Binding arbitration is a very good alternative to the publicity, costs and delays associated with the court system. When properly implemented, binding arbitration provides a fair, fast and efficient forum for resolving legal disputes.

It can be “your equivalent of a bullet-proof vest”

Binding arbitration is a way to resolve a legal dispute outside the court system. It is considered binding when people agree in a contract (such as a buyer’s order or retail installment agreement) to waive their right to traditional litigation and instead arbitrate future disputes.

Should such a dispute arise, the parties involved present their side to an arbitrator. That arbitrator is a neutral third party, usually a retired judge or attorney. He or she weighs the evidence, makes a decision and issues an arbitration award based on substantive law.

One of the most compelling reasons for considering arbitration to resolve disputes is that in arbitration, you are less likely to see an extreme award, because decisions are made by legal professionals and not by a jury.

Here’s another reason: privacy. In fact, it is probably the most important benefit. The arbitration process is private in all jurisdictions.

Arbitration also is typically less expensive and faster than resolving a dispute through the court system. The average binding arbitration case can be resolved in less than nine months, whereas the average civil case takes more than two years to resolve.

The key is having a fair agreement. A properly drafted binding arbitration agreement can help protect dealers from unwanted publicity and the uncertain fate of a jury verdict.

“Plaintiffs’ lawyers have discovered how attractive auto dealers can be as defendants — especially in class-action lawsuits,” says Tom Hudson, managing partner of Hudson Cook, LLP, a firm that specializes in consumer financial services law. “Even the most conscientious and compliant dealers are not immune to these allegations. The plaintiffs’ lawyer’s strategy is to file a lawsuit, putting the dealer in the gun sights of a hostile jury, and press for a settlement. A properly drafted arbitration agreement can be your equivalent of a bullet-proof vest.”

A properly drafted agreement is imperative

Binding arbitration has its critics, and some of the criticism is warranted. This typically focuses on agreements that are not fair to consumers or employees. If you are considering binding arbitration, be aware of the surrounding issues and know how to avoid them.

It is imperative to have a properly drafted and implemented arbitration agreement. Without that, you will most likely encounter problems, and the agreement may not withstand challenges in court.

Courts across the United States have placed various tests on arbitration agreements to determine their validity. Typically, a court will look at five general areas when determining enforceability:

Affordability: The agreement should not impose unreasonable fees that prohibit a consumer from filing a claim.

Accessibility: The agreement should not impose undue burdens such as lengthy or unreasonable travel on the consumer.

Ease of use: The agreement should be written in plain language that consumers can understand.

Balance of fairness: The agreement should not require the consumer to arbitrate more claims than the dealer/finance company.

Obvious presentation of the agreement: The arbitration provision should be obvious in the agreement and not written in a smaller font than other important provisions in the same or any accompanying document.

Your legal counsel can work with you to ensure that any agreement you decide to use will withstand courtroom challenges.

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Explaining arbitration to customers

You should consult with legal counsel about the best way to present the concept of binding arbitration to your customers. Some of them may not be familiar with it and they will have questions.

Be certain that all employees involved in sales can explain what binding arbitration is. The explanation may be as simple as this: “The binding arbitration agreement means if you have a dispute with the dealership, you agree to go to a third party to resolve it instead of going to court.”

F&I employees will likely get the most questions, so they should be prepared to provide additional information. Here are answers to some common questions:

Q. Is the arbitrator biased?

A. The arbitrator is an independent and neutral third party. He or she will look at the facts and make a fair decision based on those facts and substantive law. An arbitrator will be disqualified if circumstances exist that create a conflict of interest or cause the arbitrator to be unfair or biased.

Q. Isn’t it faster to go to court?

A. Arbitration is typically faster than going through the court system. The average civil case takes more than two years to resolve, while the average arbitration case is resolved in less than nine months.

Q. As a consumer, how could I benefit from binding arbitration?

A. Resolving a dispute through binding arbitration is generally quicker, less expensive, less disruptive and less stressful than resolution through litigation. Studies have also shown that arbitration awards are comparable to the average court award.

It is also helpful to have binding arbitration brochures that provide detailed information for customers.

Handling customer objections

Occasionally, a dealer tells me about a customer who refused to sign a binding arbitration agreement. Many dealers have developed a standard business practice of obtaining a signed binding arbitration agreement with every transaction. If the customer refuses to sign the agreement, there is no deal. Tell the customer you are sorry that you will not be able to do business with them and ask the customer to come back if he or she reconsiders.

How does your arbitration agreement stack up?

If you are currently using a binding arbitration agreement, compare it to the checklist shown above, developed in consultation with Hudson Cook, LLP, to see how it stacks up against generally accepted principles of binding arbitration.

Protect your legacy

Is binding arbitration right for your dealership? I encourage you to consider it. Weigh the pros and cons, and talk with your legal counsel. A properly drafted arbitration agreement may be just the tool to help protect your legacy.

Charles F. Arrambide is assistant vice president and associate risk officer for Universal Underwriters Insurance Company. In his 24 years of experience in loss prevention and risk management, Arrambide has worked with numerous auto dealers to develop and implement risk improvement programs, including Binding Arbitration, Discrimination — Zero Tolerance training, STE&O Risk Management and the Auto Dealers Loss Prevention Guidebook.