Should your company require customers to arbitrate disputes?

Nobody likes going to court. It’s often costly and time-consuming, and the outcome is never guaranteed. When parties can’t agree on a resolution, many organizations rely on arbitration. In fact, many companies’ contracts specify that all disputes must be resolved in arbitration. Should yours?

If you’re considering a mandatory arbitration clause in your customer contracts, you should know that there are special rules for arbitration with consumers. These rules are promulgated by the American Arbitration Association and are not law, but the AAA may refuse to provide an arbitrator for your dispute if you don’t follow them.

First of all, what is arbitration?

Arbitration is a form of alternative dispute resolution, meaning alternative to courtroom litigation. In many ways, arbitration is a slightly less-formal version of court. A neutral arbitrator, rather than a judge, will hear the evidence and render a ruling. The rules of evidence are somewhat relaxed, and the procedures are much less formal. It is much easier to schedule and can take significantly less time than litigation. It’s also usually less expensive.

Arbitration proceeds in much the same way as litigation. The parties are each given an opportunity to present their case to the arbitrator (or arbitrators). Witnesses and evidence are brought forward. Opposing parties have the opportunity to cross-examine the witnesses and challenge the evidence. Ultimately, the arbitrator makes a decision about how the dispute should be resolved. In most cases, this decision cannot be appealed.

What are the rules for consumer arbitration?

The rules are intended to balance the power between consumers and organizations. The first step is to ensure that any mandatory arbitration clause in your contract fully spells out the provision and its consequences.

Here are other key provisions of the AAA’s consumer due process protocol:

  • The consumer and the business must have the right to an independent, impartial arbitrator who will independently administer their dispute. No party can have the unilateral right to choose the arbitrator.
  • Consumers have the right to legal representation.
  • The costs for the process must be reasonable for the consumer.
  • The location of the arbitration must be reasonably accessible to the consumer.
  • The arbitrator(s) must fully disclose any conflict of interest, appearance of conflict, or previous contact with either party.
  • The arbitrator must have no personal or financial interest in the matter.
  • The arbitrator must be empowered to provide any relief that would be available in court.
  • Both parties must have full access to any information that is crucial to resolving the dispute.

Arbitration is not a panacea, but it may be a way for you to retain some control over the costs of resolving disputes with your customers. Talk to a business attorney about your options.