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Banning arbitration clauses may increase business litigation

Generally businesses and entrepreneurs want to avoid having to go to court over any type of dispute. Business litigation can be expensive and time-consuming, which can be detrimental to a company's profit margins. The car industry in Michigan and elsewhere have been aware of this, which is why automotive dealerships have been including binding commercial arbitration agreements in their loan contracts.

However, the Consumer Financial Protection Bureau is now considering banning automotive dealerships in the United States from using these types of dispute-resolution provisions in their loan contracts. The bureau has been conducting a public inquiry to determine what effect these arbitration provisions have on consumers and financial services firms. The Dodd-Frank Act made the inquiry mandatory, while also granting the bureau power to enact regulations for consumer protection.

The automotive industry's use of arbitration clauses has increased significantly within the last 10 to 15 years. Many car dealerships claim that disallowing them to use arbitration provisions in their loan contracts will potentially increase costs and puts them at risk for class-action lawsuits. However, consumer advocates argue that ending these dispute-resolution clauses will help protect consumers who are usually at a disadvantage when dealing with car dealerships in the court of law.

If the bureau disallows use of arbitration clauses, it will likely cause an increase in business litigation for car dealers in Michigan and elsewhere. This will require the car dealerships to take this into consideration when they do their business planning. It may also require an increased understanding of all applicable laws affecting the car industry in order to avoid lawsuits as well as prepare to respond to them in an effective manner.

Source: autonews.com, " U.S. scrutiny of dispute provisions in loan contracts threatens dealerships ," Amy Wilson, March 20, 2013

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