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Dealing with binding arbitration clauses

Several months after Margo Rebar and her husband moved into their new house in April of 2000, they found signs of major termite damage. Rebar, who lives in Vestavia Hills, Ala., says the pest control company who wrote a termite bond on the house wouldn't fix the damage, and because her agreement with them included a binding arbitration clause, she couldn't sue. She and her husband have paid $55,000 to fix the damage to date.

Then her attorney, Thomas Campbell, hit on a novel solution: turn the tables on the corporation -- Cook's Pest Control -- that included the binding arbitration clause in her contract. "He suggested that I enclose a note with my next payment to Cook's that I wouldn't accept binding arbitration and that if they cashed the check, I'll assume that my conditions have been accepted," Rebar says.

Cook's cashed the check and she didn't hear an objection to her note until she sued. Their dispute about whether her note voided the arbitration clause went all the way to the Alabama Supreme Court, which ruled in her favor. Her original case against Cook's and the person who sold the house with the alleged termite damage is still pending.

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Clifton Slaten, the lawyer for Cook's, denies that Cook's was liable for repairing the termite damage to Rebar's house, saying that the company fulfilled its obligation under the termite bond, providing the Rebars with a treatment to eliminate any termites on the property.

"The Alabama Supreme Court did rule in her favor in regard to the arbitration clause dispute, but I wonder if they would say that today, given that the U.S. Supreme Court has said that arbitration is valid in consumer contracts," Slaten says.

Welcome to the world of binding arbitration, where most consumers don't escape clauses in the way that the Rebars have. Many companies have since rewritten their clauses to eliminate a consumer repudiation of the binding arbitration clause. Despite the widespread nature of these clauses, there are some things you can do to get out of them or at least try to get out of them.

Many consumers have had long-term relationships with companies that pre-date the recent rush to binding arbitration clauses. So, they have the right to sue in the event of a dispute as long as a particular corporation hasn't amended the original agreement. Many do so by slipping amendments to agreements in with your monthly bill.

So read every piece of paper that you get from any company that you have a relationship with. If you see a binding arbitration clause, write back and say that you won't accept it. You can also try the Rebar's strategy of modifying your agreement with a letter enclosed with a check in payment for services, saying that if the company cashes the check, the arbitration clause is voided.

If you see one in an agreement or a contract that you are about to sign, try to strike it out. The company you want to do business with very likely won't agree to strike the clause, in which case you'll have to either agree to the clause or go elsewhere. Unfortunately, the vast majority of companies you'll want to do business with have such clauses in their agreements, so you may have to accept them.

Bad clauses
While both state and federal courts are upholding many binding arbitration clauses because of the federal Arbitration Act of 1925, there are some clauses that are being struck down by courts. These contain what Paul Bland of Trial Lawyers for Public Justice calls "unconscionable" clauses that place an overly heavy burden on the consumer. Such clauses include ones that:

  • Force consumers to travel a long distance to an arbitration hearing
  • Impose a substantial cost on the consumer, say, more than $10,000 or $20,000 to take a dispute to arbitration
  • Ban class-action lawsuits
  • Stipulate that the corporation can bring a suit, but the customer must go to arbitration

"A lot depends on where you live," Bland says. "A consumer who lives in a state with strong consumer protection laws, such as California, is lucky. If you live in Texas, where the protections are not strong, you'll probably be out of luck." He advises consumers to consult a lawyer with expertise in consumer law and arbitration clauses before they decide what to do about a dispute that may have to go to binding arbitration.

There are other avenues for change, including:

  • Individual companies. A few companies have taken action against binding arbitration clauses. Mortgage giants Freddie Mac and Fannie Mae won't accept such clauses in subprime and many other types of mortgages they buy. Since they are two of the largest buyers of mortgages in the country, their decision is very influential. Some credit unions don't include the clauses in their loan and banking agreements.
  • The courts. Bland estimates that there are at least 200 cases pending in various courts today about different aspects of binding arbitration clauses. Because federal law pre-empts state law, many of these decisions just chip away at binding arbitration, but many are helping consumers in various ways in different states.
  • Federal legislation. To make permanent change in binding arbitration clauses, change needs to occur on the federal level, including reform in or repeal of the federal Arbitration Act, according to Samantha Coulombe of the consumer advocacy group Public Citizen. She believes that consumer education is important to create a dialogue in society and bring this to the attention of lawmakers.
  • State legislation. While some states are taking steps to improve consumers' rights in regard to binding arbitration clauses, they can only do so much because federal law pre-empts state law. However, in 2003 California enacted a pro-consumer law that moderates many of the worst provisions of binding arbitration, and some other states have enacted provisions that curb binding arbitration in certain areas.
  • The arbitration process. Celeste Hammond, an arbitrator in business cases, believes that the arbitration process should be reformed to make it more fair to consumers. "Arbitrators could be required to explain the reasons behind their award instead of just stating what the award is," she says. "They could be required to follow the rule of law and consumers could be given limited rights of appeal."
-- Posted: Nov. 17, 2004
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See Also
Main: Arbitration clauses are a rights giveaway
Mandatory arbitration clauses have consumers signing away the right to sue
Card customers being pressed to give up their right to sue
Financial advice glossary
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