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Traditional Bonds vs. Islamic Bonds Called “Sukuk”
The word Sukuk is an Arabic word which means certificate. These are certificates which are offered by corporations and governments which follow Islamic principles. For instance, Saudi Arabia has issued a new tranche of Sukuk in the year 2017. This was done to provide medium-term financing to the government to meet its debt obligations. The […]
Financial Troubles in the Fracking Industry
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Conditional Pass-Through Covered Bond
In one of the previous articles, we studied about covered bonds. We discussed how covered bonds are considered to be safer as compared to asset-backed securities. We also explained how having double recourse makes covered bonds virtually risk-free and gives investors the confidence they require to invest their money even if they end up getting […]
The Role of Government in Financial Systems
In the previous articles, we have already established that the financial system of any country is the key to its economic prosperity. It is for this reason that these financial systems need to be appropriately maintained. The government is the party that is most suited to this maintenance of financial systems. However, too much government […]
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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