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What Is Mandatory Arbitration?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 05 November 2014
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Mandatory arbitration is a means for resolving disputes in which the two parties involved are required to meet with an arbitrator, who is usually an attorney, and who is supposed to be neutral. Mandatory arbitration has attracted a great deal of attention among consumer advocates since the early 2000s, when it began to be used with increasing regularity in all sorts of contracts, from contracts to establish telephone service to purchasing contracts for homes. There are a number of issues with mandatory arbitration which can make it very problematic when it is not set up with care.

On the surface, the idea behind mandatory arbitration seems sound. If a problem develops, having a redress before having to go to court would seem logical; this allows people to try to work out a settlement before having to spend a great deal of money on legal fees. However, in some cases people sign binding mandatory arbitration clauses, which means that the outcome of the arbitration is legally binding, and if it does not feel fair, it may not be possible to take it to court.

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Furthermore, some supposedly neutral arbitrators are actually linked with the author of the contract in some way. For example, someone buying a home in a development might sign the clause without thinking about it, and learn that the arbitration company is actually owned by the developer once problems develop with the house and the homeowner attempts arbitration. Mandatory arbitration can also be costly for consumers, with some companies requiring that people pay fees to file complaints with the arbitration company.

The mandatory nature can also be an issue. Since arbitration is mandatory, people must approach the arbitrator first about any problem, no matter how serious it is. If the consumer refuses to deal with the arbitrator or attempts to take the case to court, it will be automatically rejected. Even when someone can take the outcome of mandatory arbitration to court, courts rarely overturn the decisions made in arbitration proceedings.

In some nations, pushback against mandatory arbitration has resulted in clearer laws pertaining to the practice, including laws specifying when, where, and how it can be used. The goal is to reduce abuse of such clauses, and to make sure that they are used appropriately, for the purpose of encouraging people to settle without involving the legal system, rather than forcing people to abide by arbitration decisions which may not be in their favor.

People should be aware that they have the right to review contracts and have them fully explained. It is possible to reject clauses within a contract, although the company issuing the contract may withdraw the offer of services as a result.

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