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Indiana Department of Financial Institutions

DFI > Education > Education Information > Credit Information > Credit Problem Help > Right to Sue Diminishing Right to Sue Diminishing

Companies are turning to mandatory arbitration in hopes of resolving disputes more quickly and less expensively than in the courts. But lawyers and other experts say that for the consumer, arbitration can cost more, with fees that could run into thousands of dollars. Arbitration also permits less evidence-gathering that can help win a case, usually doesn't allow for appeals and may be less likely to result in a victory.

Arbitration clauses in contracts have increased manyfold over the last three years. Driving this trend is a series of recent court decisions that favor arbitration to resolve disputes without clogging court dockets. Arbitration clauses can involve tremendous perils for consumers. Among the risks you face are:

  • Ambiguous procedures. Arbitration operates under a set of rules vastly different from those governing a jury trial. The process may not permit one party to the dispute to gather information from the opposing side, so consumers may have trouble getting facts they need to support their claim. And while arbitrators must apply statutes or follow the precedents of case law, their judgments are generally final and not subject to court review.
  • No bargain. Binding arbitration is touted as a low-cost way to get justice, but it can end up costlier than taking a case to court. Consumer may have to pay for the arbitrator's time, which can run $300 or more per hour - effectively ruling out arbitration's usefulness in cases involving small claims. Even when the arbitrator decides in favor of the consumer, awards are often limited to simple restitution for the amount of the loss.
  • Defendants pick the "judge." In most instances when you enter into a contract containing a mandatory arbitration clause, you are agreeing to use an arbitration firm named by the company whose products or services you are buying. In the event of a dispute requiring the firm's services, both parties select an arbitrator from a list provided by the arbitration firm. But in some cases, it's the firm itself that chooses. Because that firm can have a financial stake in maintaining good relations with the companies that retain it, critics say, consumers are placed at an unfair disadvantage. And because the arbitrator's decision usually isn't made public, people who bring a similar complaint against a company will not be able to find out how other consumers fared.

The growing use of mandatory arbitration clauses is beginning to attract the attention of regulators at the Federal Reserve Board and Federal Trade Commission, who fear that consumers may be losing significant rights without realizing it. The Federal Reserve Board is looking carefully at the use of arbitration clauses in all consumer credit agreements, including mortgages and car loans, to make sure "consumers are not being deprived of their rights."

Clauses Obscure

The problem is that many consumers agree to mandatory arbitration without knowing it. The clauses may be buried in the pile of documents a consumer is asked to sign quickly, such as during a real estate settlement or tacked onto the back of a sales receipt.

A growing number of companies - among them banks, computer makers, insurance firms, and car dealers - that are rewriting the fine print of their contracts and sales agreements require that consumers agree, in advance, to give up their right to sue. Such clauses also bar class-action lawsuits.

Many credit card companies, large and small, also are turning to arbitration. First USA Bank, the largest issuer of Visa cards with 58 million customers, began requiring mandatory arbitration in 1997. American Express customers, by using their card after June 1, 1999, will give up their right to sue the company.

Cost of Arbitration can Sometimes be Higher

To deter frivolous complaints, the cost of arbitration can sometimes be significantly higher than court fees, making it financially impossible for some consumers to seek relief. However in the case of Williams v. Aetna Finance (83 Ohio St. 3d 464; 700 N.E. 2d 859, 11/4/98), the Supreme Court of Ohio struck down a clause which required a consumer to pay large fees simply to advance a case to arbitration. Citing a 1993 decision against ITT Finance Co., the court stated that "[i]n a dispute over a loan of $2,000 it would scarcely make sense to spend a minimum of $850 just to obtain a participatory hearing." The Williams case involved a "pitchman" who was paid referral fees to bring homeowners to a finance company for expensive home equity loans.

What is Arbitration?

