Mandatory Arbitration Stinks

I recently wrote about one of the many dangers credit card holders face: mandatory arbitration. Most cardholders don't realize it, but they've agreed to have all disputes settled by arbitration firms that tend to favor the card-issuing banks.

It turns out this problem is more far-reaching than I'd realized. It crops up in cell-phone contracts and even employment contracts. But then I heard more.

For example, the housing industry. If you buy a home from a builder, chances are you sign a lengthy contract with lots of fine print. There's also a good chance that you're agreeing to mandatory arbitration in case of disputes. On the Milwaukee Journal Sentinel's website, Ellen Gabler recently wrote about the Metropolitan Builders Association:

The group arbitrates disputes between its members and consumers who build a new home or have work done on their existing home. If there is a problem, the builder and homeowner go before an arbitration board run by the builders association. The interesting thing is that the people deciding the case are all members of the association.

Imagine that -- you'd be taking up your beef about a builder to a group of people who are builders or associated with builders. It's not exactly a jury of your peers, is it? That's worth thinking about, because many people who support arbitration explain that it's faster and cheaper than going to court. That may be true, but it sure seems less fair than the court system.

Making matters worse is that most people don't realize they're agreeing to it, as the provision is typically buried deep in a contract. Companies that use arbitration clauses include national homebuilders like Toll Brothers (NYSE: TOL), Beazer Homes (NYSE: BZH), and Lennar (NYSE: LEN).

So what's the good news in all this? There has been agitation in Washington to ban mandatory arbitration clauses. The best outcome would be for Congress to improve the current situation. You may want to let your representatives know your thoughts on the matter.

But until then, be aware of what you sign -- and think twice if you see mandatory arbitration clauses in contracts.