One paragraph near the end of most agreements decides where a fight happens, who hears it, and how much it costs. The entrepreneur says it deserves a real decision.
Read enough commercial agreements and a pattern shows up near the last page. Governing law. Venue. Dispute resolution. The section is usually short, usually copied from somewhere else, and almost never discussed during the negotiation.
Steven Capuano thinks that is backwards. The serial entrepreneur and product inventor, who has spent more than twenty years building companies in consumer products and health and wellness, describes the dispute clause as one of the few terms in a contract that only matters on the worst day of the relationship, which is exactly why it should be chosen on one of the best.
The basic choice
When a business agreement goes wrong, the parties typically end up in one of two places. The first is court, a public process run by a judge under established procedural rules, with appeals available and filings that are generally part of the public record. The second is arbitration, a private process in which one or more arbitrators chosen under the contract hear the dispute and issue a decision that is usually binding and difficult to appeal. The American Arbitration Association and similar bodies administer many of these proceedings under published rules.
Neither option is automatically better. Each trades one set of advantages for another.
What court offers
Court brings structure. Discovery rules give each side tools to obtain evidence from the other. Judges apply precedent. A party that believes a decision was wrong generally has a path to appeal. For a small company facing a much larger counterparty, those protections can matter, because they limit how far a better-funded opponent can tilt the process.
The costs are time, expense, and visibility. Court calendars can stretch for years, and what is filed in a case is often searchable long after the dispute ends.
What arbitration offers
Arbitration is usually faster and more private, and parties can choose an arbitrator with expertise in their industry. For technical disputes over product specifications or licensing royalties, that expertise can save a great deal of explanation.
The tradeoffs are limited discovery, limited appeal, and fees for the arbitrator and administering body that the parties pay directly. A founder who signs an arbitration clause is also, in most cases, giving up the right to take that dispute to court at all. Under the Federal Arbitration Act, courts generally enforce those agreements.
How Capuano approaches it
His approach is to make the choice on purpose, deal by deal. A supply agreement with a manufacturer overseas raises different questions than a licensing deal with a domestic partner or a distribution agreement with a national retailer. Where would enforcement realistically happen? How technical is the likely dispute? How much does privacy matter? Who is likelier to need the protections of a formal court process?
"The clause is going to decide where you stand on the worst day of the deal," Capuano said. "You should know what it says before that day, not after."
He suggests founders ask counsel three things before signing: where a dispute under this agreement would be heard, roughly what it would cost to bring one, and what rights the company gives up under the clause as written. If those answers come back as surprises, the clause is worth negotiating, while there is still something to negotiate with.
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