Arbitration ties consumers' hands

By Bankrate.com

Unhappy customers used to threaten, "I'll see you in court!"

That often won't work anymore. These days, consumers are increasingly forced to resolve disputes via mandatory binding arbitration. Unfortunately, though many people now are covered by binding-arbitration agreements, most don't know what they are, how they work, when they come into play or who would decide the fate of their complaints.

Businesses love binding arbitration. For them it's a faster and cheaper way to settle disputes and a great way to generate debt collections.

Consumer advocates aren't quite as happy about it.

"I think binding arbitration is bad for a number of reasons, chiefly because it guts the U.S. Constitution, which is the one document that makes our country unique," says David Rumley, an attorney with Wigington Rumley in Corpus Christi, Texas, who has worked on binding-arbitration cases. "Here, an ordinary person can take a big corporation to court and get a hearing in front of a jury of his or her peers." Binding arbitration, Rumley argues, is weighted in favor of big business.

What is binding arbitration?

Mandatory binding arbitration is an agreement to have a third party weigh the merits of each side of a dispute and render a decision. That decision is final, and in most cases it can't be appealed, either to another arbitrator or to a court of law.

You give up your right to sue when you sign a contract containing a binding-arbitration clause, and you expose yourself to fees that can run into the thousands of dollars, plus the cost of a lawyer. You lose many of the protections you would have in court.

A hearing can be in person or via a conference call. If the hearing is in person, it may be held in another state. If so, you'll have to pay your expenses for travel and lodging. If you hire a lawyer, you'll pay his or her expenses, too.

Though consumers can represent themselves in arbitration, just as they can represent themselves in court, it's probably a bad idea, as binding arbitration is usually a one-shot deal. If you make a procedural mistake or miss a deadline, the arbitrator may automatically rule in the other party's favor.

Arbitration is supposed to provide a neutral third party to resolve disputes. However, many consumer advocates charge that because the major arbitration companies receive so much business from large corporations, they are biased toward those corporations and against consumers. The arbitration companies say arbitrators must disclose their backgrounds and disqualify themselves in the event of a conflict of interest.

"Arbitrators are required to disclose conflicts of interest, and in many cases you can get more information about an arbitrator's background to see if that person might have a bias in favor of the other party," says Pamela Kentra, an associate professor at the Chicago-Kent College of Law who acts as an arbitrator in Better Business Bureau arbitration and mediation cases.

"If you have a choice of arbitrators, the No. 1 characteristic you want is neutrality, so if an arbitrator in your case had a history of working for a company in the same area as the party you have the dispute with, you might want to request another arbitrator," Kentra says.

Who could face binding arbitration?

Clauses for mandatory binding arbitration are common these days. They have become so widespread in many businesses over the past 10 years that they are nearly impossible to avoid. For example, if you want to purchase a cell-phone contract, almost all cell-phone providers include a binding-arbitration clause in their agreements. The only way to avoid binding arbitration is to not get a cell phone.

You also find them when you buy a home or a car, receive most kinds of medical services, get a computer or a software program, sign up for insurance, open a bank account or obtain a credit card.

In most cases, these are take-it-or-leave-it agreements under which consumers must accept all the terms of a contract in order to obtain a particular good or service.

Arbitration can be invoked by you or the company. In most cases it will be the company.

Paul Bland, an attorney with Public Justice, a nonprofit organization devoted to consumers'-rights issues, says: "The vast majority of arbitration claims involving consumers are collections actions brought by creditors against consumers. For instance, the National Arbitration Forum is doing hundreds of thousands of arbitration cases where a creditor is invoking arbitration in order to get a customer to pay overdue balances."

In many of these cases, Bland says, consumers either don't open correspondence from creditors and/or arbitrators about claims or ignore them altogether, resulting in an automatic judgment against those consumers.

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