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Arbitration Clauses

I’m Katelyn Holub, an attorney focusing on personal injury law in northwest Indiana.

Welcome to Personal Injury Primer, where we break down the law into simple terms, provide legal tips, and discuss topics related to personal injury law.

Today’s question comes from a caller who asks “I don’t understand what arbitration is but, whenever I sign contract documents for web services or contracts for other services, there typically is an arbitration clause in the agreement, what does arbitration mean?

Arbitration is a dispute resolution process. Arbitration is distinguishable from other forms of adjudication and the main distinguishing characteristic is that it is a private system of dispute resolution.

By private I mean the parties pay for it.

In the courtroom, under the Constitution, everyone is entitled to a trial by jury. That means a jury of your peers can decide the facts of a case and decide what the verdict should be in any given situation.

As I said, the Constitutional right to a jury applies to both civil and criminal matters. The entire court system is open to the public. We the people pay for the system.

Arbitration is a private dispute resolution procedure that avoids a jury trial and avoids standard court proceedings.

So, if you agree in a contract to arbitration you are basically giving up your right to a trial by jury of your peers.

And you’re also often agreeing to pay for the dispute resolution system that you have just signed up for, if a dispute develops over the performance of the agreement.

There are many substantial adverse consequences to agreeing to do this.

If your case were to proceed in court there is very little cost associated with the preceding, other than paying for a filing fee, that can range from between $150-$500. Of course, if you have to pay experts to testify in court, such as a doctor or an engineering expert, there is a cost associated with presenting evidence in a jury trial setting. But the cost is nominal compared to the cost of arbitration.

When you agree to arbitration, the procedure is far more costly. What generally happens is, if a dispute has to be resolved, the parties hire and pay for professional arbitrators to decide the dispute. In a typical situation the plaintiff side of the litigation selects one arbitrator, the defendant side of litigation selects another arbitrator, and the two of them get together and decide on a third arbitrator.

Each arbitrator is a layer of expense. The parties generally agree to split the cost of arbitration. Arbitrator fees can range from a nominal amount, to more than $5000 per hour depending on the complexity of the issue.

So quite literally, after spending two- or three-days presenting evidence to the arbitrators, each party may owe tens of thousands of dollars in fees to the arbitrators.

So why do you think companies push arbitration into contracts?

Well, it cuts down completely on disputes. If you’ve got a small dispute that’s worth $50, how could you possibly take the company to arbitration and spend $10,000 getting someone to decide who is right. So, these arbitration provisions basically prevent people from going to the public court system which permits a jury trial. Then it becomes too costly to fight over important grievances of a nominal dollar amount. The consumer ends up giving up, and the company gets rich.

Unfortunately, our courts have decided that in most cases arbitration is legal (as long as the consumer willingly agrees to it) and the courts have approved the process.

Companies like this because without arbitration they can be hauled into court on class action cases, where small claims are aggregated against them. A company which has cheated a million people out of $50 would never be able to get away with it if there were no arbitration provision, because in court the million people who were swindled could all join together and present a case to a jury as a class action, and very cost-effectively obtain a fair resolution of a claim against the company.

So that’s why you see arbitration provisions in most contracts these days.

If you can at all avoid it, you should decline to execute a contract that contains an arbitration provision.

Most companies will not do business with you though, if you don’t sign a contract with such a provision.

So, you’re stuck with deciding to not buy the product, or submit to a costly and possibly unfair arbitration procedure.

If you can’t avoid an arbitration provision altogether, then it makes sense to see if that provision can be modified so that the entire cost of the arbitration has to be paid by either the defendant company, or the winner of the arbitration.

That can save you some cost if you decide to take the company to arbitration, but you better be sure that you win. If you don’t, and the company wins, you could have to pay the company’s entire cost of arbitration in addition to your entire cost of arbitration, and end up owing hundreds of thousands of dollars.

I hope you found this information helpful. If you have questions about your legal rights if you get hurt due to the carelessness of another person, or as a result of substandard medical care, or due to a product defect, construction injury, or any other type of personal injury, please give us a call at (219) 736-9700. You can also learn more about us by visiting our website at DavidHolubLaw.com – while there make sure you request a copy of our book “Fighting for Truth”.