Many contracts contain arbitration clauses, which provide that a dispute related to the contract must be resolved through arbitration rather than litigation. Consumers may not realize when their contracts with corporations are controlled by these clauses, and they tend to be unfamiliar with the arbitration process. Sometimes arbitration clauses are very detailed, governing the choice of arbitrator, the location of the arbitration, and the arbitration fee structure.
Arbitration can be mandatory or voluntary, and the decision can be binding or non-binding. Mandatory arbitration means that the parties must use arbitration to resolve any dispute, while voluntary arbitration means that the parties can explore other options for resolving their dispute before going through arbitration. Binding arbitration means that the arbitrator’s decision is final and likely cannot be reviewed by a court unless it involved fraud. By contrast, non-binding arbitration means that either side can reject the outcome and pursue litigation instead. The outcome of non-binding arbitration can become binding, though, if the two sides agree to accept it or fail to pursue litigation within a certain time as provided by the arbitration clause.
Choosing the Arbitrator
For a simple dispute, the parties may retain the services of an independent arbitrator. They can review the specific fees and background of arbitrators whom they find online or in the phone book. However, an arbitration agreement often will designate a certain arbitration agency to resolve the dispute. The main agencies are the American Arbitration Association, the National Arbitration Forum, and JAMS. Fees for arbitration agencies usually consist of a percentage of the amount in dispute, in addition to a case service fee paid at the outset. These arbitrators tend to have a background in the legal profession, although not all of them do.
You can hire your own lawyer to represent you during arbitration if the subject matter of the arbitration is important or if the amount of money involved is significant. Most people do not hire a lawyer for an arbitration that involves only a small amount of money. If more than $100,000 is at stake, each party usually will want to hire a lawyer.
Benefits of Arbitration
Efficiency and cost are two of the main reasons to choose arbitration instead of litigation. Arbitration may resolve a dispute in a few weeks or months, while the same dispute might take years to reach a resolution in court. While arbitration is becoming more sophisticated and thus more costly, especially when parties hire their own lawyers, it remains less expensive than litigation. (However, the cost of initiating arbitration is higher than the cost of filing a lawsuit.) The rules tend to be simpler and more flexible, making them easier for ordinary people to understand. For example, the process of discovery is far less technical and formal.
Arbitration tends to promote respect between the parties, reducing any rancor and sometimes even preserving a productive relationship between them. The outcome of arbitration is often private, as are the proceedings. This can allow each side to protect confidential information, while encouraging them to be candid with each other. However, some people view this privacy as a lack of transparency, which creates a risk that one party may manipulate the proceedings.
Drawbacks of Arbitration
Arbitration clauses sometimes allow a party with greater sophistication or resources to exploit a less sophisticated or wealthy party. Companies often use them as a tactic to discourage consumers from exercising their rights. If you feel that the result of arbitration is unfair or inconsistent with the facts, you may not be able to ask a court to review it unless you can show actual fraud.
A common complaint is that arbitrators and especially arbitration agencies are biased. They may solicit business from companies, which are more likely to retain their services again if the arbitrator produces a favorable result. An arbitrator who is already embedded in an industry may be more sympathetic to an entity in that industry than to a consumer.
As a consumer, you can take certain precautions to protect your rights. You may want to get familiar with the terms of any agreements that you have signed with major companies. If one of these companies changes the terms of the agreement, you should take note of the changes and make sure that you are content with them. If you find that an agreement requires binding arbitration, you can consider looking for an alternative company that does not require it. Or you can consider contacting the company, especially if it is not very large, to see if you can negotiate this provision out of the agreement.