By Linda Gerstel With increasing frequency, lenders have been inserting arbitration provisions in lending agreements. Incorporating an arbitration provision in lending agreements, allows lenders to take advantage of the benefits of arbitration.
Arbitration takes the case away from the jury and deters lender liability blackmail.
Punitive damage exposure is reduced and arbitration is faster and costs less than litigation. Finally, arbitration maintains privacy. A carefully drafted arbitration provision may allow a lender to preserve its self-help remedies, and its ability to resort to the courts for monetary defaults while reserving arbitration for other disputes. Although the use of arbitration provisions by the banking industry is a relatively recent practice, challenges have been made to the enforceability of such provisions on grounds that the claims at issue are either not arbitrable or not within the scope of the arbitration agreement. In addition, borrowers have also argued that such provisions are unconscionable or lack mutuality.