Reprinted with permission from
August 8, 2005 issue
Q. I'm considering adding a clause to my construction contracts that would make any and all disputes with my customers throughout construction and the warranty period subject to binding arbitration. What do I need to be aware of?
A. Binding arbitration is a mechanism to resolve disputes between a builder and home owner that arise during or after construction and that cannot be resolved through negotiations. Builders have turned to binding arbitration — also known as a pre-dispute arbitration agreement ? as a less expensive and less publicized alternative to litigation or hearing a case in court.
Through binding arbitration, the parties involved submit their case to a neutral third person or a panel of individuals known as arbitrators for a final resolution. Typically, an arbitrator's decision is final and neither party can appeal the decision except in the case of improprieties or fraud on the part of the arbitrator.
Arbitrators generally are professionals and may be more likely than a jury composed of laymen to understand the technical aspects of a construction controversy. Arbitration also may provide a speedier resolution than litigation.
Arbitration Is Recognized in All 50 States
Arbitration is a recognized method of dispute resolution in all 50 states. If a contract has a valid arbitration clause, one party may compel the other into an arbitration proceeding.
The same is true for situations involving interstate commerce (building a home using materials shipped across state lines, for example). In those situations the arbitration clause is subject to the Federal Arbitration Act (FAA).
Arbitration Clauses Should Be Specific, Prominently Located
Since arbitration requires the waiver of the right to a jury trial, courts have refused to enforce vaguely worded or ambiguous arbitration.
Also, because many courts take the position that an arbitration clause must be entered into "knowingly," they have stricken clauses that have been written in fine print or displayed in less prominent locations on contracts, such as the backs of contract pages. In fact, some states require a larger type size, specific locations within a contract or even an additional signature or initialing in order to make a mandatory arbitration agreement valid.
Finally, some arbitration clauses have been found to be invalid because they have been unreasonably favorable to the builder.
Some Dos and Don'ts
To help minimize the chances that your clause will be attacked:
- The arbitration clause in the contract should be obvious. It should include the home owners' initials or signature indicating that they have read it and understand it.
- Don't have the clause favor you at the expense of the home owner.
- Consider paying the home owner's filing fees or a portion of the fees if the consumer is unable to pay them.
- The arbitrator should not have ties to the builder or the building industry. You might want to consider giving the home owner a say in selecting the arbitrator.
- Do not limit the remedies available in the arbitration clause. Don't deprive home owners of remedies that they would otherwise have according to the law.
- Hold the arbitration hearing in a neutral location near the house at issue.
Some builders have also begun to abide by The Consumer Due Process Protocol, which establishes minimum requirements to ensure that the arbitration process is fundamentally fair. The protocol can be found at www.adr.org.
Your local attorney should be consulted for the appropriate language, type size, location and endorsement requirements for your jurisdiction.
If you have questions for Ask the Lawyer, click here.
There is no guarantee that your question will be answered in this format, so if you have a particular legal concern that requires immediate attention, contact the NAHB Legal Research Service at 800-368-5242 x8491.
"Ask the Lawyer" is a service of the NAHB Legal Action Committee and NAHB Building Products Issues Committee. The information provided is intended to familiarize you with the law in this area. It is not intended to be an exhaustive presentation of legal information on this particular subject, and in no way constitutes an opinion of law. Your own attorney must review this information to determine how it may apply to your particular situation.
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