Behavioral Finance – An Introduction
As investors, we are often perplexed by the behavior of the markets. For instance, we may find a stock to be overvalued. Hence, ideally, the stock should drop in value and become fairly priced. However, in reality, it may keep on increasing in value, and the quantum of overvaluation may increase vastly. Similarly, we may […]
Commercial Banks and Branch Banking
The business model behind commercial banking practice has completely changed over the years. Earlier, commercial banks were heavily dependent upon branch banking. Branches that served corporate customers were thought of as being an asset. As a result, it was common for corporate banks to advertise these branches to prospective clients. However, over the years, the […]
Vulture Funds: The Name Says It All
What Do Vulture Funds Do ? Countries and companies are in turmoil all the time. When entities are close to financial distress, the normal tendency of investors is to flee. Common investors think that no more money can be made when an asset is about to hit rock bottom. This is not the case with […]
Investment Banks and Governments
Governments all over the world regularly engage in high-value financial transactions. They often need the help of experts in order to do so. Since investment banks have a lot of experience in mediating high-value transactions, they are often appointed by the governments to be their advisors on these matters. In this article, we will have […]
Gender Gap in Pension Systems
The gender gap in pension systems around the world is a very real and pressing issue. Numerous studies have been conducted on this matter and almost all of them have concluded that the gender gap is a systematic problem that needs to be addressed by pension funds as well as by pension fund regulators across […]
Entrepreneurs who start up new companies have to deal with a lot of different types of stakeholders. As a result, they have to enter into a wide variety of agreements with these different stakeholders. Over the course of time, it is possible that the entrepreneur and an external party may not agree on some of the points. In such cases, the usual response of any party is to go to court and file litigation. However, this can have several disadvantages and may not be desired by either party. It is for this reason that many start-ups have started including the arbitration clause in their contracts. In this article, we will have a closer look at what arbitration is and how it impacts the various stakeholders.
Arbitration can be considered to be a legal process that is equivalent to filing a case in a court of law. However, instead of government-appointed judges hearing the case, it is heard by an impartial private party. The arbitration process is voluntary. This means that all parties entering into a contract must agree with the arbitration process, the choice of the arbitrator, and the fact that the decision of the arbitrator will be binding.
It is also important to know that the arbitrator need not be a single person. There are full-fledged arbitration companies that have a bench of legal experts from various domains.
The usage of arbitration can be dangerous if the entrepreneur is not careful. This is because they are allowing a certain group of privately appointed judges to take precedence over the courts. However, over time, entrepreneurs have realized that if they follow the best practices and use arbitration, they are as likely to get justice in a private arbitration system as they are to get it in a public court.
These best practices include careful consideration of the arbitration panel being chosen. The entrepreneurs should know of the number of arbitrators who are being chosen, the rules and norms that such arbitrators follow, the language in which the arbitration will take place as well as any waivers to the arbitration process. It is also important to know how much arbitration fee will be charged over the course of the dispute.
The start-up community of any particular region is generally aware of the reputation of the various arbitration organizations which function in that region. As a result, they should conduct a thorough background check and also read the agreement carefully in order to avoid disputes at a later stage.
The arbitration process leads to several small benefits for start-up companies. The details of these benefits have been listed below:
In many developing countries, public courts take a long time to respond to any dispute. Hence, in such cases, the services of the arbitrator can prove to be very efficient. The early stage of any business is characterized by extensive decision-making. Hence, if arbitrators help to quickly end the dispute, they allow entrepreneurs to spend more time making important decisions about other aspects of the business.
On the other hand, private arbitrators tend to have domain experts on board. These domain experts are well equipped with the knowledge required to do justice in such cases. The availability of domain experts, as well as their effective decision-making process, is the main reason why many entrepreneurs prefer to use arbitration.
The bottom line is that legal issues can drain any start-up company of its vital resources. There are many companies that have spent a lot of time and money in fighting these litigations.
Over a period of time, many of these start-ups have realized that arbitration is a more efficient and cost-effective mechanism to solve business disputes. As a result, investors and founders nowadays generally enter the arbitration clause in the funding agreement. This means that instead of approaching the courts, they approach the arbitrators if any business dispute arises.
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