You signed a contract with an arbitration clause. You did not think about it. The clause was buried on page fourteen, sandwiched between the indemnification provision and the governing law section, and you had other things to worry about -- like closing the deal. Learn more about indemnification clauses.
Now there is a dispute. You want to sue. You call a lawyer. The lawyer reads the agreement and tells you that you cannot go to court. The arbitration clause in your contract requires that every dispute arising out of or relating to the agreement be settled by arbitration. That was the plan. You just did not know it was yours.
Arbitration is a form of alternative dispute resolution (ADR). Unlike mediation -- where a neutral third party helps the parties negotiate but has no power to decide anything -- arbitration puts the outcome in someone else's hands. A dispute resolution clause that requires arbitration means the parties agree to submit their dispute to an arbitrator, a private individual (usually a retired judge or experienced attorney) who hears evidence, considers arguments, and issues a binding decision called an award.
The arbitrator functions like a judge, but outside the court system. There is no jury. The proceedings are private. The rules of evidence are relaxed. And in most cases, the arbitrator's decision is final. There is no meaningful right to appeal.
That last point matters more than people realize. In court, if a judge gets the law wrong, you can appeal. In arbitration, the arbitrator can get the law completely wrong and your options are essentially nonexistent. Courts will only vacate an arbitration award in extreme circumstances -- fraud, corruption, or the arbitrator exceeding their authority. Getting the law wrong is not enough.
There is a distinction between binding and non-binding arbitration. Binding arbitration means the arbitrator's decision is final and enforceable -- a court can enter judgment on the award as if it were a court judgment. Non-binding arbitration means the decision is advisory -- either party can reject it and proceed to litigation. Most commercial arbitration clauses require binding arbitration. Non-binding arbitration is rare in business contracts. Some contracts use a tiered approach: arbitration and mediation in sequence, requiring the parties to attempt mediation first before a demand for arbitration can be filed.
Companies put arbitration clauses in their contracts for several practical reasons, and those reasons are not trivial.
Speed. Litigation takes years. Arbitration typically resolves disputes in months. The arbitration process moves faster because there are no crowded court dockets, fewer procedural hurdles, and limited discovery. For companies that need resolution quickly, this matters.
Cost. In theory, arbitration is cheaper than litigation. Fewer depositions, shorter timelines, simplified procedures. In practice, the cost savings depend heavily on the complexity of the dispute and the arbitration rules governing the proceeding. Simple disputes save money. Complex ones may not.
Privacy. Court proceedings are public. Arbitration proceedings are private. No public filings, no press coverage, no competitor reading your trade secrets in a court docket. For technology companies with sensitive IP, privacy is a significant advantage.
No jury risk. Juries are unpredictable. They can award enormous damages based on emotion rather than contract terms. Arbitrators are professionals who decide based on the agreement and the law. For companies worried about runaway verdicts, eliminating jury risk through an arbitration clause is an intentional strategy.
Finality. Limited appeal rights mean the dispute ends when the arbitrator decides. No years of appellate litigation. No endless motions. The arbitration award is final, and courts enforce it. For businesses that want certainty, finality has real value.
Everything above sounds reasonable. Here is the other side.
Filing fees are expensive. The American Arbitration Association charges filing fees that start at $2,175 for claims under $75,000 and scale up from there. JAMS is similarly expensive. The arbitrator's hourly rate -- often $400 to $800 per hour -- is paid by the parties, not the taxpayer. In court, you pay a filing fee and the judge's salary comes from public funds. In arbitration, you are paying for the entire dispute resolution infrastructure yourself. For smaller disputes, arbitration can cost more than litigation.
Limited discovery. Discovery in arbitration is restricted compared to litigation. That benefits defendants who want to hide information. If you are the party that needs documents, emails, and depositions to prove your case, limited discovery under arbitration rules can be devastating.
No meaningful appeal. Finality is a feature when you win. It is a catastrophe when you lose. If the arbitrator misapplies the law or ignores critical evidence, you are generally stuck with the result. Courts give extraordinary deference to arbitration awards.
Class action waivers. Many arbitration clauses include provisions that waive the right to participate in class actions. This forces every dispute into individual arbitration. For consumers and employees, this eliminates the economic viability of small claims. For companies, this is the entire point.
For startups and SaaS companies, arbitration clauses present a unique set of risks and opportunities.
Mass arbitration. Class action waivers were supposed to protect companies from aggregate litigation. Instead, they created mass arbitration -- thousands of individual arbitration claims filed simultaneously. Each one triggers a separate filing fee. When companies like DoorDash and Intuit faced thousands of individual arbitration demands, the filing fees alone ran into the tens of millions. The arbitration clause that was supposed to save money became the most expensive provision in the agreement.
Consumer arbitration rules. California and other states have specific rules governing consumer arbitration. If your SaaS product serves consumers, your arbitration clause must comply with state-specific requirements on cost allocation, venue, and procedural fairness. An arbitration clause that violates these rules is unenforceable.
B2B arbitration works. Between sophisticated businesses -- startup-to-startup, vendor-to-enterprise -- arbitration makes sense. Both parties understand the tradeoffs. The dispute is usually a contract interpretation issue, not a mass consumer complaint. B2B arbitration clauses with well-chosen arbitration rules and a clear scope are efficient tools for dispute resolution.
