What is an Arbitration Agreement?
What is a Arbitration Agreement?
An arbitration agreement requires parties such as a buyer and a seller or purchaser and service provider to resolve any disputes they might have through arbitration instead of through the court system. An arbitration agreement, which might also be called a "binding arbitration agreement," is typically found within a contract, and in the case of a car dealership, it would likely be contained in the buyer’s purchase agreement. The terms of an arbitration agreement vary according to state requirements and federal law, which generally mandates that certain things be contained in the document.
The purpose of an arbitration agreement is to avoid the formalities of resorting to the court system, which can be time-consuming and costly and may not result in anything favorable to any of the parties involved . Arbitration agreements are generally enforceable in most states, and because of this, economic reasons, resources and time savings, consumers in most cases cannot get out of an arbitration agreement. This means that the agreement is binding and its binding nature is compliant with the terms of the Uniform Arbitration Act.
Some examples of problems that a binding arbitration agreement can prevent are a declaratory judgment, a statement under oath, medical records, employment records, failure to pay bills or breach of contract. It can also prevent you from being able to file a class action lawsuit against a defendant that has a binding arbitration agreement in place.
The Reason Car Dealerships Prefer Arbitration Agreements
As mentioned in previous sections, many car dealerships now include arbitration agreements in their standard sales contracts, hoping to protect both the dealership and the consumer by providing a quicker, less expensive process for resolving disputes. Arbitration is a process designed to streamline the dispute resolution process. The process allows the parties to pick a third-party neutral arbitrator whose role in the procedure is meant to mimic that of a judge – conducting a fair and impartial fact finding process and making a binding decision. Unlike in civil court, in arbitration there is not a public record, and the process is meant to be much more flexible and informal.
The advantages for both parties vary depending on the specific situation. For the dealership, it is an advantage because the process is faster and more streamlined. For the consumer, arbitration can be an advantage because once a decision is made, an arbitration award is very hard to appeal which means that the dispute process is closed and the consumer receives a final decision quickly.
Components of an Arbitration Agreement for a Car Dealership
Many car dealerships have implemented arbitration programs to resolve customer disputes. Such arbitration agreements are typically drafted by the Dealer and include several important components. Arbitration agreements are usually lumped together with other contractual papers in "the deal" that are presented to the consumer without much explanation or even the right to take them home and review the provisions.
The dealer will provide the consumer with a copy of the arbitration agreement that applies to the consumer’s particular case because it is specific to the customer. A basic arbitration clause will require the customer to use binding arbitration to resolve all disputes with the dealership but will exclude small claims.
The arbitration agreement may contain a class waiver. This means that the consumers can only arbitrate individual disputes, not class disputes and they may be signing away their rights to participate in an involuntary class action lawsuit against the car dealer.
The agreement will state who must pay for the cost of arbitrating the dispute. Many arbitration programs require the Dealers to pay front costs such as the filing fee. This is especially important in states that allow claimants to proceed without paying a filing fee, unlike many federal courts.
Some arbitration programs will apply the Federal Arbitration Act (the "FAA"), and some will not. This is something to look for in arbitration agreements. Where the FAA will apply, there may be limitations on a consumer’s ability to choose a state court. The same is true for restrictions on the venue where the arbitration may be brought, in addition to the state where the arbitration takes place.
Some arbitration agreements will say that the arbitration award is "non-reviewable" – meaning that it is pretty much final and the court will have a very limited ability to ever overturn it.
Potential Benefits for Consumers
The potential advantages for consumers agreeing to entry into arbitration, by contract, are issues which should be carefully considered. As with other types of arbitration, the potential advantages are cost and time efficiency, as well as the more informal, private nature of the proceeding.
Cost
Arbitration can help reduce litigation expenses. A significant issue in virtually all litigation is preparation for discovery (formal requests for documents and information), and particularly the cost of document assembly and production. Since discovery in arbitration is usually much more informal, if not non-existent, many costs inherent in civil litigation do not arise in arbitration proceedings. The consumer must also consider the percentage of more established arbitrators, attorneys and judges. Consumers may, for example, select a law school graduate with a few years experience rather than a more expensive, more experienced attorney or judge. Arbitrators, attorneys and judges also may be more efficient in determining the issues at hand in arbitration. For example, motion practice and hearings for a trial may take many hours when a court docket is crowded. In arbitration, the hearing might take less time to schedule, may be held in a conference room rather than a courtroom, and there may be no motions at all. The potential gain in efficiency allows for significant net savings.
Speed
Litigation, particularly in United States courts, can be a long and drawn out process. On average, civil suits may take years to resolve, depending on the level of the dispute. If the issue in dispute is whether a consumer deserves full recompense for a defective vehicle, the consumer may be living with the alleged defect and seeking restitution while the case is being litigated. In arbitration, depending on the type and cost of arbitration sought, the amount of time that elapses between the filing of the complaint and the arbitrator’s decision can be significantly shorter than it would be through the courts. The Consumer Financial Protection Bureau has estimated that arbitration can potentially reduce the amount of time that elapses before the decision is rendered by 50 per cent. Of course, these estimates depend on many factors. An informal and efficient arbitration process may take far less time than a court process, but an expensive process or a major dispute may lengthen the arbitration proceedings.
Privacy
The privacy of the arbitration process may be important to some consumers. In United States courts, the entire litigation process is usually a matter of public record, and unless the court seals the records, the outcome and the substance of the case will be available to the public. In an arbitration, although the potential exists for settlement records to leak out, arbitration proceedings are usually confidential.
Disadvantages and Concerns for Consumers
There are certain potential drawbacks to arbitration for the consumer. For instance, while the consumer may be limited in their ability to reclaim punitive damages, the manufacturer usually is not. Further, some arbitration clauses make the arbitration decision binding on the parties. This means that the consumer does not have an option to appeal the decision if they do not agree with it .
