What Arbitration Is and Why It Matters for Business Owners
Running a business means you will eventually face disputes. These conflicts could be with employees over contract terms or workplace issues, customers over product quality or service delivery, suppliers over payment or delivery terms, or business partners over profit sharing or decision-making. When disagreements arise, the traditional route of resolving them in court can be time-consuming, expensive, and stressful - not to mention completely public. Anyone can look up a court case and read about the allegations, who’s involved, and what happened. And since the court process is deliberately adversarial, the facts presented by each side are usually, let’s say, less-than-flattering of the other side. Those public allegations against you or your business could even be false. Luckily, there’s an alternative: arbitration. Arbitration is a method of resolving disputes outside the courtroom, offering a quicker, more cost-effective, and private way to settle issues.
In this article, we will delve into what arbitration is, its benefits for business owners, situations where arbitration is particularly advantageous, and how to prepare for it. Understanding arbitration can equip you with the knowledge to save time, money, and stress, helping you keep your business running smoothly even in the face of conflicts.
We’ll start with the basics and explain what arbitration is and what it is not.
What is Arbitration?
Arbitration is a method of resolving disputes outside of the courtroom. You may have heard the term “alternative dispute resolution” or “ADR,” which refers to specific processes that help parties resolve their disputes without court intervention. Arbitration in one form of ADR. Another form of ADR is mediation, which is a much different process, but many people confuse the two. Check back here next week for a thorough discussion about mediation so you can have absolute clarity about the difference between these forms of ADR and know when to employ each for the success of your business.
What Arbitration Is: Arbitration is like a private court in that a neutral third party, known as an arbitrator, listens to both sides and decides who wins and who loses. The arbitrator is typically an expert in the field related to the dispute, ensuring a fair and informed decision. It looks a lot like the court process. Both sides present their cases to the arbitrator and call witnesses. The lawyers for each side get to cross-examine witnesses and admit documents into evidence. At the end of the proceeding, the arbitrator issues a formal decision in writing, and that decision is binding, meaning you and the other party must follow it. To give further weight to the arbitrator’s decision, it is often submitted to a court for the judge to sign. Notably, only the decision is presented to the court - no facts of the case, arguments, or evidence will be made public.
It’s vital to note that the decision usually involves exchanging money. Arbitration is not available in cases where someone’s liberty is at stake.
What Arbitration Is Not: Arbitration is not the default resolution process. Both parties must agree that if any dispute arises between them in the future, they agree to settle the matter through arbitration. This agreement must be outlined in a written contract, and most states have specific rules on how the arbitration clause in a contract must be phrased and executed. One deviation could make the clause unenforceable, meaning you end up in court anyway.
Arbitration rules are less stringent than court rules, offering a more flexible and faster process. While it’s ideal for the arbitrator to be genuinely neutral and an expert in the type of dispute, that’s not always the case. Since no formal court rules are in place to ensure impartiality and the arbitrator’s expertise, the parties may or may not be able to petition for another arbitrator to hear the case. Furthermore, unlike a jury trial with a judge, there aren’t the same checks and balances. The arbitrator possesses all the power over the process and the final decision, giving you more control over the resolution process.
Now that you understand the basics, we’ll discuss how arbitration benefits you as a business owner.
Benefits of Arbitration for Business Owners
Since you’re busy running a business, arbitration offers many benefits. Here are a few.
Arbitration Saves Time. Going to court can be a long, drawn-out process. It can take months, if not years, to resolve. Court cases are often delayed, and you might be stuck in legal limbo. Arbitration, on the other hand, is designed to be fast and efficient. Arbitrators typically start the process quickly and keep it moving until the conclusion. This means you spend less time away from running your business.
Arbitration Saves Money. Legal fees can also add up quickly in court cases, significantly the longer it takes to resolve. Attorneys charge for their time, and the longer it goes on, the more expensive it becomes. Arbitration is generally less pricey because it avoids many of the formalities of a court case. If your lawyer charges by the hour, fewer billable hours means lower costs for you.
Arbitration Keeps Your Affairs Confidential. This may be the most enticing reason for choosing arbitration as a dispute resolution method. Court cases are public, which means anyone can look up the details of your dispute. This can be embarrassing and might harm your business reputation. Arbitration, however, is a private process. The hearings are not open to the public, and the details are only disclosed if both parties agree. This confidentiality can protect your business’s image and sensitive information.
When to Choose Arbitration
While arbitration has many benefits, it’s not always the best choice for every dispute. However, here are some situations where arbitration can be particularly advantageous.
Contract Disputes. Contract disputes are highly technical and can boil down to the interpretation of one or two words that may seem ordinary to laypeople (juries, for instance) but have specific meanings under the law. However, many arbitrators are current or former lawyers, and they’ll often be able to parse out the technical details and specific legal terms without explanation or ambiguity.
Employment Issues. Employment disputes, such as disagreements over wages, working conditions, or wrongful termination, can be sensitive and complex. Using arbitration for these issues can help maintain a better relationship with your employees. The confidentiality of arbitration also means that the details of these disputes won’t become public, which can protect both your business and your employees’ privacy.
Business-to-Business Disputes. When you have a conflict with another business, arbitration can help maintain a professional relationship. Since the process is less adversarial than a court case, you’re more likely to reach a resolution that allows both parties to continue working together. This can be especially important if the other business is a key supplier, customer, or partner.
The Importance of Expert Guidance
Before we close, I want to emphasize an important point: with arbitration, you can override the default dispute resolution process—court—by simply agreeing to it. However, with great opportunity comes great responsibility. The court process has formalities built in to protect the parties, and since arbitration is less formal, you want to be very careful about choosing arbitration to resolve business disputes. After all, a decision against you or your business could mean a big payout to the other party.
I aim to ensure your business thrives. I can advise and counsel you to help you make the best decisions about resolving business disputes with as little impact on your business as possible. I also create and review contracts, including those with arbitration clauses. Finally, I help you put your foundational legal, insurance, financial, and tax systems in place so your business is protected from risk and prepared to resolve disputes before they arrive at the point where arbitration is needed. All this saves you time and money, so you can direct your energy and attention to what you do best: running your business.
The Advisor You Need, No Matter What Happens
As your trusted advisor, I understand the negative impact of conflict on you and your business. That’s why I offer a comprehensive Business Breakthrough Session where we’ll analyze your current business foundations - including protecting your business from the risk of conflict - and develop a plan to address gaps. Together, we’ll ensure that your business is well-equipped to handle anything that happens. With my support, you can confidently engage with third parties, safeguard your brand’s reputation, and focus on what you do best—growing your business.
Contact us today to get started.
This article is a service of Starsia Law, a Personal Family Lawyer® Firm. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Life & Legacy Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love.
The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer® firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.