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,"
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
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.
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
- 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,
- 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
- 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
- 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."