Avoid Getting Screwed By The Arbitration Trap

More and more these days, consumers are being forced to sign Arbitration Agreements when they sign purchase agreements. There are numerous arguments against them but I’ll point out one thing: Arbitration is dangerously unpredictable and unfair.

One good aspect of the legal system is that it is predictable to some extent. There is a process which is followed and, for the most part, participants in the legal system know how the story is going to unfold. A suit gets filed, a defendant answers. The parties talk, exchange information and the case will probably settle. Experienced attorneys can often tell when a case will settle and for how much. If it doesn’t settle, it is decided by an impartial court.


Proponents of arbitration argue that their process is faster and less expensive. Why wouldn’t you want to use it? My experience has shown that while it may be faster, it is no less expensive. And add to that how wildly unpredictable and unfair it can be. I’ll give you some examples.

A manufacturer agreed to buy my client’s defective car back the moment we filed suit. The manufacturer refused to pay my usual attorney fee. They argued that since all we had done was file suit, I wasn’t entitled to the same amount they had always paid me previously at this point. My client had signed an arbitration agreement but the manufacturer had not sought to enforce it until we hit this snag. They asked if we were willing to arbitrate just the attorney fees. I agreed. The arbitrator listened to our arguments about being deserving of fees and never heard a counter argument to it - the manufacturer did not even bother to attend the hearing. The arbitrator issued his ruling: no fees and no buyback! He decided - despite not being asked - to “un-award” my client the buyback!

I called the attorneys for the manufacturer and pointed out that the arbitrator had gone beyond the scope of what he had been asked to do and obviously the buyback was not undone. They agreed with me. They even agreed to pay my usual fees when I offered to take the whole matter to court and show what the arbitrator had done.

Case two was an arbitration where my client’s damages were clear cut: A business ripped him off for a precise amount. Everyone agreed that if my client was owed anything, the amount was $10,000. We went to the arbitration and made our arguments. The defendant argued my client was owed nothing. I argued my client was owed $10,000. A few weeks later we got the ruling. My client was awarded $15,000. The defense attorney went nuts, calling me and screaming at me. He asked if we would accept $10,000. I asked him - if the arbitration had come in at $5,000 - would he have agreed to raise the award to $10,000? There was a long silence from the other end of the phone. “Of course not.” I told him that was my answer as well.


I once had an arbitrator tell us (both me and the other side) that he was unable to make a decision because he felt he could only make an award we both agreed on (and the other side kept saying my client wasn’t entitled to anything). Of course, that is wrong. If we could have come to an agreement without him, we would have settled before we hired him.

I’ve had an arbitrator “find” that he was allowed to rewrite the arbitration agreement as part of his award. He specifically made a ruling that was not allowed by our agreement but then “found” that the original agreement between the parties was modifiable by him.


I’ve also seen arbitration programs where the manufacturer wrote its own rules and required consumers to have their cases decided by retired executives of that manufacturer using the rules they had written for themselves. In those days we often fought efforts to force the arbitration by simply showing the rule book to the judge. After all, if I can pick the game, the playground and the referee, I will always win.

The problem with arbitration is the finality you get by saying, “There will be a ruling and it will be final,” applies to a ruling that might be horrifically stupid. And since the grounds for judicial review are quite narrow, you often get stuck with these wacky results. And notice that in the examples I have given, there have been wacky awards in my clients’ favor. But for every client who got lucky, there was one who wasn’t so lucky.


As for finality? Get a good arbitration award in your favor and a big defendant will still sue. They’ll lose but they will waste your time and money in court - which is what arbitration was designed to avoid.

So, if you see an arbitration provision in a contract you are being asked to sign, do what you can to avoid it. Once you sign it, you might find that your legal rights have been thrown into a veritable blender of idiocy and no one knows what will be poured out when the process ends.


Follow me on Twitter: @stevelehto

Hear my podcast on iTunes: Lehto’s Law

Steve Lehto has been practicing law for 23 years, almost exclusively in consumer protection and Michigan lemon law. He wrote The Lemon Law Bible and Chrysler’s Turbine Car: The Rise and Fall of Detroit’s Coolest Creation.


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