Arbitration vs. Court: Understanding the Best Path for Business Disputes

Why Should Business Owners Consider Arbitration vs. Court?

Attorney Colleen McKnight, founder of McKnight Law, emphasized that deciding whether disputes should be resolved in court or through arbitration is one of the most important contract considerations for business owners. Many companies began including arbitration clauses in contracts over a decade ago under the belief that arbitration was faster, less expensive, and more private. However, trends have shifted, and today business owners must carefully weigh whether arbitration truly benefits their situation.

Colleen explained that choosing the battleground for a dispute is a strategic decision. Businesses often have the option to decide between arbitration and the courts when drafting contracts, and that choice can significantly affect the outcome of any future legal battle.

What Is Arbitration and How Does It Work?

Arbitration functions like a private court. Instead of appearing before a judge who is appointed or elected, both parties select an arbitrator, or sometimes a panel of three arbitrators. The chosen arbitrators operate under their own rules, which can differ from federal or state court rules. Importantly, arbitration is private, unlike the public nature of the court system required by the Constitution.

This privacy can appeal to companies, particularly when dealing with sensitive claims such as sexual harassment or employee disputes. By requiring arbitration, businesses can resolve conflicts outside of public view. However, Colleen cautioned that while arbitration is often promoted as faster and less costly, in her experience it does not always save money or time. Discovery—the most expensive part of litigation—still takes place in arbitration, and flexibility in rules can either help or hinder a party depending on the case.

Why Do Employers and Companies Favor Arbitration Clauses?

Many employers insert arbitration clauses in employment contracts and handbooks, requiring disputes to be resolved privately rather than in court. These clauses can reduce public exposure for companies, preventing sensitive information from becoming accessible to other employees or the general public.

Colleen noted that in most arbitration agreements, costs are split between the parties. While this works in business-to-business disputes, it can burden employees or consumers who lack resources to pay for arbitration. To address this, major arbitration groups like AAA and JAMS have implemented adjustments in cases involving consumers and employees.

Is Arbitration a Good Choice for Small Businesses?

Colleen made clear that arbitration is not always a good option for small businesses. In urgent matters, such as obtaining a temporary restraining order when an employee has stolen trade secrets, businesses need quick access to the courts. In Texas, for example, a restraining order can be obtained the same day, while arbitration takes longer to initiate.

While arbitration may offer privacy and the opportunity to select arbitrators, Colleen stressed that small businesses are often better served by the court system, where they can act quickly to protect their interests.

What Are the Biggest Misconceptions About Arbitration?

One of the most common misconceptions, according to Colleen, is that arbitration is always faster and less expensive. In reality, arbitration can be equally costly due to discovery and extended deadlines allowed by arbitrators.

Another risk is that arbitrators, who are paid and want to be chosen again for future cases, may “split the baby.” This means that even if one party should win outright, arbitrators often award partial victories to both sides, leaving everyone dissatisfied. Compounding this issue is the fact that arbitration rulings are final, with no option for appeal.

Can Arbitration Clauses Be Negotiated or Removed?

The ability to negotiate arbitration provisions depends largely on the context. For consumer agreements, such as terms and conditions when purchasing devices or signing up for digital services, there is usually no room for negotiation. These “click-through” agreements typically require arbitration and are non-negotiable.

However, in employment contracts or business-to-business agreements, there may be opportunities to push back. If the parties have equal leverage, one side may successfully refuse an arbitration clause. On the other hand, when a smaller company contracts with a large corporation, the smaller party may have no choice but to accept arbitration terms if they want the business relationship.

How Do Courts Enforce Arbitration Clauses?

In most states, including Texas, courts enforce arbitration clauses strictly. If the parties agreed to arbitration in a contract, judges typically send the dispute to arbitration. There are limited exceptions, such as laws protecting military veterans under USERRA or other statutory protections that prevent forced arbitration.

Colleen also noted that sometimes plaintiffs strategically file cases in court before arbitration can be compelled. In high-profile situations, companies may face public scrutiny for attempting to force arbitration, which can influence how disputes play out in the public eye.

When Might Businesses Prefer a Public Trial Over Arbitration?

Although many companies initially seek privacy, there are times when a public trial serves a business better. If a company knows it acted properly, litigating in court can allow the public to see the full story. Colleen referenced recent high-profile cases where initial claims painted a damaging picture, but the defenses revealed a much different narrative. In arbitration, only the initial allegations would be known, leaving the company unable to publicly clear its name.

What Advice Does Colleen McKnight Give on Arbitration Clauses?

Colleen advised that while she is comfortable handling arbitration, she does not generally recommend mandatory arbitration clauses for clients. She emphasized the risks of no appeals, the tendency of arbitrators to compromise unfairly, and the lack of accountability in the system.

Her preference is often to preserve the right to a jury trial. Juries, while unpredictable, frequently deliver fair outcomes, and their decisions can be appealed if necessary. For business owners, the decision to include or exclude arbitration clauses should always be weighed carefully as part of a broader legal strategy.

Final Thoughts on Choosing Between Arbitration and Court

Ultimately, Colleen encouraged business owners to treat the choice between arbitration and court as a business decision. Each option carries pros and cons, and the right answer depends on the company’s goals, leverage, and the types of disputes they are most likely to face. For small businesses, the court system often provides faster and more effective protection, while larger companies may value the privacy of arbitration.

Regardless of the path chosen, Colleen emphasized the importance of understanding exactly what arbitration entails and ensuring that business contracts reflect the strategy that best supports long-term success.