What makes the use of Arbitration Clauses in Consumer Contracts problematic?

By Aarya Adhikari

A consumer contract is a legally binding agreement between businesses and their consumers concerning the sale of goods, supply of services or digital content.[1] In the law of contracts, consumer contracts present a fundamental challenge as there is asymmetry in information, sophistication, and stakes between the parties to these contracts i.e., the business and the consumers.[2]

In consumer contracts one-side which are the businesses stand as a counseled and well-informed business party, entering numerous identical transactions, with access to the tools and sophistication to understand and draft detailed legal terms and design practices that serve the commercial goals of the business.[3] On the other side are the consumers who are informed only about some core aspects of the transaction, however rarely informed about the standard terms.[4] In most cases consumers enter into transactions without any professional understanding of the contract’s legal contours. [5]Further it is irrational as well as infeasible for consumers to keep up with the complex terms that the business provides in the multitude of transactions. [6]

Whenever there is a dispute, consumers usually have two ways to resolve them.[7] First is the normal dispute resolution process where they can take the case to courts and tribunals i.e., through the process of litigation.[8]Second is the process of arbitration which is one of the methods of alternative dispute resolution.[9] It is a technique that provides an alternative to litigation if the parties voluntarily agree to arbitrate after a dispute arises. [10] Mandatory Arbitration clauses however require one party to agree on another party’s pre-dispute arbitration provisions.[11] In consumer contracts, they eliminate citizens’ rights to go to court and settle disputes.[12] Due to this clause the consumers are required to take their disputes and complaints to a privatized forum in which they are less likely to prevail and if they do prevail, they are less likely to recover their due.[13] Moreover, there is no effective right of appeal once a dispute is decided by an arbitrator.[14]

Even though these clauses are becoming increasingly common in everyday transactions many consumers are unaware that they are subject to and are entering into these mandatory arbitration clauses.[15] Further for the consumer these clauses are an obscure procedural provision which creates a hurdle and risk to a valuable job opportunity or an important consumer financial transaction.[16] Further, consumers usually do not think that they will have a dispute with the businesses.[17] Even if they do think about the dispute, they do not want to go to court due to their slow, excessively technical and intimidating nature.[18] In addition, hiring a lawyer to handle the case would usually cost more than what most disputes are worth.[19] Despite these benefits of arbitration, there are serious pitfalls.[20]

The main problems seen with mandatory arbitration clauses are that they are one sided agreement where consumers do not enter into the mandatory arbitrations agreements or even get an opportunity to negotiate their terms.[21] Rather these terms are imposed on consumers and are usually also hidden in the small print of contracts.[22] Hence, consumers might not even realize that they are subject to the mandatory arbitration provision until a dispute arises.[23] Another problem with mandatory arbitration clause is that they explicitly prohibit class action lawsuits.[24] This places individual consumers in a disadvantageous position and lowers the consumer’s bargaining power against a corporation because an individual consumer may not have the time or resources to bring an action against fraudulent practices alone.[25] There is also a lack of public record due to the requirement that the arbitration proceedings must be kept confidential.[26] As a result, no precedent is set after the case is concluded, however businesses have an advantage as repeat players to anticipate how certain issues are decided.[27]Further there are also upfront costs that the consumer has to bear and usually these upfront arbitration costs are almost always higher than initiating a lawsuit especially if the issue could have been tried in small claims court. [28]Hence, consumers are prevented from seeking a remedy against the business because these upfront costs are too expensive. [29]Hence, consumers abandon the action due to unforeseen costs.[30] Lastly, there is limited judicial review and decisions are only overturned if there is an applicable manifest disregard of the law which is a very difficult standard to meet where there is no written opinion of the arbitration proceedings.[31]

In conclusion we see that consumers are at a disadvantage and do not have equal bargaining power with the corporations when it comes to Mandatory Arbitration clauses which makes these clauses problematic.[32]

[1] BusinessCompanion,’Consumer Contracts’ (Business Companion) <https://www.businesscompanion.info/en/quick-guides/consumer-contracts> accessed 15 July 2021.

[2]  K Stone and A Colvin ,’The arbitration epidemic’ (Economic Policy Institiute, 7 December 2015) <https://www.epi.org/publication/the-arbitration-epidemic/ >accessed 15 July 2021.

[3] Oren Bar-Gill, Omri Ben-Shahar and Florencia Marotta-Eurgler ‘The American Law Institute’s Restatement of Consumer Contracts: Reporters’ Introduction’ (2019) 15(2) ERCL <https://doi.org/10.1515/ercl-2019-0008> accessed 14 July 2021

[4] ibid.

[5] ibid.

[6] ibid.

[7] Oklahoma Bar Association,’ Methods for Resolving Conflicts and Disputes’ (2015)  <https://www.okbar.org/freelegalinfo/disputes/> accessed 16 July 2021.

[8] ibid.

[9] ibid.

[10] ibid.

[11] Citizen Advocacy Center,’Consumer Guide to Mandatory Arbitration Clauses’ <https://www.citizenadvocacycenter.org/uploads/8/8/4/0/8840743/mandatoryarbitrationbrochure.pdf > accessed 16 July 2021.

[12] ibid (n 2).

[13] ibid.

[14] ibid.

[15] ibid (n 11).

[16] ibid (n 2).

[17] ibid

[18] ibid (n 7).

[19] ibid (n 2).

[20] ibid.

[21] ibid (n 11).

[22] ibid.

[23] ibid.

[24] ibid.

[25] ibid.

[26] ibid.

[27] ibid.

[28] ibid.

[29] ibid.

[30] ibid.

[31] ibid.

[32] Formative Law ‘The Tyranny of Arbitration Clauses in Consumer Contracts’ (2020) <http://www.formativelaw.ca/2020/10/the-tyranny-of-arbitration-clauses-in-consumer-contracts/> accessed 13 July 2021