Arbitration is often referred to as alternative dispute resolution or ADR nowadays. The stated intention of ADR is to avoid the delays and hassle of the overworked legal system, avoid expensive lawyer fees and allow the problems and solutions to be dealt with in a practical, not legal manner. Arbitrators are typically retired judges and designated by arbitration firms that provide neutral mediators.

Being a libertarian, I appreciate an private sector attempt to work out disagreements and problems in a way that does not require government oversight and control. In fact, corporate ADR is increasingly popular as a way to settle conflicts in a peaceful manner. It also allows corporations a way to handle sensitive inforrmation that would be revealed in a lawsuit. Non-binding arbitration is a great way to handle disputes. After all, if the issue can be settled when either party could appeal, it's obvious something has been agreed upon. Even binding arbitration can be appropiate among equal players who have decided on arbitration earlier with full knowledge of the consequences. For a non-corporate example, sports leagues and teams often have arbitrators available for appeals to various rulings.

Unfortunately, arbitration is also being used by an increasing number of corporations to deal with employee and customer complaints. As a condition of employment or contract for service (opening a bank account or having one's home sprayed for insects, for example), the individual must agree to have complaints judged by an arbitrator and forfeit their right to a lawsuit. While the companies may claim the same reasons as before, the truth is that the companies are using their ability to demand binding arbitration to avoid proper evaluations of their actions.

First, arbitration must be paid for by the plaintiff and defendant. The fees for filing and hearings must be paid up front. No problem for the corporation, but this can seriously dissuade a complaintant from filing. This is why lawyers can take cases on contingency - they're only paid if they win. It creates a problem with ambulance chasers, but it also allows less off people to file lawsuits as well. Often, the clause demands arbitration to take place in a specific location. Forcing a complaintant to travel across the US again reduces the possible plaintiffs. If the complaintant loses, some arbitration contracts demand that they pay all legal costs. While lawsuits are always easier for those with money, this is justice only for the well-off.

Second, a frequent requirement of arbitration is the silence of both parties, before, during and after the process. This denies other consumers the chance to hear of the company's problems and avoid their business, and allows the company to repeatedly perform the same offenses. Without public data, safety agencies find it impossible to accurately gauge the dangers of industries. If anyone remembers the furor over defective Firestone tires, realize that the information was hidden for years by Firestone requiring silence in exchange for cash payments. The lethal nature of warehouse-style stores has also been hidden by privacy requirements. Arbitration hides the flaws of companies from the public eye, reducing the motivation to change faulty practices.

Third, the costs of arbitration reduces cases to only the most egreious of problems. Those with smaller problems will simply choose not to pursue a settlement that would cost less than any possible reward. Typically, such a scenario would be dealt with through a class-action lawsuit joing numerous injured parties together, but mandatory arbitration has no such possibility. Even if it did, the privacy demands would prevent the customers from properly organizing. Arbitration allows the companies to freely screw over consumers and employees as long as it's under a certain monetary amount.

Fourth, arbitration lacks the checks and balances of the legal system. Even when an arbitrator acts in a unfair manner, there is no court of appeal or higher court to turn to. The usual laws of introduction of evidence and the ability to subpoena records and witnesses are missing as well. The judges can act as they see fit, and court rulings have stated that even when the outcome of arbitration was seriously perverted by errors and willful mistakes, it is final due to the binding power of the contract.

Fifth, the arbitration process is unfairly biased towards the company. Unlike corporations, employees and customers don't have the bargaining power to remove arbitration clauses, which are often buried in the fine print anyways. Other times, the arbitration is introduced to current customers as a condition of continuing the service without even requiring a signed legal document. The arbitrators are discretely pressured to rule for the companies, as it's the companies who choose the arbitrator and who will pay them beyond the one encounter with the complaintant. One arbitrator recently talked about how he awarded a high amount for a complaintant that had been truly wronged and was unable to find work after that. Other arbitrators have mentioned how they reduce awards to avoid upsetting the companies. 1 Even the arbitration companies who provide arbitrators are fairly biased towards the companies. Some advertise that they "provide a defense" against customers, and others are paid outside of their normal fees or financed by the companies who use them. Whether the companies pick only pro-corporate arbitrators or the arbitrators feel indebted to rule in accordance with their paycheck isn't important, as the outcome is the same. Complaintants rarely win arbitration cases. First USA, a credit card issuer, won 99.6 percent of the time. 2 Even when they do win, the possible remedies available are often extremely constrained, and arbitrators are unable to properly award the plaintiffs.

For these reasons, read what you sign. This is always good advice, but never agree to arbitration without researching the firms involved and the rules of the process. While some companies use arbitration to make life easier for both parties, other use it to buy justice with money, and this is a violation of equal protection under the law. I'm afraid that legislative action might be the only cure to this problem, although public outrage hopefully will be enough.

One quick rule of thumb is to see whether the contract has a one-way arbitration clause - the employee or customer can only enter binding arbitration, but the company can choose to use arbitration or take the claim to court. If it's enough justice for you, why isn't it enough justice for them?

Important Source: Trial Lawyers for Public Justice's brief against ADR. They may be a group of ambulance chasers who want to get paid through more lawsuits, but they're right about this being a problem.

1. Source: Los Angeles Times article - unfortunately, their archive costs money and so I can't find the name or provide a link
2. Source: Seattle Times,

Ar`bi*tra"tion (#), n. [F. arbitration, L. arbitratio, fr. arbitrari.]

The hearing and determination of a cause between parties in controversy, by a person or persons chosen by the parties.

⇒ This may be done by one person; but it is usual to choose two or three called arbitrators; or for each party to choose one, and these to name a third, who is called the umpire. Their determination is called the award.


Arbitration bond, a bond which obliges one to abide by the award of an arbitration. -- Arbitration of Exchange, the operation of converting the currency of one country into that of another, or determining the rate of exchange between such countries or currencies. An arbitrated rate is one determined by such arbitration through the medium of one or more intervening currencies.


© Webster 1913.

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