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What the Heck is an Arbitration Clause?

By Stewart J. Guss on April 25th, 2012

“Arbitration clauses? What’s this guy talking about? I’m just an average guy, none of that stuff applies to me. Only big businesses have to worry about that arbitration stuff, not individuals like me. Right?”

Wrong. I’ll bet you’ve got at least one binding mandatory arbitration agreement (“BMA”) that applies to you right now. Many credit card agreements, automobile purchase agreements and mortgages have BMAs. If you have credit cards, a car or a house, you may be subject to several BMA agreements right now.

So what is arbitration? What is a BMA? Why should you care about any of this?

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. Decisions in an arbitration are usually final and cannot be appealed. 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. Consumer are required to waive their constitutional right to have their dispute heard and decided by a jury of their peers (i.e. usually other consumers).

“Well, that doesn’t sound so bad. After all, I get to avoid all the hassle of a lawsuit, right?”

Here are a few things to think about. First, arbitration providers are organized to serve businesses, not consumers. All of their marketing is targeted toward businesses, and most of the arbitrators are either executives or lawyers in the corporate industry. Because only businesses are likely to be “repeat customers” of an arbitrator, there may be an inherent bias toward the business clients and against the consumer.

Also, “discovery” is greatly limited in arbitration. Discovery is the process by which the parties to a dispute obtain from the “other side” information and documents that are relevant to the case. In a regular lawsuit, discovery is a right; in arbitration it is a privilege. A consumer’s right to obtain important (and often incriminating) evidence against a business is often severely limited.

While there is nothing wrong with a voluntary arbitration agreement to which both parties have agreed and fully understand, many businesses require arbitration in the “fine print” before they will do business with you.

So what can you do? Shop around for credit cards. Find credit card providers who do not have BMA clauses in their agreements. Write to those who do and explain why you won’t be doing business with them. Likewise, when shopping for a vehicle, insurance, a mortgage, or any other major purchase, make sure ahead of time that you won’t be required to sign a BMA in order to conduct your business. Our forefathers fought to insure your right to a jury trial in civil cases. Make sure you do what you can to preserve that right!

Stewart J. Guss is a licensed attorney practicing in the Houston area for 15 years. He concentrates in the areas of personal injury, insurance law, consumer law, and small business issues. He may be reached at 800-898-4877 or via email at stewart@attorneyguss.com.

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