What follows are our general observations and opinions about arbitration clauses in California business contracts. This is not legal advice, it is not a definitive statement of California law, and every agreement depends on its own terms.
Arbitration clauses arrive in almost every commercial template, and they are usually signed without much thought because they sit near the end with the governing law and notices provisions. That is a mistake. Agreeing to arbitrate changes who decides your dispute, what it costs, how long it takes, what you can find out from the other side, and whether you can appeal a decision you think is wrong.
Our view is that arbitration is genuinely better for some commercial relationships and genuinely worse for others, and that the honest answer depends on what kind of dispute you are realistically likely to have. Anyone who tells you it is simply faster and cheaper is describing a best case, not a rule.
The real trade-offs
Where arbitration tends to help: confidentiality, which matters when the dispute would expose commercially sensitive information or embarrass a business relationship you want to preserve. Choosing a decision-maker with actual expertise in your industry rather than whichever judge is assigned. Avoiding a jury where the facts are technical or the optics are unfavourable. And a degree of scheduling control.
Where it tends to hurt: cost, because you pay the arbitrator and the administering body on top of your own lawyers — and in a three-arbitrator panel that is three sets of fees, often making arbitration more expensive than court for a modest dispute. Limited discovery, which cuts against whoever needs documents from the other side. And the near-absence of meaningful appeal. Our reading is that the grounds for vacating an award are narrow, and an arbitrator’s legal or factual error is generally not among them. A result you consider plainly wrong is usually final.
That last point deserves weight. In court a serious error can be corrected on appeal. In arbitration it usually cannot.
The clause decides more than you think
A clause reading “any dispute shall be resolved by binding arbitration” leaves almost everything unresolved. The provisions worth settling deliberately are:
- Scope. Does it cover only contract claims, or anything “arising out of or relating to” the relationship? Broad language sweeps in tort and statutory claims you may not have contemplated.
- Number of arbitrators. One is materially cheaper; three is more predictable on high-value matters. Some clauses sensibly use a threshold — one arbitrator below a stated amount, three above.
- Rules and administering body. These differ meaningfully in cost and procedure, and some offer expedited tracks for smaller claims.
- Seat. Where the arbitration happens is a real cost and convenience issue, and a clause requiring a small California business to arbitrate on the other side of the country is worth resisting.
- Discovery. Silence usually means very limited discovery. If your likely dispute depends on the other side’s documents, say what you are entitled to.
- Fees. Who pays the arbitrator, and is there a prevailing-party provision?
- Carve-outs. Injunctive relief and small claims are commonly excepted, and it is often sensible to keep the ability to go to court quickly to stop something.
Enforceability and unconscionability
Arbitration agreements are broadly enforceable, and our reading is that both the Federal Arbitration Act and California’s own arbitration statute reflect a policy favouring enforcement. But California courts do apply general contract defences, and unconscionability is the one that comes up.
The analysis generally looks at both procedural unconscionability — how the agreement came about, whether it was presented on a take-it-or-leave-it basis, whether the rules were provided — and substantive unconscionability, meaning terms that are unreasonably one-sided. Both are usually needed, on a sliding scale.
In a negotiated agreement between two businesses with counsel, these challenges rarely succeed. The risk rises where there is a marked imbalance in sophistication or bargaining power, or where the clause is conspicuously lopsided: one side must arbitrate while the other may sue, the drafting party picks the arbitrator, or the costs imposed effectively prevent the weaker party bringing a claim at all.
Practical suggestions
Decide based on the dispute you are actually likely to have. A relationship whose realistic failure mode is a straightforward payment dispute may be better off in court, where a motion can resolve it quickly and cheaply. A relationship where the likely dispute is technical, confidential or reputationally sensitive is a better fit for arbitration.
If you do include a clause, write a real one rather than a single sentence. And make it symmetrical unless there is a specific reason otherwise — a mutual clause is both fairer and far more likely to survive a challenge.
Talk to us
If you are deciding whether to agree to arbitration, or a clause you signed is now being invoked, call us at (310) 556-9692. Contract review and drafting is transactional work, so we handle it on an hourly or flat-fee basis rather than on contingency, and we will give you a cost estimate before we start.
Related reading: our contract review and drafting resources, plus business purchase and sale agreements, LLC operating agreements, and commercial lease negotiation.
This article reflects our own general views and opinions and is offered for information only. It is not legal advice, it is not a definitive statement of California law, and reading it does not create an attorney-client relationship between you and our firm. If an arbitration provision affects an agreement you are in, please speak with a lawyer about your particular contract.
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