Binding Arbitration Clauses in Consumer Contracts
- Posted by Fries Law
- On April 5, 2016
- 0 Comments
- Arbitration, Consumer Contracts, Contract Law, Litigation
You want to build a new home. You hire ABC Builders to design and construct your home, and sign a contract, in which the builder agrees to give you a warranty at closing. Several months later, the home is built, and by all appearances, it is a work of perfection. Now, comes the day – closing day. Among the many documents you are asked to sign is a builder’s limited warranty. You come across a paragraph entitled “Binding Arbitration Clause,” the content in bold and CAPITAL letters. You think nothing of it and sign the dotted line.
Fast forward five years and you have problems not only in the foundation, but also in the roof of your home. You noticed these issues when you moved in, but thought nothing of it. You contact ABC to express your concerns. They do nothing about it because they say it is not covered by their warranty. You hire a lawyer and you sue in Pennsylvania Court. Now, the Court must consider the validity of the following arbitration clause:
“ALL DISPUTES ARISING OUT OF THIS CONTRACT, SHALL BE SETTLED BY ARBITRATION ADMINISTERED BY XYZ ARBITRATION CORPORATION. THE PLACE OF ARBITRATION SHALL BE IN DALLAS, TEXAS AND TEXAS LAW SHALL APPLY. JUDGMENT BY THE THREE-PERSON ARBITRATION PANEL, WHICH PANEL MEMBERS SHALL BE CHOSEN BY ABC BUILDERS, SHALL BE BINDING. YOU MUST PAY ALL ARBITRATOR FEES IN ADVANCE BEFORE YOUR HEARING WILL BE SCHEDULED, AND YOU ARE RESPONSIBLE FOR ALL COSTS OF ARBITRATION.”
You may be surprised to realize that arbitration clauses of this nature are generally enforceable, unless the Court finds that the arbitration clause is unconscionable; that is, inherently unjust or unfair. Binding arbitration clauses are becoming increasingly common in major transactions, such as new home construction contracts, and in day-to-day transactions such as credit card agreements. In the example above, you may be able to convince the Court that having your Pennsylvania case resolved in Texas, at your expense, is inherently unfair and “unconscionable.” However, what if your home builder has a clause that the arbitration hearing will be held in Philadelphia, or New York, or even in the community where you live, and that the expense of the arbitration proceedings, including arbitrator fees, will be divided between you and your builder? You may still have a serious problem because the arbitrators may have a bias, whether conscious or unconscious, in favor of the builder. Even worse, if you disagree with the decision of the arbitrators, you will have no right to appeal.
Home builders, credit card companies, nursing home facilities and other corporate entities are using binding arbitration clauses more and more in their favor as a way to protect themselves from Court proceedings. As a consumer, this deprives you of basic rights, including the right to take your home builder, your credit card company, or your store to a Court in your community, and in having your case decided by a jury consisting of individuals from your community. Binding arbitration clauses also deprive you of your right to file your own lawsuit, without a lawyer, with your local Magisterial District Judge for disputes up to $12,000. Arbitration clauses deprive you of these basic consumer rights, and, in some cases, prevent you from resorting to the Courts when you have suffered serious injuries.
As a consumer, your first and most effective defense, and solution, is to READ THE CONTRACT. If you do not understand the contract, and if the sales person tells you that the language of the contract is just “standard,” do not accept this explanation. “Standard” contract language can have serious and devastating consequences for you. If you see a binding arbitration clause in a contract or warranty, demand that it be removed. If you are entering into a contract with a builder for the construction of a new home, demand to see the builder’s warranty before you sign the contract to see if the warranty contains binding arbitration language. If the sales person refuses to remove binding arbitration language from the contract or warranty, especially where the language is one-sided in favor of the company, do you really want to do business with this company, especially for something as important as your home? Remember that many sales persons will tell you what you want to hear to get you to sign the contract, but you will be bound by the language of the contract. Generally, verbal assurances are legally meaningless.
In some cases, the arbitration of disputes is a preferable alternative to Court proceedings, where the arbitrators are truly impartial, where the parties have an opportunity to jointly select arbitrators, and where the rules and costs are understood in advance. However, in the context of consumer contracts for new homes, credit cards, nursing homes and other consumer necessities, it is not likely that the mandatory arbitration provisions in the corporate contracts will be favorable to you.
If you are unsure regarding your rights under a contract, you should consult with your attorney. The attorneys at Fries Law Office are experienced in contract negotiations and the resolution of contractual disputes, whether by arbitration or in the Courts. Protect your rights as a consumer, and contact us if you have questions or problems in enforcing your rights as a consumer.