Your aboveboard credit card company has advised you that by using its card you are
agreeing to settle any dispute with them through arbitration. So you're vaguely aware
that in the slim possibility of a misunderstanding you'll have to sit down with an
arbitrator to settle the thing.
Sounds reasonable... doesn't it?
There are too darned many lawsuits today anyway.
While that may be true, do you really understand what arbitration means? And do you
know that there are arbitration clauses in many sales contracts today, including
everything from appliances to home purchases? Even your insurance company may entice
you into voluntary arbitration. Do you understand what you're giving up by signing that
contract or using that credit card?
First of all, don't confuse arbitration with mediation. Mediation is not binding on the
parties, and one can still get one's day in court. No so with arbitration. Simply
stated, an "arbitration clause" is an agreement within the major contract between two
parties whereby they agree to settle any future disputes through an arbitration
service, rather than seek a court ruling. Since the sellers (and credit card companies)
are writing the contracts, they hold all the cards - including the right to select the
In early clauses, neither side was allowed to seek a court's ruling. Lately, in what
seems to be an over-the-top advantage to an already one-sided situation, some sellers
give themselves the additional right to sue the consumer in court.
There are two major arbitration services: The National Arbitration Forum and the
American Arbitration Association. The service gets to select an arbitrator, the place
for the hearing, as well as the date. The arbitrator acts as "judge," hears both sides,
and makes an "award" -- a decision to which both parties are bound.
It is extremely difficult to appeal that decision to a court.
On the other hand, the award can be filed with a court, which finds itself having to
enforce an order not of its own making.
Here's an example of what can happen to unsuspecting consumers: One couple, after
ordering a Gateway computer by phone and subsequently being unhappy with the customer
service, filed suit in court. Imagine their surprise when the court ordered them to
arbitrate, even though they had never signed an agreement to settle any disputes in
that manner. The 30-day warranty, which the couple had overlooked in the shipping box,
stated that if the buyer kept the computer f or more than 30 days, the only recourse
for dispute was arbitration.
The U.S. Court of Appeals for the Seventh Circuit found the couple had agreed to
arbitration and were bound by it, even though they had never read the "terms".
Furthermore, Gateways's telephone order taker was not required to inform them of the
The Court held that today many purchases are made before the buyer learns the terms of
the sale. Rarely does the consumer come out ahead in these matters. In a May 26, 2004,
Houston Chronicle article, Rick Casey described one of those rare instances involving
an arbitration settlement that ruled against a couple that had tried to sue their
homebuilder. The ruling was later overturned by the Court of Appeals because the
arbitrator had failed to disclose that he was a lawyer for the Greater Houston
How did this whole nasty business get started?
Blame it on Congress. In l925, it enacted the Federal Arbitration Statute. It was meant
to relieve overburdened courts from hearing contract disputes. Large corporations found
advantages to quickly resolving disputes without the greater costs and time delay of
seeking court resolutions.
With the enactment of Deceptive Trade Practices Acts (DTPA) during the 1970's, big
businesses began looking for immunity from the triple damages that could result from
DTPA lawsuits. So their lawyers solved that sticky wicket by embedding arbitration
clauses in their contracts, which would simply prohibit consumers from going to court.
It didn't take long for credit card companies to see the huge benefit of arbitration.
That's when you began to receive those notices, in very small print, advising that
further use of your card would constitute your agreement to arbitrate any dispute.
Can you avoid this problem by telling the seller or sales person, "No thanks, I'd
rather keep my options open"
? Sure, as long as you're willing to lose that source of
credit. In most cases, it's a take-it-or-leave-it deal
If you're hoping I'll tell you that the whole scenario will change in the future - I'm
sorry to disappoint you. In my opinion, it will only get worse. There will be more and
more mine fields for the unsuspecting consumer. Meanwhile, we should give even broader
consideration to the phrase, "caveat emptor
". Let the buyer beware