Almost every adult has signed a contract with a clause requiring arbitration in the event the parties are unable to resolve a conflict relating to the contracted goods or services. These mandatory arbitration agreements often appear in contracts relating to employment, credit cards, car rentals, contractor services, phone services, car loans, home-building, and investment accounts. An overwhelming majority of the time, companies include forced arbitration clauses in their contracts to gain an advantage over individuals and consumers.
Unfair advantages for companies
Businesses do not include arbitration clauses for the benefit of consumers and individuals. Most of the time, arbitration clauses are used to give big businesses and shady companies an unfair advantage over the other party to the contract. There are several reasons that companies prefer arbitration agreements.
Increase Consumer’s Expense
Arbitration increases the expenses associated with bringing litigation against the company. The consumer typically has to pay half of the arbitrator’s fees which often are several hundred dollars per hour or more. If the consumer is allowed to file a lawsuit in a state or federal court, the consumer does not have to pay the judge to oversee the case. The loser typically has to reimburse the winner the costs associated with the arbitrator, but many consumers cannot afford to pay half the fees upfront. Moreover, contingency fee attorneys’ have an increased risk of losing money in arbitration, so arbitration clauses also prohibit many attorneys from representing clients.
Another common prohibition in arbitration clauses is the prohibition against class actions and multiparty lawsuits. This prevents a group of individuals or consumers from filing an arbitration case jointly to spread the costs across the group and make the arbitration more affordable. Group actions would also decrease the costs for the company of defending the arbitration, but the company does not care about decreasing the arbitration costs. The purpose of the class action prohibition is to deter individuals from filing arbitrations by making it too cost-prohibitive for the wronged individual or consumer.
Arbitrators Often Biased in Favor of Big Business
In arbitration, an arbitrator, who is usually an attorney or expert in a specific field, reviews the evidence and rules in favor of one party or the other like a judge or jury. The arbitrator is chosen by the parties involved in the arbitration. Instead of having a jury of peers decides the merits of the case, a paid arbitrator fulfills that role. This scenario creates an inherent bias in favor of the company. The arbitrator makes money when he is chosen. It is highly unlikely that a consumer or individual will be involved in a second arbitration, so the arbitrator will likely not receive repeat business from the individual. However, it is very likely that the company will have more arbitrations in the future. If the arbitrator rules against the company, it is unlikely the company will want to hire him again as an arbitrator. Thus, it serves the arbitrator’s own financial interests to rule in favor of the big company.
No Appeal
If a person obtains an unfavorable judgment or verdict from a judge or jury that is contrary to the law, the person can file an appeal and have the unfavorable ruling overturned by a higher court. Arbitrations cannot be appealed. This allows an arbitrator to make a ruling that is contrary to the facts and the law without any recourse. The loser cannot appeal the arbitration to a higher court. This of course increases the inherent bias in favor of the big company because the arbitrator will not be overruled for deciding a case unfairly.
May Cost More to Arbitrate Than Amount in Controversy
Some arbitration clauses do not require the loser to pay the other side’s arbitration costs. Some companies have this language in the contract to prohibit the consumer, employee, or individual from obtaining justice for small claims. Arbitration can easily cost thousands of dollars if not more. Thus, if an individual has been shortchanged a few hundred dollars or even a thousand dollars, he or she has no recourse. It will cost more to arbitrate than what the individual will recover even if he or she wins. The individual would end up spending more money than what he or she would recover even if he or she won the arbitration. Some of the most unethical companies prefer this language.
How to protect yourself
Do not agree to forced arbitration. The simplest way to accept a contract without agreeing to the forced arbitration clause is to mark out the arbitration section of the contract with an X and place your initials next to the crossed-out provision. Often, the person collecting the contract for the company will not object to the change. Keep a copy of the contract with the changes for your own records. If the representative objects to the changes, discuss your concerns. If the company refuses to accept the contract with your edits, determine for yourself whether it is better to agree or give your business to a competitor.