As an alternative to judges or courts settling disputes between consumers and businesses, binding arbitration works out a deal through an independent, third-party body. Binding arbitration may save time, money, and energy when two parties disagree over a contract, the performance of a service, or the exchange of goods. The arbitrator's decision is final and cannot be disputed or appealed.
Businesses often prefer to resolve claims through binding arbitration because it is usually more private, and helps to avoid possible bad publicity that could erupt in a trial. They are also not bound to certain legal requirements, such as "discovery," whereby the persons involved in the claim have access to otherwise private information. Increasingly, lenders and distributors are requiring consumers to sign binding arbitration agreements, which might lessen the load on courts, but may also erode a consumer's constitutional rights.
Binding Arbitration Process
A binding arbitration hearing is set up much like a court hearing: all parties may choose whether or not to hire an attorney and each party is given time to present evidence and call on witnesses. After hearing from everyone involved, the arbitrator makes a final and binding decision; while this decision is legal and usually immediately enforced, it can be disputed to the arbitrator or challenged in court. For everyone involved, a resolution will generally be offered sooner than it would take a judge or jury to hear and decide a case; in general, many arbitration hearings can be finalized in one day. This process also saves money, since each party presents their evidence less formally, without necessarily needing an attorney, although some fees for the arbitrator and attorneys may be involved.
Mandatory Versus Voluntary Arbitration
The controversy surrounding binding arbitration revolves around people's rights with respect to mandatory and voluntary arbitration. With mandatory arbitration, a borrower or consumer must agree to use an arbitrator, rather than the courts, to resolve any issues. This is often required as part of getting a loan financed or buying large purchases, such as a car. In voluntary arbitration, after a disagreement arises, both the consumer and the company can agree that they find it mutually beneficial to let a third party intervene.
Consumers waive their constitutional rights to sue as an individual or with a class action suit when they sign a mandatory binding arbitration clause as part of a contract. Advocates point out that many people do not know that they have denied themselves that right. Consumers are also not usually aware that the independent arbitrator may have an interest in siding with a corporation for financial reasons, and may not be entirely neutral. The fee to file a claim may actually be more than hiring a lawyer, therefore some advisers suggest consumers think carefully before agreeing to this course of mediation.