Mandatory Arbitration Hits Home
Texas and federal courts provide little protection to consumers trapped in arbitration agreements. The recent housing surge in the Lone Star State gave rise to a number of disputes between homeowners and homebuilders. Many homeowners learned, to their chagrin, that during the excitement of signing the contracts for their dream homes, they may have inadvertently signed away the constitutional right to have juries settle complaints against the homebuilders...In April 2002, Texas Lawyer reported an ongoing case of Dawn Richardson, an Austin homeowner, who filed a suit against David Weekley Homes after she learned that her family's new home allegedly was contaminated with dangerous levels of toxic mold and volatile organic compounds such as benzene, benzaldehyde, decane, heptane,formaldehyde, methylbenzene, octane, styrene and xylene.

Mandatory Arbitration Hits Home
Texas Lawyer June 3, 2002

SECTION: NEWS; Vol. 17; No. 50; Pg. 21

by ROBERT S. BENNETT and DAVID M. MEDEARIS

Texas and federal courts provide little protection to consumers trapped in
arbitration agreements. The recent housing surge in the Lone Star State gave
rise to a number of disputes between homeowners and homebuilders. Many
homeowners learned, to their chagrin, that during the excitement of signing
the contracts for their dream homes, they may have inadvertently signed away
the constitutional right to have juries settle complaints against the
homebuilders.

Although Texas Civil Practice and Remedies Code ?171.022 prohibits judges
from enforcing mandatory arbitration clauses when such the agreement is
determined to be unconscionable at the time the contract was formed, there
is no standard for the court to apply. Texas courts - for example Houston's
1st Court of Appeals in Emerald Texas Inc. v. Peel (1996) - have upheld
binding arbitration clauses in homebuilder contracts where all evidence
indicates that buyer had no knowledge of real estate or even a basic
understanding of what arbitration meant. Furthermore, the Texas Supreme
Court has made it clear - in 1999's In re Oakwood Mobile Homes Inc. - that
it makes no difference if the arbitration clause is an option or a
take-it-or-leave-it adhesion contract. In the words of the court in Emerald,
"public policy favors of arbitration." In April 2002, Texas Lawyer reported
an ongoing case of Dawn Richardson, an Austin homeowner, who filed a suit
against David Weekley Homes after she learned that her family's new home
allegedly was contaminated with dangerous levels of toxic mold and volatile
organic compounds such as benzene, benzaldehyde, decane, heptane,
formaldehyde, methylbenzene, octane, styrene and xylene. [See "In Austin:
Arbitration-Bound Texans Seek Lawmakers' Help," Texas Lawyer, April 15,
2002, page 1.] As alleged, all the family's personal belongings were ruined
by the contamination, and they were forced to evacuate after discovering the
contaminants caused the family serious health problems, including
neurological damage to their baby and the death of their family cat, which
had cancer.

Recently, in Richardson v. Weekley Homes, the 53rd District Court of Travis
County ordered the Richardsons to arbitrate their dispute with Weekley
before the American Arbitration Association on the arbitration clause, which
the Richardsons alleged they did not understand when they signed the
contract with the homebuilder.

In Richardson, the homebuilder agreed to advance filing fees and arbitration
fees, but this underscores another problem with mandatory arbitration
clauses in consumer contracts. Large companies often contract with
arbitration firms to handle all consumer disputes. Companies naturally tend
to use the same arbitrator repeatedly - as long as they are happy with the
results they obtain. Moreover, the secrecy of arbitration proceedings and
loss of trial and evidentiary precedent makes it difficult for consumers to
go up against arbitration regulars, such as large homebuilders. Because of
the recent surge in new home construction in Texas and the usage of
mandatory arbitration clauses by savvy homebuilders, it is likely this
alternative justice will mean no justice to many homeowners.

