Why You Should Be Afraid of Mandatory Arbitration Agreements

Cross-posted from Tort Deform: The Civil Justice Defense Blog (www.tortdeform.com)

An issue which has not yet been touched upon on in detail on Tort Deform is the horrible effect that mandatory arbitration provisions often have on unsuspecting consumers.

Mandatory arbitration agreements are perhaps one of the most dangerous developments within the American civil justice system. In short, a mandatory arbitration agreement is a contract which bars an aggrieved consumer from seeking redress in the nation's courts.

Unbeknownst to most Americans, corporations are making these mandatory arbitration agreements a part of an increasing amount of contracts. From credit card agreements, to pest control contracts, to home construction contracts mandatory arbitration agreements are becoming more and more common (if not the norm).

Well, luckily this issue will never effect you because you haven't agreed to any mandatory arbitration agreements as a part of any contracts.


Most people who are bound by these agreements don't even realize it because they were actualized by the inclusion of a small slip of paper in their contract materials (which is often crunched into all the other manuals and things you receive when you buy a relevant product or service).

You don't even have to sign anything, your mandatory binding arbitration agreement just states that if you continue to use this product or service you will be bound by it.

Silence thus becomes acceptance.

Below is an introduction to the very personal consequences these mandatory arbitration provisions as told by Ms. Jordan Fogal of Houston Texas.

You Are Responsible For Making So Many Homeless

We will take action on voting day

By Jordan Fogal

Houston, Texas

What is going on is criminal and all other platforms pale when you are responsible for making so many of us homeless.

I have written the president 2 letters, 348 emails and sent 76 faxes..before we lost our homes with many of our neighbors and no one even bothered to answer.

We have filed over 12,000 claims to the Attorney Generals office, just in TEXAS and the Attorney General nor the District Attorney have chosen to take action. We ... and all our neighbors and all the people in Texas who read the national articles about what is happening to make us homeless will take action on voting day.

Tort reform has destroyed our families doubled our foreclosure rate and look at the bankruptcies....

We can tell you what is wrong with the economy!

You have destroyed our credit ratings and made us homeless. And we, the middle class are being destroyed.

Arbitration from the prefix ar- to arrive and traitor-to betray another's trust.

My husband and I are still in the arbitration process.

We have been having depositions, preparing documents, time lines...many going back to April of 2002, and getting all ready for discovery.

It is a monumental task. As the builder and AAA, the American Arbitration Association know - it is also cost prohibitive ... no matter what kind of spin they try to put on arbitration ...as being

cheaper than court, my husband and I write the checks and we know better.

This is why most new homeowners with defective houses, repair their own homes ... even though they have warranty papers - those slick booklets that are enclosed in the decorative folders they hand in

exchange for your checks.

If their defects are extensive they are forced into foreclosure , and many into bankruptcy. Houston's foreclosures have more than doubled in one year and the numbers are not accurate.

Arbitration: Is the privatization of the "justice" system that is FOR the protection of bad builders.

It assists shoddy builders, with bulging pockets, preying on the public. It is easy to see why all the ads, for new homes and the multitude of thrown up housing is so rampant. There is no protection

for the purchaser. You are paying for eye candy, these houses will never make the historical register.

So far we have paid over $10,000 dollars in arbitration costs for the privilege of being made homeless in Houston, and this is just the beginning. New home buyers are suppose to buy and shut up. And you had better shut up or under the new laws you are considered a "dispute" and will be dealt with accordingly by the builders, their lawyers and if necessary the arbitration process.

You are not going to be a repeat offender in AAA. You will be broke after one visit. The builders will be back .

Now, ask yourself ... if you were an arbitrator would you rule against your continuous meal ticket or against one poor homeowner who will probably never be able to afford another home in their lifetime?

Do you think if perhaps the arbitrator ruled in favor of a new homeowner that they would be chosen by the builder as an arbitrator ever again?

Do you know that law firms like the one defending my builder have an AAA arbitrator in the firm.

Do you think if you go to AAA and get our builder's AAA arbitrator.... he will rule against his biggest client and in YOUR favor? These are just thoughts to ponder.

Tort Reform

My husband and are seeing how tort reform really works, up close and personal. I refer to tort reform as the deformed privatization of the justice system.

keep reading article

If you or your organization is interested in learning more about or working on these types of civil justice issues, please feel free to contact me at cdugger@drummajorinstitute.org.

Cyrus Dugger

Senior Fellow in Civil Justice

Drum Major Institute for Public Policy

Tags: contract law, mandatory arbitration, tort deform, tort reform (all tags)



Re: Why You Should Be Afraid of Mandatory Arbitrat

Thank you very, very much for posting about this little known, poorly understood, and horrendously damaging practice.

Do any states currently have protections against mandatory arbitration?

What would be some legislative solutions to this crisis?

by Alex Urevick 2006-10-12 12:57PM | 0 recs
Re: Why You Should Be Afraid of Mandatory Arbitrat

The Federal Arbitration Act essentially makes arbitration a favored device for dispute resolution throughout the country.

Arbitration, in itself, is not a terrible thing - it can be less expensive and much faster than a court case.  In the securities industry, the NASD and NYSE provide eminently fair arbitration forums.  The American Arbitration Association (AAA) is also very fair.

