Be Leery of Binding Arbitration Agreements

by Ralph Nader

"Americans are in love with their cars" is a badly overworked phrase, but it is a cliche that rings the cash registers at car dealers to the tune of $650 billion dollars of new car sales annually.

That's why many consumers are so vulnerable when they roam the car lots. Suddenly, they just have to get behind the wheel of that magnificent red convertible or that mammoth SUV. Caution diminishes and basic questions that might be asked even for the purchase of a $100 microwave-much less a $30,000 automobile--are forgotten.

Now car dealerships-already with all the advantages in their corner-are increasingly locking the door on consumers who might raise a dispute after the purchase of a car—even where outright fraud may have been involved.

This is being accomplished by requiring consumers to sign an agreement to forgo their Constitutional rights to ask the courts to settle a dispute with the dealer. Instead of an impartial judge or a jury of randomly selected jurors, the consumers are required to place their fate in the hands of an arbitrator. This is called binding arbitration which keeps the consumer from seeking justice in the court room even after the arbitrator's decision.

In theory, the arbitrator is supposed to be neutral and agreed on by both parties, but many dealers designate the arbitration company in the sales contract when the automobile is purchased. And common sense suggests the arbitration company isn't likely to come up with decisions which might cut off future business from the dealer.

If the binding arbitration clause is in the contract, why doesn't the consumer simply refuse to sign the contract? One big reason is that many consumers don't realize the requirement for binding arbitration is in the contract-and dealers aren't likely to mention the issue until the buyer has signed the contract and the consumer is about to drive away with the shiny new car.

In the cases where the consumer does become aware of the binding arbitration clause, the dealer often tells the buyer that they can't sell them the vehicle unless the binding arbitration clause is signed. At this point, all the advantages-certainly all the emotion-are on the side of the dealer. The buyer is salivating at the thought of driving away with that beautiful 220 horsepower monster and, too often, surrenders to the dealer's claim that the clause is a "must sign" agreement before the car leaves the lot. Car dealers, by definition, are negotiators and consumers should remember this when they lock horns over questionable claims about the mandatory nature of binding arbitration clauses. Remar Sutton, the president of the Consumer Task Force for Automotive Issues (http://www.autoissues.org/) lists some of the frauds that binding arbitration lets car dealers commit:

1. A dealership buys wrecked vehicles, repairs them, sells them to unsuspecting customers without disclosing the damage. The vehicle becomes a repair nightmare for the consumer and the dealer refuses to accept responsibility.
2. A dealership employee forges the consumer's credit statement and forces the consumer into an automobile loan that the consumer can't afford. When the forgery is discovered, the consumer is sued by the finance company. The consumer's credit is ruined.
3. A dealership trades in the consumer's old car, but never pays off the loan on the old car. The consumer is sued by the finance company and forced to pay thousands in damages.
4. A dealership buys lemon vehicles from the manufacturer, destroys the paper which shows the vehicles' histories and sells the cars to consumers.

Under arbitration, clear well established and consistent rules followed by courts are lacking. This makes it difficult for consumers to obtain information necessary to establish their claims in contrast to court procedures which provide for "discovery." Unless the arbitrators commit fraud their decisions cannot be appealed and, in most cases, there are no reviews or other oversight to ensure fair procedures. In short, binding arbitration is anything but consumer friendly.

While automobiles represent big investments for consumers (usually second only to purchases of homes), they are far from the only area where binding arbitration is imposed on consumers. Credit card companies, computer firms, electronic equipment sellers, insurance companies and home improvement contractors and large employers among others frequently slip in the binding arbitration clauses which take away the consumers' right to address their grievances in courts of law.

Consumers need to read these contracts closely to make certain they aren't giving away their rights to settle disputes in court. If companies insist on a binding arbitration agreement, just walk away from the transaction. You don't have to give away your rights as a citizen just for the privilege of purchasing an automobile or obtaining a credit card. It may take a little shopping, but there are choices in the marketplace where you can purchase a product and still keep your rights as a citizen. If more and more walk away, the vendors will start shaping up. For more information: Watch Dateline NBC's Hidden Camera Investigation December 5 with Remar Sutton, president of the Consumer Task Force for Automotive Issues and read the January/February 2002 issue the National Consumer Law Center Reports on binding arbitration clauses-NCLC Reports http://www.consumerlaw.org/