Despite the longstanding public policy favoring arbitration and other forms
of alternative dispute resolution, there is reason to believe that the tides
may be changing. For instance, earlier this year, the U.S. Supreme Court
ruled in EEOC v. Waffle House Inc. that the Equal Employment Opportunity
Commission could bring suit on behalf of employees in court even when the
employer requires their employees to enter into binding arbitration
agreements as a condition for employment. Justice John Paul Stevens,
speaking for the court, noted that "[d]espite the FAA [Federal Arbitration
Act] policy favoring arbitration agreements, nothing in the FAA authorizes a
court to compel arbitration of any issues, or by any parties, that are not
already covered in the agreement." In the dissenting opinion, Justice
Clarence Thomas argued that "[b]y allowing the EEOC to pursue
victim-specific relief on behalf of [the employee] . . . the court
eviscerates [the employee's] arbitration agreement. . . ."

Several weeks after the EEOC decision, the 5th U.S. Circuit Court of
Appeals, interpreting Texas law, also refused to compel arbitration in a
case involving the sale of a mobile home, in which the sales contract
included a mandatory arbitration clause. In that case, Fleetwood Enters. v.
Gaskamp, the buyer's children allegedly suffered personal injuries from
exposure to formaldehyde in the new mobile home. The court held that since
the children were not parties to the contract, the parents were entitled to
bring suit on behalf of their children.

While the EEOC case and the 5th Circuit case relate to the party bringing
suit, one court suggested that another controlling factor is whether the
particular disputed issue is covered by the contract. In a 1999 Florida
case, Seifert v. U.S. Home Corp., brought against a homebuilder by a
homeowner whose husband allegedly was killed due to a defective air
conditioning system installed in their new home, the Florida Supreme Court
refused to compel arbitration because the court ruled that the agreement to
arbitrate is not necessarily binding on independent tort actions based upon
common-law duties.

While these recent court decisions offer some hope for consumers who
unknowingly sign away their constitutional right to have juries settle
complaints, the recent decision by the 53rd District Court to compel
arbitration in Richardson highlights the need for re-examination of the
policy of allowing adhesion contracts by large corporations to deny
consumers a day in court.

On May 15, 2002, the Texas Legislature held a hearing on binding arbitration
to review the topic, "trends in the use of binding arbitration requirements
in consumer agreements, with special attention to transactions in which the
consumer has little or no bargaining power." Consumer groups as well as
representatives of the homebuilding industry participated full-force in the
debate. However, both sides agree that as far as the Texas homebuilding
industry is concerned, mandatory arbitration is not an option for aggrieved
homebuyers - it is the rule.

One homebuilder tells homebuyers who refuse to sign his company's
arbitration clause to go elsewhere. He says they will continue this
practice, even if and when the roaring economy slows down, according to the
information in the committee packet of the Subcommittee on Binding
Arbitration. According to information received by the Subcommittee on
Binding Arbitration, several homebuilders require purchasers to enter into
mandatory arbitration agreements.

Because the FAA pre-empts state law, it is difficult for state legislatures
to do away with mandatory arbitration. However, some states have taken
positive steps to protect their consumers. For instance, California recently
enacted a law - California Code of Civil Procedure ?1298.7 - that
eviscerates agreements in any claims related to bodily injury or wrongful
death. More significantly, last year, New Mexico became the first state to
adopt the Fair Bargain Act developed by Paul Carrington, a professor at Duke
Law School, according to a report submitted to the subcommittee, "Public
Citizen, Revised Uniform Arbitration Act: An Opportunity for State-Level
Reform."

The Fair Bargain Act, which applies to all standard form contracts or
leases, provides statutory guidance for judicial relief to have clauses that
"disable civil disputes" declared unenforceable in certain circumstances.
The act is a legislative attempt to make arbitration fairer to consumers,
and since the act applies across-the-board to form contracts - whether they
include a mandatory arbitration clause - the act is not anti-arbitration,
but pro-fair-arbitration, which is consistent with the philosophy of the
Federal Arbitration Act, and thus should survive pre-emption challenges.

Maybe it is time for Texas to follow New Mexico's lead and protect its
consumers.

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