When negotiating business contracts, the parties and their counsels must anticipate potential disputes that may arise and determine how such disputes will be addressed. Nearly all business contracts include terms for resolving disputes- e.g., choice of law, venue, prevailing party attorney fees… and arbitration. Arbitration is the alternative to court- it’s a private dispute resolution process where the case is tried before an arbitrator that acts as the judge.
Whether to agree to arbitrate is often a highly strategic consideration given the pros and cons of arbitration. Arbitration gets sold as a sleek alternative to court- faster, cheaper, more efficient. However, although we ultimately prevailed, all my recent arbitrations were the opposite.
This article focuses on certain business disputes resulting from a breach of an underlying contract such as contracts in connection with LLC members, shareholders and founders, partnerships and joint ventures, investments, services, supply, licensing, executive agreements, M&A, etc. (collectively, “Business Disputes”). This does not pertain to disputes like consumer claims, medical care, user agreements, etc., where the underlying agreements are not normally negotiated and include arbitration as the default.
Business Contracts / Disputes. The practical reality is that for certain business disputes arbitration can be significantly more costly and disadvantaged than civil court, and the decision to mandate disputes to arbitration becomes narrower. Interestingly, in most cases we recently arbitrated, none of the clients knew the significance of the arbitration clause when they negotiated the contract.
Disadvantages. The primary disadvantages in arbitration for Business Disputes are (1) the potential increased costs, (2) more unpredictable outcome, and (3) finality. Unless managed right, arbitration can look and feel like full-blown civil litigation with the added cost of paying for the “judge” and limited ability to appeal.
Costs. Indeed, the parties often end up recreating court: sprawling discovery, motion practice, depositions, expert battles, and multiple evidentiary hearings. And because the process is contractual, there isn’t always the same built-in set of procedural guardrails that a court imposes (deadlines, standing orders, local rules, meaningful enforcement). It can become an expensive, slow-moving fight with fewer checks on waste. Meanwhile, the fees keep piling up. Arbitrator fees (often split 50/50) can be substantial, and you’re paying them on top of attorney fees.
Outcome. Now add the practical realities- like attorneys, arbitrators are also service providers, making the process more unpredictable due to inherent incentives, or arguably, conflicts of interest. For instance, the longer a matter runs, the more time gets billed, hence, more fees for the arbitrator. Of course, the presumption is that the arbitrator is managing the case costeffectively and in the best interests of the parties; however, the financial incentives are hard to ignore. Relatedly, because reputations matter in the marketplace, there can be subtle pressure to keep both sides “reasonably happy,” especially when repeat players (and their counsel) are in the room. None of this means arbitrators are unethical—just that the incentives in arbitration are different than court and pretending otherwise is unwise.
Finality. Then there’s the part most people don’t appreciate until it’s too latefinality. Arbitration awards are notoriously difficult to overturn. In court, a bad ruling may be appealable; in arbitration, your appellate options are typically narrow and uphill. That finality is sometimes a feature—until it’s your case and the arbitrator gets it wrong, or “splits the baby,” or issues an award that feels more like a compromise than a decision grounded in the contract and the evidence.
Advantages. Confidentiality is the real upside, and it is often an important factor for parties. Civil suits are public records. If the dispute involves sensitive financials, trade secrets, brand issues, reputational risk, or the kind of partner fallout you don’t want aired in public filings, arbitration may be the right call.
The other advantage is arbitration conducted pursuant to negotiated guardrails to facilitate an expert neutral and overall efficiency and costeffectiveness. However, too many arbitration clauses get dropped into contracts reflexively, often by transactional counsel who don’t litigate or spend time evaluating the nuances to determine whether arbitration is necessary.
So what’s the practical takeaway for business owners and deal counsel? Treat the arbitration clause like a real business term—not boilerplate.
Before you sign, ask: Do we truly need confidentiality? Are we willing to pay for it? Do we want an expert decision-maker? If arbitration makes sense, build in guardrails: streamlined discovery (limits on document requests and depositions), tight deadlines, page limits, restrictions on dispositive motions (or clear rules allowing them), a defined hearing window, and thoughtful
carve-outs (especially for injunctive relief—if you need a TRO to stop trade secret misuse or brand confusion, you don’t want to be arguing about whether the arbitrator can move fast enough). Either way, decide on purpose.
In sum, the question isn’t “Is arbitration good or bad?” The question is: for this deal, if a dispute arises, what are we optimizing for—privacy and finality, for instance? If yes, then arbitration makes sense, with specific conditions to maximize control and efficiency and minimize waste and costs. Otherwise, arbitration may have minimal value and likely serious drawbacks.