In recent years, arbitration has become a booming business. From a business perspective, arbitration brings closure to a commercial or consumer dispute far more quickly than protracted litigation through the traditional court system. And associated costs are generally lower.
So its not surprising that many companies anxious to control and manage legal costs are writing pre-dispute arbitration clauses into their contracts. These essentially require all disputes arising under the contract to be resolved through a specific arbitration program.
But businesses that blithely copy clauses from form contracts should know they must be used thoroughly and with care. They run the risk of being voided by the courts on various grounds. Pre-dispute arbitration clauses can also breed ill will, as they are frequently misunderstood or flat-out missed by customers who are later peeved to learn that they have no choice as to where they can go to have their dispute heard.
Regulatory agencies and the courts start with the premise that pre-dispute arbitration clauses have a strong tendency to be unfair to most consumers. They argue that a company pondering such a clause can consider all of the legal implications of arbitration vs. other adjudication mechanisms, whereas it is likely that a customer at the point of purchase will not focus on the legal consequences of signing off on a contract containing such a clause.
Some states have laws that prohibit the use of pre-dispute arbitration clauses under various circumstances. Some ban them entirely, even in business-to-business contracts. Some ban them in consumer contracts, or certain kinds of consumer contacts.
Even in states like Ohio, where these clauses are enforceable, they may be voided on a case by case basis if they are considered unconscionable or oppressive or if it is otherwise established that all parties did not voluntarily and knowingly agree to arbitrate future disputes.
Unconscionability may be found if a contract is presented to a party who doesnt have an opportunity to negotiate contract terms who must accept the contract or risk being unable to obtain the desired product or service. Form (boilerplate) contracts presented to a customer on a take it or leave it basis are frequently considered unconscionable and therefore unenforceable.
These clauses have also been found unconscionable in cases in which they were in very small print and/or on the reverse side of the contract, or when they place unreasonable burdens on the customers, such as requiring the arbitration to be held in a state other than the consumers. If the clause is interpreted as discouraging people from making legitimate claims, it will likely be struck down.
The key to the successful inclusion of a pre-dispute arbitration clause is in its wording and presentation within the contract. The use of prominent and adequate disclosures relating to pre-dispute arbitration clauses can minimize and even eliminate some of the problems relating to a consumers lack of knowledge or bargaining power at oppressiveness.
These clauses should clearly and conspicuously:
- Inform consumers that the clause affects important legal rights, and that they will not be able to go to court if there are any disputes arising out of the contract;
- Identify the arbitration forum and provide a telephone number that can be used to obtain additional information about the forum;
- Identify the types of disputes covered by the arbitration clause, which may not include claims for criminal or statutory violations or punitive damages;
- Disclose the nature and amount of any fees consumers may have to pay in connection with the process;
- Identify the standard that will be used as the basis for the arbitrators decision;
- Provide for a separate signature line, appearing immediately below the arbitration clause, for the consumer to sign to acknowledge acceptance of the terms (or conspicuously place the clause above and on the same pages as the contracts signature line); and
- Contain a statement that the consumer will not be bound by the terms of the clause unless he or she signs on the signature line.
Above all, these clauses should never appear in small print or otherwise be buried in a contract.
David Weiss is president of the Greater Cleveland Better Business Bureau. For more information on arbitration clauses, contact the BBB at (216) 241-7678.