There can also be a concern that the arbitrator may be biased in favor of the manufacturer, especially if the same arbitrator is used repeatedly by the manufacturer or the panel of arbitrators is drawn from a group selected by the dealership or the manufacturer. In addition, those decisions are generally not published, which prohibits the consumer from researching the precedent in place.
What to Know Before Signing
It is important to understand your rights before signing any agreement with a car dealership and this is especially true when it comes to arbitration agreements. It is important to know what you are giving up when you agree to arbitrate claims that arise out of your relationship with the dealership. In effect, you are agreeing to waive your right to go to court in front of a judge and jury, and you are giving up many valuable rights under the consumer protection laws that protect you from wrongful actions by dealers. You should never sign something unless you understand it, and you should never sign an arbitration agreement without knowing what the consequences are.
When you are reviewing an arbitration agreement you should ask yourself the following questions: 1) Is the arbitration agreement mutual?; 2) What claims must be arbitrated and what claims can I still take to court?; 3) How can I opt out of the arbitration agreement?; and 4) Does the arbitration agreement remove rights or remedies that would otherwise be available through a legal action? Even one-sided arbitration agreements can be problematic, and if these questions and concerns are present when you are reviewing the dealership’s contract, you should not proceed with the transaction until you speak with a lawyer.
Recent Case Law and Examples
Over the last few years, there has been a growing trend of states passing legislation to limit the use of arbitration agreements, though the trend has varied across the country. California, for example, passed a law in 2019 that went into effect on January 1, 2020, prohibiting new car dealerships from requiring consumers to agree to arbitrate all disputes as a condition of procuring a sale or lease. N.Y. Gen. Bus. Law § 399-cc (2020). The law further carved out an exception for existing customers ("procuring customers") that have a dispute with a dealer for their previous purchase or lease of a vehicle, and who signed an arbitration agreement with the dealer prior to January 1, 2020.
Several other states have also recently considered or are currently considering limitations on the use of arbitration agreements, including Connecticut, Florida, Georgia, Illinois, Louisiana, South Carolina, Wyoming, Texas, Vermont, and West Virginia. One distinct development in 2019 was the passing of an Illinois law, effective January 1, 2020, which applies to any consumer form contract that contains an arbitration or class action waiver provision. 820 Ill. Comp. Stat. 405/75. The law also expands the Illinois Attorney General’s enforcement mechanism to bring lawsuits for declaratory and injunctive relief against those who impose an arbitration or class action waiver provision on consumers in Illinois in violation of the law. The law expressly applies "retrospectively," meaning it applies "to the interpretation of contracts in existence or entered into before the amendatory Act’s effective date."
In federal court, the Consumer Financial Protection Bureau’s March 2019 Fair Lending Report summarizes the Bureau’s enforcement actions over the previous six years. For example, the CFPB noted that over the last six years, it has taken action on 18 non-discrimination cases involving dealers. It has also taken action against lenders that discriminated when purchasing dealer markup, specifically where discrimination was likely to occur. In March 2018, the CFPB reached a settlement with a large national bank for $2.774 million for discriminating against, and thereby denying, minority consumers access to credit. The Bureau had found that minority loan applicants were charged an interest rate that disproportionately exceeded the interest rate imposed on white borrowers, in violation of the Equal Credit Opportunity Act. Additionally, the Bureau noted that in 2016, it began to remove discriminatory pricing caps from consent orders.
The FTC also has an active interest in car dealerships and recent trends. Most car transactions involve negotiated credit and this ‘point of sale’ financing is nearly universally facilitated by dealers. When this situation occurs, the dealer is required to comply with Regulation Z, the implementing regulation for the Truth in Lending Act’s (TILA) Home Equity Lines provisions. The FTC’s Business Guide for Automotive Lease and Sales Industry provides guidance to dealers regarding which practices are prohibited, including misrepresenting warranty options and failure to provide important disclosures. Beyond lease and sale, dealers must also screen for red flags such as identity theft, credit card fraud, and refund fraud, as these practices can harm consumers even if they do no directly affect a transaction. If a dealer sells or provides, service contracts, it must comply with the holder rule under TILA, which protects consumers from hidden changes in the terms of the agreement and liability for defects that are covered under warranty.
Ways to Contest an Arbitration Agreement
Consumers who wish to challenge the validity of or opt out of an arbitration agreement in their auto sales contract have basically three options. The first option is to refuse to sign the actual sales contract. Refusal may be difficult given that the dealership often presents numerous documents at once and may insist that the consumer sign all of them in order to complete the transaction. However, if the dealership only presents the sales contract and the arbitration agreement separately, the consumer is likely to have additional leverage to refuse to sign the document. Many consumers will simply sign what they are presented with without reading the documents, however the consumer who wishes to challenge the agreement can review the arbitration agreement separately from the sales agreement before deciding whether or not to sign. Unfortunately, if the consumer chooses not to sign the contract, they often forfeit the car .
The second option available for consumers to challenge an arbitration agreement is to opt out of it. Many dealers will allow the consumer to opt out of the arbitration agreement, and specific language allowing the consumer to opt out must be contained in the sales contract, preferably in a box next to the paragraphs where the consumer signs the agreement. A dealer may also add additional language allowing the consumer to review the contract at home before signing it. This will provide the consumer with the opportunity to have another party review the contract and advise the consumer as to their best course of action after reading the arbitration agreement.
The third option available to consumers is to mount a legal challenge to the enforceability of the arbitration agreement. If successful, the consumer may be able to have the litigation proceed in court rather than before the American Arbitration Association.