Principal Attorney
An arbitration clause can look like a minor provision when a business contract is being negotiated. Its importance often becomes clear only after a serious dispute develops. By signing the agreement, the parties may have already decided that their disagreement will be resolved privately by an arbitrator rather than by a judge or jury.
That choice can affect discovery, costs, confidentiality, scheduling, and the ability to challenge the final decision. Arbitration can be advantageous in some commercial relationships, but businesses should evaluate the actual language of the provision instead of assuming arbitration is automatically faster, cheaper, or preferable to litigation.
What Is an Arbitration Agreement?
An arbitration agreement is a contractual commitment to submit certain disputes to arbitration rather than resolve them through conventional court proceedings. It may exist as a separate agreement, although commercial contracts frequently include arbitration as one provision within a much larger document.
Under Texas Civil Practice and Remedies Code § 171.001, written arbitration agreements are generally valid and enforceable, subject to applicable legal exceptions and defenses. The Federal Arbitration Act, 9 U.S.C. § 2, also governs many arbitration agreements involving interstate commerce.
The scope can vary considerably. One clause may require arbitration only for disputes involving payment or performance, while another may apply broadly to virtually every disagreement arising from the parties’ business relationship.
The agreement can also determine how arbitration will operate. The parties may select an arbitration organization and its procedural rules, establish where proceedings will take place, decide whether one or several arbitrators will hear the dispute, and address how costs will be allocated. These provisions deserve careful review because they establish the rules for a dispute before either party knows what that dispute will involve.
Arbitration Changes the Way a Business Dispute Is Resolved
Imagine a Texas company entering a long-term agreement with an out-of-state supplier. The contract requires binding arbitration in another state under the rules of a designated arbitration provider. Three years later, a multimillion-dollar disagreement develops over the supplier’s performance.
The Texas company cannot simply decide that filing suit in Dallas would be more convenient. If the arbitration provision is valid and covers the dispute, the company may be required to follow the procedure it accepted years earlier.
That can have advantages. Arbitration proceedings are generally private, which may be valuable when a case involves proprietary information, financial records, or sensitive business relationships. The parties may also be able to select an arbitrator with experience in the subject matter rather than presenting a highly technical dispute to a general court.
Arbitration can sometimes provide greater scheduling and procedural flexibility as well. However, a complicated arbitration involving extensive discovery, experts, multiple hearing days, and several arbitrators can still become expensive. Businesses should be cautious about treating arbitration as an inexpensive version of litigation.
The Biggest Tradeoff May Come After the Decision
One of the most significant differences between binding arbitration and traditional litigation involves what happens after a decision is made.
A party that loses in court generally has access to an appellate process, subject to procedural requirements. Judicial review of arbitration awards is considerably narrower. Federal and Texas law establish limited circumstances in which an award may be vacated, and disagreement with an arbitrator’s interpretation of the facts or law ordinarily does not provide the same appellate opportunity available after a trial.
For some businesses, finality is an advantage. Ending a dispute without years of appeals may provide certainty and allow both companies to move forward. For others, the limited ability to challenge a substantial adverse award may outweigh that benefit.
This issue becomes particularly important when a contract involves significant financial exposure. A company should understand the consequences of binding arbitration while negotiating the agreement rather than after an unfavorable award has already been entered.
Not All Arbitration Clauses Create the Same Risk
Whether a business should sign an arbitration agreement depends heavily on what the clause actually says.
Location is one example. Arbitration in Dallas may be relatively convenient for a North Texas company, while a provision requiring proceedings in New York or California could add substantial travel and logistical expenses.
The selection of the arbitrator can matter just as much. A dispute involving complex intellectual property or a specialized commercial transaction may benefit from a decision-maker familiar with that area. The number of arbitrators also affects both the process and expense; a three-arbitrator panel can provide broader perspectives but generally costs more than a single arbitrator.
Discovery provisions deserve similar attention. Restricting depositions and document requests can reduce litigation expense, but limited discovery may become a disadvantage if the information needed to prove a claim is controlled by the opposing party.
Attorney’s fees, confidentiality, emergency relief, and the types of claims subject to arbitration can also alter the practical effect of the agreement. The question is therefore not simply, “Should we agree to arbitration?” It is whether the proposed arbitration process makes sense for this particular business relationship.
Sometimes the Arbitration Agreement Becomes the First Dispute
An arbitration clause does not always prevent litigation. In some cases, it creates an initial legal dispute over where the underlying case belongs.
One party may file a lawsuit while the other asks the court to compel arbitration. They may disagree over whether a valid arbitration agreement was formed, whether the dispute falls within its scope, or whether another contractual provision affects enforcement. Careful drafting can reduce these conflicts. Broad boilerplate language copied from an unrelated contract may create uncertainty when applied to a different transaction years later.
Businesses should also review arbitration provisions alongside the rest of the agreement. A dispute-resolution clause can interact with provisions governing choice of law, venue, termination, confidentiality, indemnification, and attorney’s fees. Reading it in isolation can obscure how those provisions will operate together.
A Dallas business contracts attorney can help evaluate these provisions during negotiations, while a Dallas business litigation attorney can assist when disputes arise over their enforcement.
Making the Decision Before You Sign
For some commercial relationships, arbitration offers meaningful benefits. Privacy may be important, the parties may value a specialized decision-maker, or both sides may prefer a more flexible proceeding. In other transactions, access to broader discovery, a jury trial, or appellate review may be more valuable.
The financial stakes and likely nature of a future dispute should influence that decision. So should the bargaining positions of the parties. An arbitration clause presented as standard language is still a contractual provision with potentially significant consequences.
The American Arbitration Association publishes commercial arbitration rules and resources that businesses can review when an agreement incorporates AAA procedures.
An arbitration agreement is ultimately part of the allocation of risk within a contract. Evaluating that risk while the parties are still negotiating provides considerably more control than addressing it after the business relationship has deteriorated.
Arbitration Agreements and Commercial Disputes in Texas
At Sul Lee Law Firm PLLC, we advise Texas businesses on arbitration agreements, commercial contracts, alternative dispute resolution, and complex business litigation. Our team can review arbitration provisions before an agreement is signed, assist with contract negotiations, and represent businesses when existing agreements require disputes to proceed through arbitration.
Contact our office to discuss an arbitration agreement, contract negotiation, or commercial dispute involving your business.