Does Your Arbitration Clause Provide the Protection You Think it Does?

Many dealers rely on arbitration agreements as an alternative form of dispute resolution to a judge or jury trial.

Steve Levine, Attorney, Ignite Consulting Partners

Many dealers rely on arbitration agreements as an alternative form of dispute resolution to a judge or jury trial.  The reasons range from the speed, costs, to being able to avoid a “runaway”, emotional jury.  Recently, though, I've seen a number of these agreements or clauses that provide a false sense of security because of drafting errors that could lead to disaster.

For instance, I've read more than one form that stated that the rules of commercial arbitration apply, and I think a strong consumer advocate could successfully argue that a car finance transaction is clearly a consumer transaction, and move to set aside the agreement and pursue claims in court, which the agreement is meant to prevent.  Similarly, in a recent review I came across language that mandated the arbitration take place in the county where the dealer is located.  This sounds fair, but a consumer that has moved far away or out of state can argue otherwise and try to defeat the clause on that basis.

Many of these agreements identify the administrative body that will conduct the arbitration and the rules that will be followed, but what if that body no longer exists?  Would a judge rely on that reason to mandate a judicial action instead?  I'm not much of a betting man, so I'd rather not find out.

Finally, make sure your agreement clearly states it is subject to the Federal Arbitration Act instead of a state law  because federal law may be more favorable, and check that your form has a mechanism that specifies how fees and costs for the coverage will be allocated.  Absence of these points have been successfully used to set aside arbitration agreements.  

To sum it up, don't take the risk and assume that your form is compliant, have it checked out by a qualified expert.  

In next week's blog, I'll dive into an often overlooked use for arbitration agreements that can cost a dealer big.


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