Many large companies routinely include a mandatory arbitration provision in their contracts with smaller businesses and consumers. These large companies thereby become the best customers for the arbitration services and arbitrators. They provide almost all repeat business. You, the small business person or consumer, on the other hand, are someone the arbitration business is not likely to ever see again. Your arbitration with them is a one-shot deal. You are not a repeat customer, unlike the big businesses who put those arbitration clauses in their contracts.

Think that doesn’t influence the arbitrators? In an ideal world, it would not, and maybe with some arbitrators it does not, but in the real world, do you really think the arbitration services don’t know which side the bread is buttered on? Do you think they are not aware of who keeps them in business? Do you think big businesses would keep using them if the results did not tend to favor big businesses?

In addition to this inherent bias against the small business or consumer, the little guy also loses an advantage when giving up the right to a jury in favor of arbitration. The theme of a large business running roughshod over a small company or consumer and acting like a bully will often play well with a jury and sometimes leads to large verdicts or punitive damages. Large companies who act badly have good reason to fear juries. But in front of an arbitration panel, the little guy is far less likely to find any sympathy. Why is that? Many of these arbitrators, by virtue of their own careers as big firm and big company lawyers, tend to be biased in favor of big companies. And they are not swayed by sympathy for the underdog.

Arbitration has its place. It is intended as a faster and less expensive alternative to the court system. Sometimes it meets those goals. And between parties of equal size, where neither one enjoys an advantage as a repeat customer, it can be a viable alternative. But you should always think twice before you sign away your rights to a jury trial. The jury trial is a cornerstone of our liberties as Americans. Talk to a lawyer before you sign away that right.

Why do small businesses put arbitration clauses in their contracts?

My usual complaint with arbitration clauses is when they are forced upon consumers or small businesses by the big businesses. As I wrote previously, I think arbitrators favor their repeat customers, namely the big businesses. A trial court is a much more level playing field for the small business or consumer taking on Golliath. But recently I’ve started to see small businesses actually write arbitration clauses into their own contracts.

This creates a problem when the client comes to me because their customer won’t pay their bill. There’s no dispute, they’re just not paying their bills, probably because of the economy.

This is a discouraging discovery. Now instead of just walking a few blocks to the court house to file suit to collect the debt and then probably taking a default judgment or getting a summary judgment in a short time against the deadbeats, we face the problem of having to go to the extra expense of opening an arbitration claim. Or if we file suit, we run the risk that they’ll actually respond to the lawsuit by demanding arbitration, pursuant to the contact. If they do that, our court filing fee is down the drain and now we have to pay again for the arbitration fees.

Arbitration. Not faster, not cheaper. Not necessarily. Especially if all you are doing is trying to collect a debt. Getting a default judgment is cheaper and easier than trying to do the same in arbitration. Plus, even after you get your arbitration award, you’re still not done. To collect, you then have to file (and pay for) an action with the court to confirm the arbitration award. What a bunch of hassle just to collect an undisputed debt.

A small business that likes arbitration would be wise to at least exempt their own collections claims from their own mandatory arbitration provisions in their own contracts.

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