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Arbitration tips for startups

Long-term litigation can be problematic for any business. However, the implications can be particularly detrimental to new businesses and startups. It can be frustrating if the premise of the dispute is a class action lawsuit out of left field or a frivolous lawsuit. Moreover, even the threat of these disputes can cause an entrepreneur to fold up shop before they officially open for business.

One solution for new businesses or start-ups is to explore arbitration. This is one way to avoid the expense of a long battle and minimize the damage to the reputation of the new company and its owners.

What is arbitration?

Arbitration is an alternate dispute resolution done outside the courts. It takes many forms so the parties must agree to the format. The complaining parties will usually send notice to the opposing party of their intent to arbitrate and outline their reasons for the dispute. The other party is given time to respond, which may be followed by choosing arbitrators and the format of the hearing as well as signing a contract to that effect. The format may already be determined based on a previous business contract that is the source of the dispute.

4 things to consider

Arbitration can be useful in a variety of ways, including:

Great for employment disagreements or contracts: It can be used to effectively address these two major sticking points in a young business. It can also set the tone of how a business resolves matters.

The importance of privacy: Reputations of new companies are particularly fragile. While people will tolerate “working out of the kinks,” it is best not to broadcast too many of a business’s early challenges.

It forestalls class action suits: These can be much more expensive than regular lawsuits because of the number of involved parties. More complexity usually means higher costs.

Craft a strong agreement: The general rules of thumb for an enforceable agreement are for arbitration to be broadly applicable, contain the format, and list those who would be involved. Strategies can be refined to fit the needs of the dispute.

Not all agreements are enforceable

It is important to remember that not all arbitration clauses are enforceable. Part of the discussion with an attorney will involve looking at the dispute and determining its’ validity. The attorney can then provide legal guidance on how to proceed (or not) to achieve the best possible results.

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