Our clients are always looking for ways to minimize legal fees and reduce the number of lawsuits. There are many steps dealers can take to try to prevent litigation, which we frequently explore in these articles. One way to reduce litigation expenses, once it becomes clear a dispute cannot be avoided, is to enter into a strong and binding arbitration agreement with a customer. Arbitration can provide a way to avoid the expense of trial and eliminate some of the risks associated with a jury trial.

Binding arbitration is a type of alternative dispute resolution where the parties agree to submit their dispute to an impartial third party who serves as the arbitrator. Arbitrators must meet certain criteria in order to serve as an arbitrator and are often are retired judges or attorneys with a considerable amount of experience and training.

The difference between binding arbitration and mediation is that a mediator does not make a final decision. A mediator simply attempts to assist the parties in resolving their disputes, but renders no decision. An arbitrator, on the other hand, serves as a fact finder and will make an ultimate ruling that, with few exceptions, bind the parties and are not appealable.

While the arbitration process may be similar in format to a trial, it is more streamlined. Many of the rules regarding discovery and evidence are relaxed and, generally speaking, it tends to be far less burdensome than a trial with respect to cost and time.

There are numerous avenues for pursuing arbitration, which include using large national organizations such as the American Arbitration Association or small independent arbitrators who can be found in nearly every community. The rates arbitrators charge very greatly depending upon the community, the complexity of the case, and the subject matter. Most often clients want to arbitrate because the cost of hiring an arbitrator and conducting arbitration tends to be less than the cost of preparing for and conducting a trial.

The laws and rules applicable to dealer-consumer agreements to arbitrate vary from state to state. Some dealers have a separate arbitration agreement, which they review with the customer as part of the sales process, others integrate the arbitration agreement into their sales contract or warranty.

The key is to make sure that the arbitration agreement complies with all state and federal law so that it is binding upon the parties. For example, some courts have interpreted the federal Magnuson-Moss Warranty Act, which applies to warranties, to require that a party that makes an express warranty to include any arbitration agreement related to the warranty on the face of first page of the warranty. Otherwise, the arbitration clause may be deemed invalid. The best way to ensure that your arbitration agreement complies with all applicable state and federal regulations is to seek the assistance of your attorney in drafting your arbitration agreement.

Other considerations to make when drafting an arbitration agreement include the location of any arbitration, the selection of an arbitrator or a panel of arbitrators, payment, the ability to recover attorney’s fees for arbitration, and whether or not the parties are required to mediate or otherwise attempt to resolve the dispute prior to resorting to arbitration.

All of these issues should be clearly and unambiguously addressed in your arbitration agreement. Failure to address these issues may cause you to waive them or, if your arbitration agreement is unclear or confusing, it could cause the entire arbitration agreement to be ruled unenforceable by a court.

As with any legal strategy there are risks involved which you should discuss at length with your attorney prior to deciding to arbitrate disputes with you customers. For example, arbitrators tend not to dismiss cases before hearing the facts whereas a judge may. Arbitrators may be more tempted to “split the difference” between the damages claimed by a consumer and a zero recovery whereas a judge may require strict proof of damages to allow any recovery. However, for many dealerships arbitration can be an effective way to resolve disputes more quickly, efficiently, and less expensively than participating in litigation.