Last week, the D.C. Court of Appeals issued an important ruling for consumers who are forced to sign contracts containing arbitration clauses. The ruling will make it easier for consumers to challenge arbitration clauses in court when the consumer had to agree to the clause in order to enter the contract. According to the ruling, a consumer may file an action in court to challenge an arbitration agreement as “unconscionable,” meaning that it is so unfair that the law will not enforce it.
An arbitration clause compels one or both parties to an agreement to resolve disputes through arbitration instead of in a court. While arbitration is generally a much faster process than a lawsuit, it removes many of the procedural protections that a lawsuit allows, including most opportunities for appeal. Arbitration clauses were originally intended as a way to reduce litigation costs in disputes between businesses, but have become increasingly common in consumer transactions. It is a process that is designed for two parties who are experienced and used to the procedure. According to the Center for Responsible Lending, statistics suggest that consumers receive worse outcomes from arbitration over credit card disputes than comparable consumers do in litigation.
The Court’s opinion deals with arbitration clauses in contracts where consumers do not have the chance to negotiate the terms of the agreement – including whether there is an arbitration clause. These kinds of standard form contracts, called “contracts of adhesion,” require consumers to sign the contract or walk away with no option to change its terms. The arbitration clauses in these contracts are often complex and confusing, written at a higher reading level than even the rest of the contracts. In many areas of the consumer economy, like credit cards or car loans, nearly every company uses an arbitration clause, meaning consumers cannot opt to take their business elsewhere to avoid the arbitration clause.
In this case, a consumer claims he was misled into buying a car when he thought he was guaranteeing a friend’s purchase. After the car was repossessed the lender tried to make him pay $8,817.50. If the lender had its way, the consumer could not have sued in court to address the violation of his rights under consumer protection laws. Instead, he would have been forced into the arbitration process where companies take advantage of their familiarity with the process and lack of protections for consumers.
Legal Aid has addressed the issue of arbitration clauses in consumer contracts before. Arbitration clauses interfere with consumers’ rights by limiting procedural protections, charging high costs, preventing appeals, and taking place outside the public eye. Although the Court’s ruling will give consumers in the District of Columbia a new avenue to protect their rights under the law, more must be done at both the federal and local level to make sure that arbitration clauses do not shield companies that abuse consumers.
The case is Colin Andrew v. American Import Center, Case No. 09-CV-893.