But you don't always get a fair forum.  Let's say I decide to form a company called "Steve's Arbitration Service."  And I go around to all the credit card companies and I say, "Put it in all your contracts that any disputes must be resolved through Steve's Arbitration Service.  I promise you'll like the results, nudge nudge, wink wink."

It's as simple as that, really.  The courts are very reluctant to ignore arbitration clauses, so if a company decides to do this to you, you're likely out of luck.  It's good to see DMI focusing on these abusive practices.

One solution would be to institute some kind of licensing or regulatory system at the federal level.  It's tricky - because arbitration is a matter of contract, and you and I can contract to resolve our disputes by thumb-wrestling if we choose - but surely there's a way to create a system where regulators would look at the procedures and results of an arbitration provider, to ensure that they're providing a fair forum.

by Steve M 2006-10-12 01:45PM | 0 recs
Re: Why You Should Be Afraid of Mandatory Arbitrat

Hi Alex,

The primary issue is that there is federal legislation which in many ways preempts state law in this area. The way to deal with this issue is through new federal legislation.

by Justinian 2006-10-12 01:59PM | 0 recs
Re: Why You Should Be Afraid of Mandatory Arbitrat

Hi Steve, I think that there are ways arbitration could meet the goals that are usually ascribed to it, but I think that the current arbitration process rarely succeeds in doing so. As the above post describes plaintiffs are at a horrible disadvantage in this process. As the above post describes the process can be prohibitively expensive. Moreover, in addition to being forced to pay for your forum plaintiffs also must often still incur the additional cost of an attorney and litigation. Attorneys in some types of cases may simply take a contingency fee (as they would outside of arbitration) but the costs of having to also pay for the forum increases the financial difficulties of the process.

Finally, many companies are attempting to preclude class actions through their mandatory arbitration provisions. The result is that in many cases where a company financially or physically harms a large group of people, but in ways that will not create large amounts of compensatory relief, there is no remedy.

by Cyrus Dugger 2006-10-12 02:16PM | 0 recs
Business ethics-an oxymoron
Thank you for brining this up.  In the past year I have personally seen a complete erosion of tried and true financial policies and procedures.
I was asked by the company I work for to accept a credit card agreement that they would mail me later, it even says so on the "application" form.
Business ethics- an oxymoron.
by Lasthorseman 2006-10-12 03:33PM | 0 recs
Tort Reform

Time for the resident law student to chime in... actually, we just talked about arbitration agreements in torts class.

The problem is not with the arbitration process itself.  Arbitration can, in some cases, be an effective alternative to courts; arbitration fees are usually less than court costs.  The problem is this: why would the companies have these arbitration agreements and make them mandatory if they didn't think arbitration was better for them than going to court.  Duh.

Tort reform may be one of the dumber ideas Republicans have come up with.  Judges and juries usually don't award huge settlements; you just hear about the huge settlements much more than the small settlements, or the cases that lost.  In fact, a lot of judges won't even consider truly frivolous lawsuits because there are already so many cases coming through the court system.  The cases that do make it through the courts are legitimate.

by Tom 2006-10-12 09:21PM | 0 recs
Re: Tort Reform

It's not that simple.  If a company gets sued hundreds or thousands of times per year, it has a big incentive to stay out of court where the costs of motion practice, full-blown discovery, etc. add up to something prohibitive.  In addition, depending on the line of business you're in, you might prefer a sophisticated arbitration panel who knows your industry rather than a clueless jury - even though in the cases where you've genuinely done wrong, the sophisticated panel is going to hammer you.

None of this automatically means that the plaintiffs, on the whole, end up with less money at the end of the day; that's not the only cost driver for companies that deal with a lot of litigation.  There are good reasons why the option of arbitration exists; but as Cyrus says, there are very serious loopholes that need to be closed.

by Steve M 2006-10-12 11:25PM | 0 recs
Re: Why You Should Be Afraid of Mandatory Arbitrat


Great discussion.

I'm not really sure that you can  say that arbitration is less expensive than normal court costs. I could be wrong but arbitration fees appear to be much larger than normal court fees.

However, more importantly arbitration fees must be paid upfront. Normal court fees are just not as high, an when a lawyer takes a case on a contingency basis, the plaintiff may pay nothing upfront to get their claim heard.

Can you explain why you believe arbitration is cheaper?

Like has been said, arbitration could be a great thing in some cases, but the framework is plays out in now is smply unfair.

by Cyrus Dugger 2006-10-13 07:01AM | 0 recs
Re: Why You Should Be Afraid of Mandatory Arbitrat

Err... should have stated that arbitration is usually cheaper than court for the corporation in question.

The other major issue with arbitration is that it doesn't allow for class action suits.  Nobody is going to bother to sue a company for, say, fifty dollars, so a company can get away with screwing over a bunch of customers for small amounts of money as long as they avoid anything major.  There was a case a few years ago in which Gateway 2000 made its customers agree to mandatory arbitration and conducted the trials through the ICC in Paris, France... which meant that anybody who wanted to sue to company had to go to Paris.  The problem isn't arbitration itself; the problem is that this isn't regulated.

by Tom 2006-10-13 10:56PM | 0 recs


Advertise Blogads