The Arbitration Clause That Cost a Startup 14 Months

In early 2023, a SaaS startup founder had an urgent request. His ex-co-founder had started threatening to pull access to the core tech stack despite having exited the company a year prior.

The founder assumed his contracts had him covered. They didn’t.

What followed was a 14-month saga, not because of bad intent on either side, but because of one bad clause: a poorly drafted arbitration clause.

Let’s break down how that happened, and how to avoid it.

1. The Clause Looked Fine… Until It Was Needed

The contract simply said: “Any disputes shall be resolved via arbitration under the Arbitration and Conciliation Act, 1996.”

Here’s what was left vague:

1. No venue.

2. No procedural rules

3. No specification of the number of arbitrators.

4. No mention of interim measures.

This vagueness seemed harmless at signing. But when the dispute arose, every missing detail became a battleground.

2. Section 9 Application, But No Clarity

To stop the ex-cofounder from disabling the platform, a Section 9 application for interim relief was rushed. However, here’s the problem:

1. The court wanted clarity on the arbitration clause before granting relief.

2. Opposing counsel argued there was no valid clause to anchor the Section 9 petition.

The hearing adjourned, thrice.

3. Section 11 Delay: Who Appoints the Arbitrator?

Next, we had to file under Section 11 of the Act to appoint an arbitrator.

Since the agreement didn’t specify the procedure for appointment, the court had to step in. That added 5 more months.

A clause that should have triggered fast resolution ended up triggering court delays instead.

4. Timelines Cost Trust and Funding

During those 14 months:

• The founder couldn’t onboard new clients (the IP rights were being contested).

• A potential investor backed out, citing “governance clarity” concerns.

• The startup bled operational time and emotional energy even though it won interim relief in the end.

5. How Do You Draft a Clause That Actually Works?

Here’s a checklist:

1. Seat of Arbitration: Choose a city and specify it.

2. Institution or Ad-hoc? Mention whether it’s under a body like MCIA, SIAC, etc., or an independent panel.

3. Number and Appointment of Arbitrators: One arbitrator? Three? Who picks?

4. Language and Governing Law: Specify if it differs from the contract default.

5. Interim Measures: Explicitly state that either party may seek relief under Section 9.

6. Time-bound Commencement: E.g., “arbitration to be initiated within 30 days of notice.”

6. The Business Cost of Vague Clauses

In founder disputes, time is leverage. The longer it takes to trigger arbitration, the more one side suffers. A vague clause is an invitation for delay. And delay is a silent destroyer of startups.

7. Lessons from the Ground

From what we’ve seen in multiple startup-side arbitrations:

• Legal clarity wins more battles than legal aggression.

• Arbitration isn’t fast unless the contract makes it fast.

• The best clause is one that’s never used because it prevents confusion in the first place.

If you’re building don’t let your contracts sleepwalk into ambiguity. You don’t need complex legalese.

You just need clarity, intention, and a lawyer who’s seen how bad clauses play out. And this especially rings true where there are co-founders or early investors involved.