arbitration can be expensive, too. One benefit of arbitration is that it isn’t necessarily a public record. But a potential downside is a limited ability to appeal the decisions of think was unfair.

For most LLCs with more than one owner, we strongly recommend adding some kind of dispute resolution agreement. These are agreements about how to decide, even when you can’t reach a decision.
Why do we need it?

Communicating is hard work. In the startup phase, people can be more open and agreeable. A typical operating agreement is written during this ‘honeymoon’ period. It’s easier for people to agree to fair rules for solving disputes before there are real problems.

It’s hard to tell where the problem will come from. But once there is a fight, it can be hard to even agree on a path forward.

And if there’s no agreement about how to solve the problem, the default answer is litigation. First, you’ll pay lawyers to develop the facts. Then you’ll ask a judge to decide what’s fair.

Plan for the day there is a disagreement. You might be in the right or the wrong. But if it is big enough to matter, you might want to negotiate before heading to court.