The Pros and Cons of Using Arbitration Clauses for Small Businesses

Arbitration clauses are becoming an increasingly popular way for businesses to resolve disputes. In this article, we will discuss the pros and cons of using arbitration clauses for small businesses. We hope this information will help business owners make informed decisions about whether or not to include arbitration clauses in their contracts.

What are arbitration clauses, and how do they work?

An arbitration clause is a provision in a contract that requires disputes between the parties to be resolved through arbitration instead of litigation. This clause is often included in employment contracts, as it can save the company time and money. If you’re considering whether or not to have an arbitration clause in your contract, it’s important to weigh the pros and cons carefully. On the one hand, arbitration can save you time and money. On the other hand, you may be giving up your right to have your case decided by a judge or jury.

The pros of using arbitration clauses

Control over the arbitrator selection: The ability to choose who arbitrates your case is a significant advantage of arbitration. You can choose someone you trust rather than leave the decision up to a court.

Speed: Arbitration is often much faster than going through the court system. This is especially beneficial if you need to resolve the issue as quickly as possible.

Cost: One of the biggest benefits of arbitration is the cost savings it offers. In most cases, arbitration costs significantly less than taking a case to court.

No appeals: Unlike in the court system, there is no possibility of an appeal in arbitration.

Privacy: Arbitration is generally kept private. Parties frequently consent to keep the resolution and terms confidential, mainly if they are contentious.

The cons of using arbitration clauses

Limited recourse: Recourse is limited in arbitration cases, meaning that you may not be able to get the justice you deserve.

Biased arbitrator: Arbitrators are not always objective, which means they may not judge your case objectively. An arbitrator could have a previous business relationship or even be bribed by one party for a favorable outcome, such as in the alleged bribery of arbitrator Marc J. Goldstein by Goldman Sachs.

Lack of transparency: There is a lack of transparency in the arbitration process, meaning that you may not know what is happening with your case.

How to decide if arbitration clauses are right for your business

The question of whether to include arbitration clauses in your business contracts is a difficult one, but the answer depends on what you’re trying to do. Before deciding whether to have an arbitration clause in a contract, businesses should consider the following factors:

The type of dispute: Some disputes, such as those involving fraud or breach of contract, may be better suited for arbitration than others.

The cost: Arbitration can save money versus going to court.

The time commitment: Arbitration can be faster than going to court, depending on the case’s complexity.

The flexibility of the process: Arbitration is generally more flexible than going to court.

By considering these factors, businesses can decide whether arbitration is the right choice for them.

In short, arbitration clauses can be a helpful way for small businesses to resolve disputes quickly and privately. However, it is also important to be aware of the potential drawbacks of using arbitration.

Adam Torkildson
Adam is a proud American citizen, entrepreneur, 2x founder, father of 2, and married. He considers himself a Constitutional Conservative and loves to golf and read books when he's not running his businesses and writing content.