This blog entry will first provide some basic reasons why businesses should use arbitration, and then provide specific reasons why US startups should locate their arbitration outside their country using an online arbitration process.
First the reasons for arbitration:
Court cases take time, even for disputes that are relatively simple or over small amounts of money. You should use an arbitration process with rules from an institution that allow you to flexibly resolve disputes faster. If your arbitration is managed properly, you could get results in a third of the time required in court proceedings.
Litigation in court can be extraordinarily expensive, even in the preparation until the day before you get to court. This is over and above the time you sit waiting for money owed to you to come in. This high cost adds unnecessary stress to your business life and may scare you away from actually making claims. Your arbitration, properly designed or using good institutional rules, could be streamlined to avoid costly courtroom-style procedures. A properly designed arbitration process will prevent you getting muscled out by a party that is much richer than you.
You can decide where your arbitration will be conducted, if you have the negotiating power to be the deal-maker rather than the deal-taker in a contract. Better yet, you can use a forum like the International Expedited Arbitration Centre (ieac.online) and fight your case from your own country or place of business, right from your desk. In that scenario, you can submit documents in an online process and avoid paying for expensive lawyers for expensive court proceedings in foreign countries.
If your arbitration process allows both parties the equal opportunity to state their case and is generally run fairly, your arbitration will result in an award that is final. The dispute doesn’t get dragged through courts with endless appeals, drawing out the dispute and costs associated with what often turns into an ego battle.
The details of your dispute remain confidential during and after the arbitration process. Many institutional arbitration rules, like the IEAC, explicitly require confidentiality. You can also specify it in your contract. This is something you cannot do about a court process. Confidentiality may be vital if you are worried about the reputation of your business.
Your arbitration award will be, if it satisfies the basic requirements of the New York Convention, unlike a court decision, immediately portable internationally, and much more so than a court decision. Thus if the other side is sitting in China, England, or Peru, you have a decision that you can start enforcement proceedings with in that country or any NY Convention country immediately or at the moment of your choosing. This is much better and easier than the battle you will have to fight to have a local court judgment recognised and executed in that same country.
If you are a startup (or a company of any size) in the US, you should use a foreign seated arbitration because of the way judicial power is distributed in the US. Generally speaking the US Federal legislation covering arbitration is the most efficient and supportive of arbitration. Arbitration legislation can vary across states. Courts in states like California have often been hostile to arbitration. So if you are a company in the US that is dealing with another US company, one way to reduce unpredictability and ensure your arbitration process isn’t negated by court battles in your state or the other side’s state, is to make sure you are covered by the Federal arbitration legislation. One way to do that is to have your arbitration award award a foreign one, i.e. have it “seated” outside the US by a foreign institution, This doesn’t mean you have to do your arbitration outside the US. It just means the award should be issued outside the US by that institution. You could achieve the same result by doing an online IEAC arbitration, and getting a Paris seated arbitration award in your hands, in Palo Alto or St. Louis or wherever else. That will mean when you decide to enforce you will be covered by the Federal Arbitration Act and the enforcement process may be less bumpy.
[One final and important comment, the vast majority of arbitration awards are voluntarily complied with, without needing to go to court.]
This blog post has highlighted various positive aspects of arbitration, i.e. that it can be fast, inexpensive, confidential, “final”, internationally recognised, and finally potentially more convenient for your domestic agreements, especially if you an US company. Consider using an online process like the IEAC (ieac.online) and switch your jurisdiction reference to courts in your contracts only if you really need to. If you have questions, I’ll be glad to help.