Can arbitration eliminate the risk of class actions?

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By Alex Baykitch and Donny Low

Arbitration is being increasingly used by companies, particularly in the US, to resolve disputes and avoid court litigation, including class actions. A particularly interesting feature of this trend is the use of arbitration clauses in consumer and customer contracts. It is now common to see arbitration clauses in contracts for mobile phones, rental cars and banking services. Arbitration clauses are also being used in employment contracts.

Arbitration clauses have been common in cross-border contracts for a long time. Arbitration provides a neutral forum to resolve disputes, with neither party having a ‘home-ground’ advantage by litigating in its own country’s courts. Also, arbitration awards in cross-border contracts are enforceable almost everywhere under the New York Convention, unlike court judgments, which are very difficult to enforce against assets located in other countries.

The use of arbitration clauses in domestic consumer contracts is driven by other factors. In the US, arbitration clauses protect against a company having to defend claims brought in different state courts and jurisdictions. Arbitration can provide a relatively standard process and often cases are decided on the papers, saving the costs associated with court hearings. In the US context, arbitration also avoids civil jury trials…

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