Arbitration Agreements in Case of Class Actions


Arbitration has become a popular alternative to litigation in civil disputes. It is one of three primary forms of alternative dispute resolution (ADR) processes, the other two being conciliation and mediation.

During an arbitration, a neutral third party listens to each party’s case and determines an outcome that is usually binding. Before entering the arbitration process, parties are informed that they waive their right to trial. However, certain class action arbitration peculiarities set this ADR process apart from its typical form where a single plaintiff sues a private or public legal person, such as a company. Here is some valuable information about arbitration and class action lawsuits.

Different lawsuits

Arbitration is typically used in disputes between individuals and large corporations, such as banks and insurance companies. However, it is also utilized when two corporations have a legal dispute. Arbitrators understand that there is the potential for millions of dollars in settlements that may have to be paid. Therefore, they must weigh each party’s case and make a ruling that is fair to both. In cases that carry this much weight, arbitrators may prefer to work as a panel instead of individually.

A class-action lawsuit features more than one plaintiff. Each claimant is suing the defendant for something similar. For example, a set of plaintiffs might sue a bank over unfair bank charges. While the case might not have much weight when only one person sues, it immediately becomes more serious when hundreds of plaintiffs add their names to the suit.

Court vs. arbitration

Litigation is a costly and time-consuming process. Some cases take years to reach a court by which time clients have mountains of legal bills to pay. Their bills may outweigh how much money they stand to receive if the judge awards them any. This may put clients off from proceeding with a lawsuit. Even once cases make it to court, delays and adjournments follow. Undertaking civil litigation is not the same as what people see on television shows and films. There are long, agonizing intervals between the filing of a lawsuit and its conclusion.

The arbitration process is far quicker than litigation. Getting a case before an arbitrator takes less time. Even the arbitration process itself takes less time, which means fewer billing hours from the attorney. Most clients opt for one form of ADR or another for these two reasons. While it is a formal process, arbitration is not as ceremonious as a court appearance. Some clients find this more appealing as the idea of testifying before a judge and jury intimidates or overwhelms them.

Arbitration clauses

Many contracts that consumers sign contain arbitration clauses in the fine print. They force the client to enter arbitration should a dispute arise. Large corporations with significant customer bases, such as banks, mortgage lenders, cellphone and internet service providers, and insurance companies utilize such clauses.

Unfortunately, in their haste to sign the agreement, many consumers do not understand what this means. For most, it is not a problem as arbitration following a dispute is one of the best ways to ensure a favorable outcome for all. However, the devil is in the detail, and many arbitration clauses include information about class action suits too.

Class action suit waivers

Many arbitration clauses forbid the use of this process if consumers participate in a class-action lawsuit. For clients, this means a long road ahead that involves litigation. While individuals and a company might be ready to negotiate during a class-action lawsuit, they do not have to do so or accept any offer. This is even more challenging during a class action suit as the attorney must get all plaintiffs to agree to a settlement agreement.

Even worse, some contracts contain a class action waiver, meaning that clients cannot participate in a class action lawsuit at all. They are expected to sue the company as individuals. Critics have labeled this an attempt to minimize consumer rights in favor of large corporations. They say that it will prevent clients from making claims about unfair practices. 

For example, if a person has been overcharged $100 in bank fees, they are unlikely to go to court over it. However, what if a thousand people with the same issue banded together? But this may not happen if they signed a class action waiver in their agreement with the bank when they opened their account.

Class action arbitration in the future

Several lawsuits are challenging a Supreme Court ruling that made it virtually impossible for clients to enter a class action lawsuit and have it go before an arbitrator. However, until this happens, class action suits before arbitrators will be hindered unless companies do not include such clauses in their contracts with clients. This is yet another reason why consumers are urged to read the fine print before committing to any transactions to avoid nasty surprises when a dispute occurs.