Start-ups and Arbitration

Entrepreneurs who start up new companies have to deal with a lot of different types of stakeholders. As a result, they have to enter into a wide variety of agreements with these different stakeholders. Over the course of time, it is possible that the entrepreneur and an external party may not agree on some of the points. In such cases, the usual response of any party is to go to court and file litigation. However, this can have several disadvantages and may not be desired by either party. It is for this reason that many start-ups have started including the arbitration clause in their contracts. In this article, we will have a closer look at what arbitration is and how it impacts the various stakeholders.

What is Arbitration?

Arbitration can be considered to be a legal process that is equivalent to filing a case in a court of law. However, instead of government-appointed judges hearing the case, it is heard by an impartial private party. The arbitration process is voluntary. This means that all parties entering into a contract must agree with the arbitration process, the choice of the arbitrator, and the fact that the decision of the arbitrator will be binding.

It is also important to know that the arbitrator need not be a single person. There are full-fledged arbitration companies that have a bench of legal experts from various domains.

How Effective Arbitration Works?

The usage of arbitration can be dangerous if the entrepreneur is not careful. This is because they are allowing a certain group of privately appointed judges to take precedence over the courts. However, over time, entrepreneurs have realized that if they follow the best practices and use arbitration, they are as likely to get justice in a private arbitration system as they are to get it in a public court.

These best practices include careful consideration of the arbitration panel being chosen. The entrepreneurs should know of the number of arbitrators who are being chosen, the rules and norms that such arbitrators follow, the language in which the arbitration will take place as well as any waivers to the arbitration process. It is also important to know how much arbitration fee will be charged over the course of the dispute.

The start-up community of any particular region is generally aware of the reputation of the various arbitration organizations which function in that region. As a result, they should conduct a thorough background check and also read the agreement carefully in order to avoid disputes at a later stage.

Benefits of Arbitration Agreement

The arbitration process leads to several small benefits for start-up companies. The details of these benefits have been listed below:

  • Time Limited: The first and most important factor is that arbitration agreements tend to be limited by time. This means that the arbitrators are bound by law to carefully consider the matter and give their decision within a specified period of time. On the other hand, public courts are under no such obligations.

    In many developing countries, public courts take a long time to respond to any dispute. Hence, in such cases, the services of the arbitrator can prove to be very efficient. The early stage of any business is characterized by extensive decision-making. Hence, if arbitrators help to quickly end the dispute, they allow entrepreneurs to spend more time making important decisions about other aspects of the business.

  • Domain Experts: Many start-up companies operate in highly technical domains. For instance, it is common for start-up companies to have products and services related to artificial intelligence and machine learning. Now, the public system of courts is not so advanced that their judges may understand the details of these complex technologies.

    On the other hand, private arbitrators tend to have domain experts on board. These domain experts are well equipped with the knowledge required to do justice in such cases. The availability of domain experts, as well as their effective decision-making process, is the main reason why many entrepreneurs prefer to use arbitration.

  • Confidentiality: Last but not the least, litigation can severely damage the reputation of a start-up firm. Information about public litigations is publicly available. As such, it can be used by competitors to create a negative perception of the company. However, when it comes to arbitration, all parties can choose to keep the information private as well as confidential. This helps the company avoid negative publicity and scrutiny that accompany any business dispute.

The bottom line is that legal issues can drain any start-up company of its vital resources. There are many companies that have spent a lot of time and money in fighting these litigations.

Over a period of time, many of these start-ups have realized that arbitration is a more efficient and cost-effective mechanism to solve business disputes. As a result, investors and founders nowadays generally enter the arbitration clause in the funding agreement. This means that instead of approaching the courts, they approach the arbitrators if any business dispute arises.

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