Arbitration is the referral of a dispute to one or more impartial persons for final and binding determination. It is designed to be private, informal, quick, practical, and economical. Parties can exercise additional control over the arbitration process by adding specific provisions to their contract's arbitration clause or, when a dispute arises, by modifying certain of the arbitration rules to suit a particular dispute. Stipulations may be made regarding confidentiality of proprietary information, evidence, locale, the number of arbitrators, and issues subject to arbitration, as examples. The parties may also provide for expedited arbitration procedures, including expedited rendering of the award, if they anticipate a need for hearings to be scheduled on short notice.

An important feature of arbitration is its informality. Under the standard rules, the procedure is relatively simple: legal rules of evidence are not applicable; there is no motion practice or court conference; there is no requirement for transcripts of the proceedings or for written opinions of the arbitrators. Although there is no formal discovery process, the rules allow the arbitrator to require production of relevant documents, the deposition of factual witnesses, and an exchange of reports of expert witnesses. The standard rules are flexible and may be varied by mutual agreement of the parties.

The fact that the arbitrators are trained and have professional expertise is also important. Arbitrators are selected for specific cases because of their knowledge of the subject matter. Based on that experience, arbitrators can render an award grounded on thoughtful and thorough analysis.

Most parties provide for arbitration of disputes because they are seeking a final and binding resolution of their business conflicts. Court intervention and review are limited by applicable state or federal arbitration laws; award enforcement is facilitated by those same laws.

Another important advantage of arbitration is that it is designed to be private, having no public record of the dispute or of the facts presented in resolving the dispute.

What are the Benefits of Arbitration?

  • Confidentiality. Arbitration is a private process. There is no public record of the proceedings.
  • Limited Discovery. Extensive discovery is avoided. Arbitrators arrange for limited exchange of documents, witness lists, and depositions appropriate to the particular dispute.
  • Speed. There is no docket or backlog in arbitration. Hearings are scheduled as soon as the parties and the arbitrator have dates available.
  • Expert Neutrals. The arbitrators have expertise in the subject matter in dispute, as well as training in the arbitration process.
  • Cost Savings. Because of the limited discovery and informal hearing procedures, as well as the expedited nature of the process, the parties save on legal fees and transactional costs.
  • Preservation of Business Relationships. In most instances, litigation between professionals and their clients destroys the working relationship. Arbitration is less adversarial and, because of its informal nature, it is more likely that the parties will be able to continue their business relationship.

Parties may arbitrate disputes either by inserting a future-disputes clause into a contract or by submitting an existing dispute to arbitration.

Who are the Mediators and the Arbitrators?

Neutrals on the National Roster of Commercial Financial Disputes include lawyers, former judges, and business persons from the financial service arena who have met the qualification criteria and who have been trained by the AAA in arbitration and/or mediation techniques.

Qualification criteria include:

  • a minimum of fifteen years professional or business experience,
  • successful completion of AAA mediator/arbitrator training programs,
  • relevant academic and business/professional credentials and licenses,
  • scholarship and continuing education achievements,
  • dispute management and neutral skills,
  • reputation in the business/professional community, and
  • commitment and availability to serve as a neutral arbitrator or mediator.

When a case is filed with the AAA, you and the other party select the arbitrator or mediator from a list prepared by the AAA. The list contains the proposed arbitrators' credentials, including educational institutions attended, degrees earned, employment history, professional licenses or certifications, offices held in professional and trade associations, the individuals' work experience, and participation in neutral training programs.

Mediators and arbitrators must disclose any relationship with the parties, their attorneys, or others involved in the case, such as witnesses; those with disqualifying relationships will not be permitted to serve on the particular case. This assures the parties that the mediators and arbitrators are neutral.

Consumers Union thinks that a fair arbitration process should be voluntary on the part of both parties to a contract and not imposed on consumers unilaterally. Rules governing the process should be clearly disclosed. Arbitration fees for indigent consumers should be waived. Finally, no arbitration clause should limit an individual's ability to join with other similarly harmed consumers in a class action lawsuit. Only when these protections are assured can arbitration truly deliver the saving - and impartial justice- that its backers promise.

See our Web Site on Arbitration.

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