Credit unions pride themselves on being the consumer-friendly alternative to banks. In the current atmosphere of bank mergers and acquisitions, they provide their members with an intimate and personalized financial service experience. According to James McCormack, president/CEO of the Pennsylvania Credit Union Association, “Credit union members know they’ll be treated like part of a family, not like an account number or just as a profit center.”

But what happens when disagreements arise, as they can do even in the best of “families”? This article explains how arbitration can offer a member-friendly mechanism for resolving legal disputes.

How does arbitration work?
In arbitration, parties submit their legal disputes to a private, neutral third party who renders a final arbitration “award.”

There are two types of arbitration proceedings: pre-dispute and post-dispute. Parties to a pre-dispute arbitration agree to arbitrate all or certain future legal disputes. Pre-dispute arbitration clauses are found in all types of financial services contracts, including credit card membership agreements, small business loans and auto leasing contracts.

Parties to a post-dispute arbitration agree to arbitrate their conflict after a dispute arises. Pre and post-dispute arbitration agreements generally name one or more arbitration providers, such as the National Arbitration Forum or the American Arbitration Association, as potential arbitration administrators.

To commence an arbitration proceeding, the aggrieved party simply completes an arbitration form, files it with the appropriate arbitration administrator and pays the appropriate filing fee (if any). To illustrate, under the National Arbitration Forum’s Code of Procedure, the arbitration administrator then forwards the filing party’s claim, the opposing party’s response and all other relevant documents to either a neutral arbitrator or a panel of neutral arbitrators. The arbitration administrator acts as “private” court by maintaining a list of arbitrators (often referred to as a panel) and requiring all parties to follow a code of procedure or rules.

In most arbitration systems, the parties can elect to have either a document or participatory hearing. If the parties chose a document hearing, the arbitrator renders an opinion after reviewing the electronic documents or paperwork they have submitted. Alternatively, when a participatory hearing is elected, each party submits evidence and appears via telephone or in-person before the arbitrator. After studying and evaluating the evidence, the arbitrator issues an arbitration award, which may then be converted into a judgment. Although converting an award into a judgment differs from state to state, the process is generally accomplished via motion practice.

Litigation: Expensive, slow and unruly
It is common for litigants to become quickly frustrated with the slow and expensive court system. Parties to a lawsuit soon realize that the litigation system is often more focused on pre-trial discovery wrangling than resolving legal disputes. Discovery is a pre-trial process whereby both parties to a lawsuit exchange relevant evidence and statements they intend to use at trial.

All too frequently, litigation is expensive, and the longer it takes for the parties to resolve pre-trial discovery disputes, the more expensive it becomes. In fact, a report (http://www.ced.org/docs/report/report_legal.pdf)
published by the Committee for Economic Development, an organization of business and education leaders addressing economic and social issues, found that discovery usually accounts for 80 percent of the cost alone in a fully litigated case. Unfortunately, pre-trial discovery gamesmanship frequently leads to a war of attrition, whereby each party tries to outspend the other.

Litigation is an emotionally draining experience. With seemingly endless timelines and constant lawyer bantering, litigants have become increasingly pessimistic about the legal system’s efficiencies. It’s not uncommon for litigants to feel trapped by a confusing legal system that seems to thrive on complex rules of procedure and evidence.

A 2003 survey conducted by the Institute for Advanced Dispute Resolution illustrates the public dissatisfaction with the legal system. According to an April 2003 IADR study, only 34 percent of respondents believed it was worthwhile to initiate a lawsuit. This is a significant drop from a 1999 IADR study in which 55 percent of respondents believed it was worthwhile to initiate a lawsuit.

In addition, in the IADR survey,  67 percent of the respondents felt that lawsuits took too long. And in a National Arbitration Forum survey, only 32 survey of Americans believed they could afford to bring a case in court.

In sum, litigation continues to evolve into an increasingly expensive and slow process. In a presentation, “Arbitration v. Litigation in Energy Cases,” William G. Paul, former president of the American Bar Association, explained, “By its very nature litigation is very expensive, particularly if either party chooses to make it so.”

It’s difficult to imagine how suing a member fits into the credit union motto of “not for profit, not for charity, but for service.” As the above discussion illustrates, litigation can be a distasteful process, especially when an institution sues one of its members (or customers). Credit unions can avoid the drawbacks of litigation, however, simply by using arbitration to resolve disputes.

Arbitration is a member-friendly alternative to litigation for a variety of reasons. The arbitration process is easier to navigate than the complex litigation system. Specifically, procedural rules used by arbitration providers are easier to understand when compared to federal and state rules of civil procedure, which even seasoned lawyers often have difficulty traversing.

Moreover, in an effort to make the arbitration process consumer-friendly, some arbitration providers, such as the National Arbitration Forum, provide parties with free resources that explain how to file a claim, respond to a claim and serve the opposing party. One would be hard pressed to find a court that provides the parties with such “litigant-friendly” information.

Several nationally conducted studies have found that arbitration is faster than litigation. For example, a February 2004 study conducted by the Corporate Legal Times found that 78 percent of surveyed general counsel and other high-ranking in-house counsel indicated arbitration led to faster recovery than litigation. Arbitration is faster than litigation in large part because it streamlines pre-trial discovery. Simply, arbitration allows the parties to focus on resolving their legal dispute. In fact, an April 2003 World Arbitration & Mediation Report study found that only 17 percent of attorneys’ time was spent on discovery in an arbitral setting, compared to 45 percent in court.

Arbitration is not only faster than litigation, it’s also less expensive than litigation. Surveys illustrate that trial attorneys have discovered arbitration’s cost-saving nature. For example, 56 percent of surveyed American Bar Association trial attorneys said it cost less to resolve disputes via arbitration vs. litigation. Consumers have also experienced cost- savings thanks to the ADR process.

One study (Lisa Brener’s “Costs and Value of Arbitration”) determined that 89 percent of consumer ADR users found arbitration was less expensive than litigation. In his presentation, Paul noted that 59 percent of Americans would automatically choose arbitration over litigation, a number that jumped to 83 percent in favor of arbitration when informed of the relative costs.

Arbitration seeks to provide an amicable alternative to the court system. With this end goal in mind, the arbitration system increases settlement opportunities. Settlement opportunities are especially important when a credit union wants to amicably resolve a member’s defaulted loan. Unlike litigation, the arbitration process offers a number of “work with” opportunities for the credit union and member to resolve their dispute independently before an arbitrator becomes involved. Consumers continue to appreciate arbitration’s inherently friendly nature; a RoperASW Survey for the Institute for Advanced Dispute Resolution found that 64 percent of consumer respondents said they would choose arbitration over a lawsuit in disputes involving monetary relief.

Danel A. Dufresne, Esq., is a staff attorney for the National Arbitration Forum. He can be reached at ddufresne@arb-forum.com or 800- 474-2371, ext. 6754.