Arbitration Clauses: The Impact of Collections Cases

It is not uncommon for some credit card agreements and loan contracts to include an arbitration provision, which allows either party to move disputes to be resolved via arbitration rather than a typical lawsuit. Courts have held that an arbitration provision remains valid and enforceable even if the creditor has already initiated a lawsuit to collect a debt. Thus, rather than going through the court system, the case must proceed through the arbitration forum. 

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Initiation of Arbitration

Arbitration typically includes significant upfront costs to the business including filing fees, case management fees, and the arbitrator’s compensation. The process typically begins after one party invokes the right to arbitration. Once the demand for arbitration is filed with the proper arbitration forum, an arbitrator is appointed. 
 

Each party is typically ordered to exchange the information it relies on to prove its claims. Depending on the type of case (and the amount in question), the arbitrator may proceed with a Desk-Arbitration, also known as a “Documents Only Arbitration” or a in-person hearing. A Desk-Arbitration is a case in which the arbitrator asks each side to prepare a brief written argument along with the documentary evidence each side relies on. An in-person hearing is conducted similarly to a trial or an evidentiary hearing and allows each side to present its evidence and any arguments.
 

After the hearing or submission of the documents in a Desk-Arbitration, the arbitrator will review the evidence presented and issue a written award. Unlike a judgment in a traditional court case, an arbitration award is generally subject to very limited appellate review and is difficult to overturn. 

After an award is issued, the prevailing party is then able to confirm the award with the court. This process converts the arbitration award into a judgment, which then allows creditors to collect on the judgment via the typical remedies. 
 

Creditors should consider a few factors before proceeding with arbitration. Perhaps the most important consideration is the cost. The upfront costs of arbitration certainly are not preferable to the cost of a civil court case, but if the debtor compels arbitration pursuant to a mandatory arbitration clause there is not much choice. One of the most important factors to consider is whether the arbitration clause allows the creditor to recover the costs of the arbitration from the debtor upon a favorable award. 

It is also important to consider whether it may be more advantageous to settle the debt without the need for arbitration. This can be dependent on the amount of balance sought, the timing of the arbitration demand, and evidence (or lack thereof) presented by the debtor. 

Also, arbitrations can be more informal than court proceedings.  Typically, hearings are conducted using zoom or other remote appearance technology, which be easier when having schedule witnesses.    Further, depending on the arbitrator, there is generally not a strict adherence to the rules of evidence like there may be in a court proceeding.

Finally, arbitrations are binding.  Once an “award” is given, it is generally final.  There is not an appeals process like in state or federal court, and the opportunity to challenge an arbitration award is limited.   Once the award is rendered however, the prevailing party can file an application with the state court to confirm the award, and once confirmed, the award becomes a final judgment subject to same execution tools for creditors available as any other judgment.

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Conclusion 

Arbitration clauses can significantly impact the strategy, cost, and timeline of debt collection efforts. While arbitration often provides a streamlined alternative to traditional litigation, it also presents unique challenges, including higher upfront costs and limited opportunities for appellate review. 

For creditors, understanding the arbitration process and the terms of the underlying agreement is critical to evaluating potential recovery and managing risk. By carefully assessing the costs of arbitration, the availability of fee-shifting provisions, and the strength of the supporting documentation, creditors can make informed decisions about whether to proceed through arbitration, negotiate a settlement, or pursue other available avenues for resolution. 

Ultimately, a thorough understanding of arbitration provisions allows creditors to better navigate collection disputes and maximize recovery opportunities. If you have questions on this topic or would like to learn more about Weltman’s Solutions, feel free to connect with Cincinnati Attorney Adam Ruwe at any time.

This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.