When Your Contract Includes an Arbitration Clause

Richard Tomlinson — Wed, 11 Jan 2006 20:00:00 GMT

Consumers need to be aware that the arbitration agreement in the contract they sign for a car, home, remodeling project, credit card application or loan, can have a major impact on their rights.

Agreeing to a binding arbitration clause as part of a contract prevents all parties from going to court. These clauses typically require parties to present any complaints for resolution to the arbitrator named in the contract.

A typical contract for a car includes the arbitration clause in small font on the back side of the contract. Most consumers overlook arbitration agreements and consent to arbitration of disputes just by signing the contract.

Costs for arbitration can be substantial and include filing fees. Arbitrators also usually charge an hourly or daily fee. Parties in a court case are not required to pay for the services of a jury or judge. Paying the decision-maker applies only in arbitration. Both parties may be required to split these costs or the losing party may be forced to pay all costs. Some businesses ignore arbitration demands and refuse to pay arbitration costs. This effectively slows the process and adds expense for the consumer.

Most arbitration clauses designate a limited number of organizations such as the National Arbitration Forum or the American Arbitration Association, to resolve disagreements. The inexperienced consumer must use the arbitrator named in the contract. Each organization has its own unique set of arbitration rules. Businesses have an incentive to name arbitrator services in their contracts that are inclined to rule in their favor. Arbitrators who want to be named in businesses’ future contracts have incentive to rule for businesses who are likely to be repeat customers.

It is worthwhile to try to cross out the arbitration clause from a contract before signing. Many sellers, however, will refuse to go forward with the deal without the clause. If so, then the consumer can decide whether to proceed.

Individuals must also pay attention to arbitration demands filed against them. Arbitration complaints usually come through the mail by certified mail. If a business or creditor files a complaint for arbitration, the consumer must respond to the complaint immediately. Failure to respond can result in the complaining party being awarded the full amount in dispute, arbitration costs, attorney’s fees and interest.

Consumers should understand what they lose when signing contracts with arbitration clauses and what they risk in ignoring arbitration complaints. They should seek advice from an attorney when they are confronted by either.

11-Jan-06 2:00 PM

Houston Consumer Law - Articles

When Your Contract Includes an Arbitration Clause