Arbitration works like this: let's say your bank overcharges you $500. If you have an arbitration contract, then you cannot sue and have your claim decided by a jury. Instead, your claim will be heard by a single individual who will decide all issues of fact and law.
Consumer rights advocates have claimed that often the arbitration agencies and arbitrators can be biased because they receive so much of their business from big companies. Also, if the claim is for a small amount of money, it may cost more money to arbitrate the claim than the claim is worth.
Other problems that people have pointed out with arbitration include:
You have no jury in an arbitration. The fate of your claim rests only with an arbitrator, and not with a jury of local citizens
The arbitrator may have a concern that if he rules against the company, the company may not hire the arbitrator for more cases in the future. Often it is the company who pays the arbitrator for his time.
The company may have a lawyer to help it, but you may not be able to afford a lawyer if your claim is small.
The arbitrator's decision may not be explained or published.
The arbitrator’s decision may only be overturned by the court if you can go to the time and expense of proving extreme misconduct on his part.
Depending on the terms of the particular arbitration clause, there could be a risk that you may have to pay the arbitrator and the corporation's attorneys.
See also this article in Bloomberg Businessweek.
In addition, virtually all arbitration clauses also include a ban on bringing or participating in any form of class action. In the above example, it might be possible for you to get legal representation if you could show that many, many other people were also overcharged - the sum of all your claims together would be enough to warrant hiring an attorney. Arbitration clauses with class bans take away this option, forcing individual customers who have been wronged to face behemoth companies alone.
Often, customers never even know these provisions exist because they do not read the agreements. Customers are rarely asked to agree to all terms before opening their accounts, and the arbitration agreements are mailed later.
Most people who do take the time to read their contracts lack the legal knowledge necessary to truly understand how arbitration works and what they are giving up. Even attorneys with full knowledge of these clauses often agree to them, simply because they have no other choice. Bank accounts, credit cards, and mobile phones are necessary in today's world, and you cannot get any of those without signing on the line and agreeing to the terms presented.
Also, many times a person may agree to a contract by clicking a button on an internet website. By clicking the button they have agreed to be bound by a long list of terms and conditions that they have never read. This could include an arbitration clause.