Texas House panel hears complaints about binding arbitration requirement

By David Pasztor
AMERICAN-STATESMAN STAFF
Thursday, May 16, 2002

Home buyers with horrifying tales of creeping mold, collapsing walls and heaving foundations converged on a Texas House subcommittee Wednesday to complain about how they unwittingly signed sales contracts preventing them from suing the builders they claim are responsible for their woes.

"We're stuck with a house on our land that we don't want," Dawn Richardson of Austin told the House Subcommittee on Binding Arbitration. "We did not know that signing a construction contract . . . meant that we forever gave up our constitutional right to a trial by jury for any and all future disputes with our builder."

But Richardson and her husband did just that last year when they hired David Weekley Homes to build their $300,000 dream home on a 4-acre plot in Oak Hill. Without paying enough attention, Richardson said, she and her husband agreed to a contract clause saying any disputes would be settled through binding arbitration. The couple and their two small children moved out of the house after just a month, Richardson said, because leaks and other damage made it unlivable.

"The home must be torn down and rebuilt," she said.

Weekley Homes says it tried to work with the Richardsons to resolve problems but that the couple refused to cooperate.

The dispute would seem ready-made to land in the Travis County Courthouse, but when they tried to file suit, the Richardsons found they had already signed away that option. Instead, they must submit to an expensive arbitration process through a private nonprofit agency.

Consumer rights groups contend that such binding arbitration clauses have become an insidious force across the country, creeping into more everyday contracts. Credit card companies, cell-phone providers and some employers now routinely insert the requirement into contracts, testified Tom Smith of Public Citizen, the consumer advocacy group founded by Ralph Nader.

Home builders are drawing most of the ire in Texas, said Jackson Williams of Public Citizen, because almost all of them are now inserting binding arbitration clauses into their contracts at the suggestion of the Texas Association of Builders.

"Practically speaking, if you buy a new home, you're going to be in arbitration," Williams said.

Williams wrote a report released Tuesday by Public Citizen claiming its research shows that binding arbitration is increasingly putting consumers in a box. The costs of arbitration, which typically is shared by both sides, are often so high that it's not worth it for consumers to pursue a claim, the report says. And since arbitration takes place behind closed doors, consumers have no way to check the track records of home builders or other companies they are considering doing business with.

It's unclear, however, just what the state Legislature might be able to do about the practice, which is allowed under federal law. Many contracts are considered interstate commerce and fall under federal law. Even when a Texas home builder sells a house in Texas to a Texan, the deal still qualifies as interstate commerce because many of the thousands of parts of the house will have come from other states.

"If the lumber's coming from Oregon, it's interstate commerce," Texas Homebuilders Association lawyer Robert Bush testified. "No questions asked; that's federal law."

Still, Smith says, the state can require that businesses not insist on arbitration at the time contracts are actually signed, giving both sides the choice between arbitration or court if a dispute surfaces later on. The state also can open up the arbitration process, he said, so consumers have access to information about the past practices of businesses.

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