Why is Mandatory Arbitration Bad?

Mandatory arbitration is a common clause in many service agreements and contracts. It stipulates that disputes between the company and the customer must be resolved through arbitration, rather than in court.

This approach has stirred considerable debate over its fairness and impact on consumer rights. Let's explore the reasons why mandatory arbitration may be viewed as a bad thing.

Limited Legal Recourse

One of the primary criticisms of mandatory arbitration is that it limits a consumer's legal recourse.

In traditional legal proceedings, both parties have the opportunity to appeal a decision if they believe it to be unjust. However, in arbitration, the arbitrator's (a 'neutral' third party who makes a decision in a dispute) decision is often final, with very limited opportunities for appeal.

This brings us to our next point.

Perceived Bias

The neutrality of arbitrators is a key concern.

Unlike judges, whose independence is protected by the judicial system, arbitrators are not always required to adhere to strict impartiality standards.

In some cases, companies repeatedly use the same arbitration firms, leading to concerns about potential bias in favour of the company, as the arbitrator may have a financial interest in maintaining a good relationship with the company.

Lack of Transparency

Court proceedings are typically public, which helps ensure transparency and fairness.

Arbitration, on the other hand, is private.

The lack of a public record can lead to a lack of accountability and can prevent the public from being aware of potential systemic issues with a company's practices.

Restricted Discovery Process

In court, both parties have access to a discovery process, allowing them to obtain evidence from the other side.

In arbitration, the scope of discovery is typically narrower, with procedures that are often less formal and more restrictive compared to court proceedings. Arbitrators may limit the types of documents that can be requested and restrict the extent to which parties can interrogate each other or depose witnesses.

This approach can result in a less thorough examination of the evidence. It can also limit the ability of parties, particularly the less resourceful consumer, to access crucial information that would be available in a more expansive court-led discovery process.

This constrained discovery environment in arbitration can significantly impact the depth and breadth of evidence presented.

Costs

While arbitration is often touted as being more cost-effective than court proceedings, this is not always the case for the consumer.

Some arbitration clauses require consumers to pay hefty fees just to initiate the process, which can be a deterrent to pursuing a claim, especially for smaller disputes.

An example of this can be seen in the case of Patterson v. ITT Consumer Financial Corp. (1993). In this case, to secure a recovery of $2,000, a fee of $850 was contractually required to commence the arbitration procedure.

Waiver of Class Action Rights

Many mandatory arbitration clauses include a waiver of the right to participate in a class action lawsuit.

This can be particularly detrimental in situations where a large number of consumers are affected by a minor issue, making individual arbitrations impractical.