Binding Mandatory Arbitration
Frequently Asked Questions
By Remar Sutton & Associates 01-05
Arbitration is an alternative method of resolving disputes in which
two parties present their individual sides of a complaint to an arbitrator
or panel of arbitrators. The arbitrator, who is supposed to be neutral,
then weighs the facts and arguments of both parties and decides the
dispute. Arbitration may be voluntary or mandatory.
is voluntary arbitration?
In voluntary arbitration, both sides in the dispute voluntarily agree
to submit their disagreement to arbitration after it arises and after
they have an opportunity to investigate their best options for resolving
is binding mandatory arbitration?
In binding mandatory arbitration, a company requires a consumer to agree
to submit any dispute that may arise to binding arbitration prior to
completing a transaction with the company. The consumer is required
to waive their right to sue, to participate in a class action lawsuit,
or to appeal.
these clauses easy to find in the paperwork?
Generally not! Some companies print them in boxes, and a few have you
sign a separate sheet of paper which contains the clause. But many companies
simply make the clauses an extra paragraph of fine print in their contracts.
“Binding Mandatory Arbitration” always the name of the clause?
Definitely not! Some companies call these clauses “Dispute Resolution
Mechanism” and other equally hard-to-understand names.
wrong with arbitration?
Nothing, if its “voluntary” arbitration! In fact, voluntary
arbitration can be a great thing in preventing lawsuits and alleviating
backlogs in the judicial system. In fact, you always have the right
to arbitrate. But you never want to give away the right to sue if arbitration
does not work. Companies want you to give away that right.
companies use binding mandatory arbitration in their own disputes with
No, most refuse to use binding mandatory arbitration in their own
business dealings. As a matter of fact, car dealers were so afraid
of mandatory arbitration for their own disagreements that they spent
millions lobbying Congressmen and Senators to pass a federal law that
prohibits automobile manufacturers from requiring binding mandatory
arbitration in disputes related to dealership franchise clauses.
The law passed in 2002.
are so many consumer groups opposing mandatory arbitration in automotive
Many mandatory binding arbitration clauses
are written to protect the dealer. Here are problems and dangers noted
by consumer advocates.
often unaware they've agreed to binding arbitration. Whether
the mandatory binding arbitration agreement is tucked in a paragraph
of fine print or provided as a separate form, dealerships often
don't mention it until the consumer is ready to sign and take the
new vehicle home. A few dealers may "forget" to mention
the arbitration requirement at all. These tactics deprive consumers
of their right to make an informed decision.
arbitration severely limits consumer options for resolving a dispute.
Before any problem arises, you lock yourself into only one option—binding
arbitration—for resolving all future disputes or problems.
The contract typically also names the arbitration company that must
arbitration clauses generally bind the consumer—not the company.
The way most mandatory arbitration clauses are written, the seller
retains its rights to take any complaint to court while the consumer
can only initiate arbitration.
not follow clear, well-established, consistent rules and procedures
such as those required for litigation in the court system. For
example, arbitrators aren't required to follow procedures that enable
one side in a dispute to request information from the other (what
the courts call "discovery"). The result is that consumers,
who usually have limited resources, may have difficulty getting
information needed to support their claims. In addition, nothing
absolutely requires arbitrators to take the law and legal precedent
into account in making their decisions although they are supposed
to do so. Most decisions cannot be appealed, and there are generally
no review bodies or other oversight to ensure that arbitrators follow
fair procedure or the law.
The seller generally
picks the arbitration company—"the judge."
In theory, both parties agree to the selection of a neutral, independent
arbitrator. In reality, the seller designates the arbitration company
in the contract. This situation can definitely affect the impartiality
of the arbitrator. Studies show that any time one company depends
on another company for a large percentage of their business livelihood,
some systematic bias in favor of that company may develop.
arbitration frequently costs more than taking a case to court.
One of the benefits usually claimed for binding arbitration is that
it costs less than litigation. Frequently this is not true. In many
cases, for instance, a consumer may have to pay a large fee simply
to initiate the arbitration process. This can deter a consumer from
even bringing a complaint. Or on a small claim total fees for arbitration
can easily exceed the amount you might be awarded if you win the
dispute. (For details see "The
Costs of Arbitration," prepared by Public Citizen's Congress
companies require mandatory binding arbitration even with cash purchases?
there companies that don't require mandatory arbitration clauses?
Yes. There are plenty of good businesses that refuse to require mandatory
binding arbitration. These are usually the companies with the fewest
can I do about the problem?
Don't deal with any companies that require a mandatory binding arbitration
clause. Before spending time with
the seller—whether in person or online—ask the seller if
they require a mandatory binding arbitration clause.
If the seller does require an clause,
tell the seller you won't buy from them and why.
If a seller requires that you sign
a mandatory binding arbitration clause,
refuse to sign it. Stick with your decision. Be prepared to leave without
completing the purchase.
The following Arbitration
Q&A from Public Citizen's Congress Watch provides answers
to questions such as: Isn't arbitration a cheaper alternative than filing
suit in court? Why do businesses use arbitration clauses? And What are
the differences between a judge and a private arbitrator hearing a case?