A well-drafted arbitration clause addresses the following elements. Miss any of them and you are inviting a challenge to enforceability.
Scope. Define exactly which disputes are covered. "Any dispute arising out of or relating to this agreement" is the standard broad language. Narrower scopes are possible but create litigation over whether a particular claim falls within the arbitration clause.
Arbitration rules. Specify which rules govern the proceeding. The American Arbitration Association (AAA) Commercial Rules, JAMS Comprehensive Arbitration Rules, or the Rules of Arbitration of the International Chamber of Commerce (ICC) are the most common. The International Centre for Dispute Resolution (ICDR), the international division of the AAA, handles cross-border matters. Each body has different procedures, fee schedules, and default provisions. For expedited arbitration of smaller disputes, AAA and JAMS offer streamlined tracks with lower costs. For international arbitration, the ICC Rules or UNCITRAL Arbitration Rules are standard. The arbitration shall be administered by whichever body the clause specifies -- choose carefully, because the rules determine everything from the arbitrator selection process to the timeline.
Seat and place of arbitration. The place of arbitration determines which court has supervisory jurisdiction over the proceeding and which country's arbitration law applies. For domestic disputes, specify a city and state. For international arbitration, the seat of arbitration is a critical strategic choice -- the Court of Arbitration will apply the procedural law of that jurisdiction.
Governing law. The law that governs the substance of the dispute. This can differ from the law governing the arbitration procedure itself. Specify both.
Number of arbitrators. One arbitrator is cheaper and faster. Three arbitrators -- one or more arbitrators appointed by each side, plus a neutral chair -- provide more balanced decision-making for complex, high-value disputes. If you do not specify, the default under most arbitration rules is one arbitrator for smaller claims and three for larger ones.
Cost allocation. Who pays the filing fees, the arbitrator's fees, and attorney's fees? Default rules vary by arbitration body. Specify cost allocation in the clause to avoid surprises.
Confidentiality. Arbitration is private by default, but the arbitration award may not be confidential unless the clause specifically requires it. Add an explicit confidentiality provision if privacy matters to your business.
Vague scope. An arbitration clause that says "disputes may be submitted to arbitration" is permissive, not mandatory. Courts read that language as optional. Use "any controversy or claim arising out of this agreement shall be determined by arbitration" or "shall be resolved by arbitration" for mandatory, effective arbitration. Sample arbitration clauses from AAA and JAMS provide tested language -- start there.
Wrong rules body. Specifying AAA rules for an international arbitration dispute, or ICC rules for a $20,000 contract dispute, creates procedural mismatches and unnecessary expense. Match the arbitration rules to the nature and value of the dispute. Learn more about what to expect from a contract dispute.
Forgetting cost-sharing. If your clause is silent on costs, default rules apply -- and those defaults may require the company to pay all arbitration fees in consumer disputes. Draft cost allocation explicitly.
No carve-outs for IP and injunctive relief. Some disputes need immediate court action. If a party is misappropriating trade secrets or infringing IP, waiting months for an arbitrator to act is not viable. Carve out intellectual property disputes and requests for injunctive or other remedies in aid of arbitration from the clause in a contract so parties can seek emergency court remedies while the arbitration agreement remains in effect for all other claims.
Connecticut courts enforce arbitration clauses under both the Federal Arbitration Act and the Connecticut Uniform Arbitration Act (C.G.S. sections 52-408 through 52-424). The FAA applies to any contract involving interstate commerce, which covers virtually every technology agreement. Connecticut courts follow a strong presumption of arbitrability -- if there is any doubt about whether a dispute falls within the arbitration clause, the court will resolve that doubt in favor of arbitration.
New York is equally pro-arbitration. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards governs international arbitration awards, and New York courts routinely enforce arbitration clauses in commercial agreements. Both states will compel arbitration and stay litigation when a valid arbitration clause covers the dispute.
The exception in both jurisdictions: unconscionable arbitration clauses. If the clause is procedurally or substantively unconscionable -- buried in fine print, imposing all costs on the weaker party, requiring arbitration in an unreasonable location -- courts can refuse to enforce it. Draft fairly and this is not an issue.
If you are signing contracts with arbitration clauses -- and you are, whether you know it or not -- read them. Understand what you are agreeing to before a dispute arises.
If you are drafting contracts, think carefully about whether an arbitration clause serves your interests. For B2B technology agreements, it usually does. For consumer-facing products, the calculus is more complex.
Either way, the arbitration clause is not boilerplate. It is a strategic decision about how your dispute gets resolved, who resolves it, and how much it costs. Treat it like one. An effective arbitration clause in a contract -- with the right scope, the right international arbitration rules or domestic arbitration rules, and proper cost allocation -- protects your business. A bad one creates a trap.
If you need help drafting or reviewing an arbitration clause in a technology agreement, contact Turley Law for a consultation.
The Founder's Playbook: 15 chapters on the legal foundations every business needs. Get Chapter 1 free.
Schedule a free consultation to discuss how this applies to your business.