Litigation is expensive, slow, and public. For many companies, that combination alone is reason enough to include an arbitration clause in their contracts. But arbitration is not a simple fix, and in a corporate context, the clause itself can become the subject of a dispute.
Understanding how arbitration clauses work, where they hold up, and where they do not is essential for any business operating in the U.S.
An Arbitration Clause Redirects Disputes Away From Court.
At its most basic, an arbitration clause is a contractual agreement to resolve disputes outside the court system, before a neutral third party or panel, instead of a judge or jury. In corporate contracts, these clauses appear in:
- Shareholder agreements.
- Employment contracts.
- M&A purchase agreements.
- Joint venture and partnership agreements.
- Commercial vendor contracts.
When a dispute arises, the party that wants to litigate in court often finds itself blocked, sent to arbitration instead, per the terms of the agreement.
The Federal Arbitration Act Governs Most U.S. Arbitration Agreements.
The Federal Arbitration Act (FAA) of 1925 is the foundational statute. It makes arbitration agreements in commercial contracts enforceable as a matter of federal law, and courts are generally required to honor them.
The U.S. Supreme Court has consistently reinforced this. In AT&T Mobility v. Concepcion (2011) and Epic Systems v. Lewis (2018), the Court upheld arbitration clauses even where plaintiffs argued they restricted access to justice.
The FAA’s pro-arbitration policy is well-established. That said, the FAA does not override everything. Arbitration clauses can still be challenged on standard contract grounds, such as fraud, unconscionability, or lack of mutual assent.
Not Every Corporate Dispute Can Be Sent to Arbitration.
Arbitrability has limits. Some disputes are simply not suitable, or not permitted, for arbitration under U.S. law.
Federal statutory claims, including certain securities fraud claims, can be arbitrated, but only if the clause clearly covers them. Ambiguous language often gets interpreted against arbitration for statutory rights.
Notably, the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (2022) prohibits pre-dispute arbitration clauses for sexual harassment and assault claims, a significant carve-out that affects employment contracts across all U.S. companies.
Arbitration Clauses in Shareholder Agreements Are Increasingly Contested.
One of the more active legal debates involves whether corporations can compel shareholder disputes, including derivative suits and fiduciary duty claims, into arbitration. Some companies have attempted to include arbitration clauses in their corporate bylaws.
Courts have split on enforceability. Delaware, which governs most large U.S. corporations, has taken a nuanced position: forum selection bylaws are generally valid, but mandatory arbitration of shareholder claims remains legally uncertain.
In 2023, over 40% of Fortune 500 companies included some form of dispute resolution clause in their shareholder-facing documents, according to the Harvard Law School Forum on Corporate Governance.
What Determines Whether a Clause Holds Up?
A poorly drafted arbitration clause can be struck down entirely, leaving the company worse off than if it had said nothing. Key elements that affect enforceability include the following:
| Element | Why It Matters |
| Scope of disputes covered | Vague language leads to court challenges |
| Choice of arbitral forum | AAA, JAMS, or ICC, each has different rules |
| Seat of arbitration | Determines which procedural law applies |
| Class action waiver | Must be explicit to be enforceable |
| Governing law clause | Should align with the arbitration provision |
According to the American Arbitration Association, corporate arbitration filings increased by 23% between 2019 and 2023, reflecting both broader adoption and growing familiarity with the process.
Confidentiality Is a Major Practical Advantage of Arbitration.
Unlike court proceedings, arbitration is private. No public docket, no published opinions, no press coverage. For disputes involving trade secrets or executive conduct, that privacy has real value.
But confidentiality cuts both ways. It also means limited appeal rights and minimal judicial oversight, outcomes that are difficult to challenge even when the arbitrator is wrong.
Arbitration clauses offer genuine advantages, but only when drafted carefully. A clause that is too broad or too vague can create more problems than the litigation it was designed to avoid.
