New Rule Restricting Use of Arbitration Provisions Follows Trend Towards Transparency and Fairness

Jul 17, 2017 1:27:34 PM

Recently the Consumer Financial Protection Bureau issued a new rule restricting the use of arbitration clauses in contracts for all sorts of financial products such as credit cards, payday loans, auto loans and more. Why are arbitration clauses so important? They are typically used to prevent aggreived consumers from banding together in class action lawsuits by requiring them to deal with financial institutions 1:1 in form of an arbitrator.  According to a Bloomberg article, its working:

CFPB found that hundreds of millions of contracts include arbitration provisions and that companies have used the clauses to keep fights out of court almost two-thirds of the time. Very few consumers even consider bringing individual actions against financial-service providers in court or in arbitration, the study showed.

As the Bloomberg article also points out, industry groups are already putting up a fight, so who knows what will actually happen with this rule.

The rule follows a general trend applicable to high volume, standardized consumer contracts and policies - more transparency and fairness is being demanded. The rule above is an example of how this trend manifests itself in terms of what a certain industry is legally permitted to include in its contract. In the consumer privacy context, hidden and confusing privacy policies are frowned upon and at times can subject a company to stiff penaltes and fines. The same thing applies to the types of legal agreements you see in eCommerce and Saas (i.e. Terms of Use and Terms of Service): if you try to sneak legal terms into a click-through transaction, odds are those terms won't be enforceable.  

None of this should really be news - the law has always leaned mostly in the direction of transparency and fairness when it comes to contracts. But with electronic terms and conditions LITERALLY EVERYWHERE these days, more and more mainstream attention is focusing on these concepts. Saavy businesses (and their legal counsel) need to weigh the risk v. reward of being transparent and fair with their contracts in light of this evolving environment. Which is the worse outcome:

  • A very transparent, balanced contract that may not minimize or eliminate ALL risk, but has a high probability of being enforced.
  • A set of hidden and confusing legal terms that purports to eliminate all risk for the business, but if challeneged in court, has a high probaility of NOT being enforced.

In the past, the decision would rest solely on a businsesses propensity for legal risk. A factor to consider now in the age of omnipresent digital media is the public backlash that can occur when a business is accused of shady contracting processes. 

We typically advise our customers to err on the side of transparency (when implementing our platform). Anything else is an uphill battle that eventually they are likely to lose. Frictionless contracting doesn't need to employ shady tactics...its just needs to be strategic. 

 

Learn more about how you can reimagine contracts.

 

Brian Powers

Written by Brian Powers

PactSafe CEO & Founder