For a dispute between business partners, mediate first. Arbitrate only if both partners want a private, final decision from someone else and accept that it can barely be appealed: under the Federal Arbitration Act a court may set an award aside on just four narrow grounds, none of which is that the arbitrator got the law or the numbers wrong (9 U.S.C. §10). The best clause does both in order: talk, then mediate, then arbitrate.

The difference is who decides. A mediator decides nothing; the partners reach their own agreement or they do not. An arbitrator decides everything put in front of them, and the decision binds like a court judgment. Partners who still have to run a business together, or who need to agree a buyout price and payment plan, are usually better served by a process that leaves the outcome in their hands. Partners who have stopped speaking need someone with the power to end it.

What follows compares the two, then gives clause wording. It is general information; a lawyer in your state should read the dispute clause you already have, because if one exists it has probably decided this for you.

The two processes side by side

Mediation vs arbitration for partners

Mediation Binding arbitration
Who decides The partners; the mediator only helps them get there The arbitrator or a panel of three
Is the result binding? Only if the partners sign a settlement Yes, and a court will enforce the award
Appeal Nothing to appeal; no agreement means no result Vacatur only on the four FAA §10 grounds, within three months (§12)
Evidence and discovery Whatever the partners choose to share Documents and hearings under the chosen rules, narrower than in court
Remedies Anything the partners agree, including things no court would order: a changed role, a staged buyout, a licence back What the clause and the rules allow, usually money, a buyout order or a declaration
Privacy Private; mediation communications are privileged by statute in many states Private hearing, but the award is not confidential unless the rules or the clause say so, and it becomes public if taken to court
Cost The mediator's fee, usually split; often one day Filing fees on the AAA's schedule plus the arbitrators' hourly compensation, plus lawyers
Business keeps running? Usually; nothing is decided over the partners' heads Yes, but the process is adversarial and it shows

Harvard's Program on Negotiation describes mediation as often a one-day commitment, and as the default when partners are deadlocked and want to keep the relationship or the costs down (PON). The AAA, the largest administrator in the US, runs both processes for partnership and shareholder disputes (AAA) and publishes its Commercial Arbitration Rules and fee schedule; the filing fee scales with the size of the claim, and the arbitrators bill for their time on top of it.

What mediation is good for, and where it fails

Mediation works when the partners disagree about the future more than the past: who runs what, whether to sell, how to split a buyout into payments the business can afford. A good mediator meets each side privately, tests each side's numbers, and drafts the settlement while people are still in the room. Because nothing is decided unless both sign, it costs little to try, and the settlement can include things a judge could not order.

It fails in three situations. When one partner is hiding money or records, because mediation has no power to compel documents; the statutory right to inspect the books (Uniform Partnership Act (1997) §403) has to be enforced first. When one partner is stalling, since every month without a decision favors whoever controls the bank account. And when the only real question is a number, such as the value of an interest, which is better sent to an independent appraiser than argued over.

What arbitration is good for, and what it costs you

Arbitration ends a dispute. Partners choose the decision maker, often someone who knows the industry or partnership accounting, the hearing is private, and the timetable is usually shorter than a court's. For a fight over whether a partner breached the agreement, or how much one owes the other, that finality is the point.

The price is the right of appeal. Section 10 of the FAA lets a court vacate an award only where it was procured by corruption, fraud or undue means; where an arbitrator showed evident partiality or corruption; where the arbitrators refused to postpone or to hear material evidence or otherwise misbehaved to a party's prejudice; or where they exceeded their powers. A motion has to be served within three months of the award (§12). The Supreme Court held in Hall Street Associates v. Mattel (2008) that those grounds are exclusive: partners cannot write a clause that lets a court review the award for legal error. A wrong answer, well reasoned, stands.

The step clause: negotiate, then mediate, then arbitrate

A tiered clause gets the strengths of both. The partners must first meet, then mediate within a fixed time, and only then may either start arbitration. The prospect of a binding award tends to make people settle in mediation, which is why most such cases never reach the arbitration stage, according to the Program on Negotiation (PON). The same source warns about using one person as both mediator and arbitrator: partners speak less freely to a mediator who may later judge them. The clause below uses two different people.

The AAA publishes standard clauses and a clause builder (AAA clause drafting); the version below adds what partnership disputes need: a carve-out for urgent court orders, confidentiality, and a separate route for valuation.

Tiered dispute resolution between partners 
Dispute Resolution. (a) Negotiation. Any dispute arising out of or relating to this Agreement or the Partnership's business (a "Dispute") shall first be the subject of a meeting of the Partners, in person or by video, held within [15] days after either Partner gives written notice describing the Dispute.
(b) Mediation. If the Dispute is not resolved within [30] days after the notice, either Partner may refer it to mediation administered by the American Arbitration Association under its Commercial Mediation Procedures, before a single mediator with experience in [closely held business disputes]. The Partners shall share the mediator's fees equally and participate in good faith for at least one full day.
(c) Arbitration. If the Dispute is not resolved within [60] days after the mediation request, it shall be resolved by binding arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules, before [one / three] arbitrator(s), none of whom served as the mediator. The seat of arbitration is [city, state]. The arbitrator shall issue a reasoned award. Judgment on the award may be entered in any court with jurisdiction.
(d) Confidentiality. The Partners shall keep the existence, content and outcome of any mediation or arbitration confidential, except as needed to enforce an award or as required by law.
(e) Court orders. Either Partner may seek a temporary restraining order or preliminary injunction from a court to preserve the status quo, protect partnership property or records, or enforce Section [restrictive covenants], without waiving this Section.

Decide one arbitrator or three now: three arbitrators bill three times over and suit only large disputes. The court-orders carve-out matters most when a partner is moving money or clients; without it, a partner may have to wait for an arbitrator to be appointed. If the agreement already names a different administrator (JAMS, or a local panel), keep the structure and change the names. Check that the clause covers claims "relating to" the business, or a fiduciary duty claim may be argued to fall outside it.

Expert determination of a buyout price 
Valuation Disputes. A Dispute limited to the value of an interest or the amount of a payment under Section [buyout] shall not be mediated or arbitrated but determined by an independent appraiser holding the ASA, ABV or CVA credential, appointed by agreement or, failing agreement within [15] days, by [the American Arbitration Association / the president of the state CPA society]. The appraiser acts as an expert and not as an arbitrator, shall determine the value under the standard in Section [__] within [60] days, and that determination is final and binding absent fraud or manifest error. The Partners share the appraiser's fees equally.

Price disputes are questions of accounting, not of who did what, and an appraiser answers them faster and more cheaply than an arbitrator. Pair this with the valuation method in the exit clause.

When the partnership agreement has already chosen

Read the agreement before choosing anything. An arbitration clause in it is generally enforceable under the FAA, and a partner who sues in court can expect a motion to compel arbitration. Courts often enforce a mediation-first requirement too, so skipping it can cost a partner the right to arbitrate or sue until it is done. With no clause at all, either process needs both partners' consent, and the default forum is court, including a petition to dissolve the partnership where it is no longer reasonably practicable to carry on (Uniform Partnership Act (1997) §801(5)).

Where the dispute is really about ending the partnership, the process matters less than having a plan for the end state. How to tell your partner it's not working covers the conversation before any of this; how to buy out a business partner and how to dissolve a partnership cover the two ways it ends. A 50/50 deadlock is better broken by a buy-sell mechanism than by either process, and the exit clause has wording for that.

The strongest case for arbitration over mediation is speed when trust is gone: a partner who will not negotiate in good faith can stall a mediation indefinitely. The tiered clause answers that with its deadlines, which is why the clause, not the choice between the two processes, is the decision that matters.