Arbitration Agreements: What Businesses Need to Know Before Signing

If you've ever signed a vendor contract, employment agreement, or commercial lease, there's a good chance you've agreed to arbitrate any disputes — possibly without fully understanding what that means. Arbitration clauses are nearly ubiquitous in business contracts today, and yet they remain widely misunderstood.

Here's what business owners and executives need to know.

What is arbitration?

Arbitration is a private, binding method of resolving disputes outside of court. Like litigation, it involves attorneys, an exchange of information, and a hearing where each side presents its case. Unlike litigation, it takes place in a conference room rather than a courtroom, and the decision-maker — the arbitrator — is typically a lawyer, retired judge, or industry expert rather than a judge or jury. Most arbitrations are governed by rules set by organizations like the American Arbitration Association (AAA) or JAMS.

The key word is binding. Once an arbitrator rules, that decision is final. There is no appeal.

The case for arbitration

For businesses, arbitration offers real advantages. It is generally faster and less expensive than litigation. It is confidential — disputes and outcomes don't become public court records. And it allows parties to select a decision-maker with relevant industry knowledge, which can matter enormously in technical or specialized disputes.

The risks of arbitration

Arbitration also comes with meaningful trade-offs. The limited discovery process — the pre-hearing exchange of documents and information — can put you at a disadvantage if the other side holds most of the relevant evidence. There is no jury, which can cut either way depending on your case. And because the decision is binding, a bad outcome is very difficult to reverse.

Perhaps most importantly, arbitration clauses are often drafted by the party with the stronger bargaining position — and they can be one-sided. Provisions that limit your remedies, restrict your choice of arbitrator, or require arbitration in an inconvenient forum can significantly undermine your position before a dispute ever begins.

What to do before you sign

Read the arbitration clause. If it looks one-sided — and many are — negotiate it. At a minimum, ensure the agreement gives both parties equal say in selecting the arbitrator and doesn't limit the remedies available to you.

Whether you're incorporating arbitration into your own contracts or reviewing an agreement that's been put in front of you, the Diefenbach Group can help you understand what you're agreeing to and what it means for your business.