Arbitration Used By Home Builders To Subvert Consumer Laws Home Builders Silence
Consumer Voices

An Editorial By Janet Ahmad President of Home Owners For Better Building And CAEC
Contributing Writer

Gladys Claridge, a 70 year old widow, decided in 1992 to take her life savings
and have a small home built on a piece of land handed down through the family.
Ironically, the name of the company was "Dream Homes". Soon her "Dream Home"
turned into a Nightmare because of foundation problems.

The contract prepared by the builder had a Binding Arbitration clause. Since her
claim was for $50,000.00, including attorney fees, she paid a $750.00 filing fee
to the American Arbitration Association (AAA). Approximately two weeks later, the
AAA required her to pay an additional fee of $2,235.00. Obviously, since she had
already spent here life savings on the house, she did not have the money for
arbitration. So her attorney asked the court to allow a trial by jury since she
could not afford arbitration. (The costs of arbitration must be paid up front.
There are no contingency options). The court said no, and the fourth court of
appeals upheld the decision, taking away her Constitutional right to a trial by
jury.

In another case, when the homeowners refused to close on the house because it was
not satisfactorily completed and many items were left unfinished, it was taken to
arbitration. The arbitrator ruled that the BUILDER was allowed to keep the
$140,000.00 house along with the homeowners' fixtures and earnest money, and the
BUILDER was awarded $100,000.00.

In yet another case, the arbitrator ruled that the builder had to repair all the
items in the house except the building code violations, and BUILDER was awarded
$10,000.00 in attorney fees.

By far, the most damaging effort has been the promotion and use of Binding
Arbitration clauses in home builder contracts to avoid their responsibility to
honor warranties. In order to buy a home in today's market, home buyers must give
up their Constitutional rights. Additionally, the law does not apply in
arbitration. Attorneys point out that in arbitration there is no requirement for
due process, right to discovery, rules of evidence or procedure and thus it
subverts the protection afforded by consumer law. The arbitrator's decision can
be filed as a final judgment in a court, even if the arbitrator's decision is
contrary to consumer law .

This is how it works. The AAA has nothing to do with the court justice system; it
is a free enterprise business. Some of the AAA's biggest and best clients are the
home builders who put Binding Arbitration Clauses in their contracts or
warranties. Contracts may vary, but basically they read: "All claims... that may
arise out of this agreement... shall upon the demand of either party, be
submitted to binding arbitration before the American Arbitration Association and
shall be governed by the provisions of the AAA Construction Industry Arbitration
Rules." In the literature published by the AAA in 1996, it states: "...AAA
created the ADR Task Force, comprised of 55 representatives of the construction
industry and its advocates... with a goal of improving AAA services and helping
the AAA be more responsive to the needs of the construction industry." There is
no mention of the consumer in the AAA literature.

Since the rules of arbitration were written by the construction industry, it is
not surprising that they were designed to benefit the home builder at the expense
of the homeowner. One rule in particular is Fast Track, which is clearly a
disadvantage to the homeowner. The homeowner has only thirty days to find expert
witnesses, get estimated costs of repairs, and find an attorney-- all while
holding down a job and raising a family under stressful and very difficult
circumstances.

Finding an experienced arbitration attorney in construction is extremely
difficult since most represent the construction industry, including home
builders. More and more attorneys complain that arbitration is expensive, costing
over $2,000.00 as a starting point. And, under "Fast Track", discovery is not
allowed; therefore the thirty day time restraint does not allow for proper
preparation for a hearing, thus making it impossible to find justice for the
consumer. One example is that most builder contracts do not allow the homeowner
to have a set of plans and specifications, again in fine print. Since discovery
is not allowed, the builder is not required to produce the original set of plans
and specifications, which are critical for preparation and the basis of any
construction dispute. Under normal litigation in a court of law, the builder
would be required to produce any documents the court deems necessary under rules
of discovery for the purpose of the consumer to prepare for trial.

The strategy and growing trend is for the home builder to take the homeowner to
arbitration. It is often used early on to stop homeowners from the ability to get
their warranty work done or even to get the home completed. The builder's
strategy relies on the fact that many homeowners will back down because of the
high cost of arbitration. It is apparent that by putting binding arbitration
clauses into their contracts, and simply not honoring the contracts, that home
builders are soliciting business for the AAA.

Complaints against home builders have reached epidemic proportions, making
arbitration a very lucrative business. One survey conducted in San Antonio, Texas
revealed that 75% of homeowners responding had problems with their builder and
would not recommend their builder to a friend. A similar survey conducted by the
Charlotte Observer in Charlotte , North Carolina likewise revealed a high level
of dissatisfaction among homeowners regarding the performance of their home
builders. Home builders in some states are completely unregulated.

Frustrated with arbitration and his inability to get his homebuilder to correct
multiple defects, one attorney publicly stated: "Home builders have gone far too
long without checks and balances, and have become entrenched with confidence that
they can do almost anything other professions would not dream of doing. Just look
at what many builders actually put in their warranty clauses: 'Seller makes NO
warranty,... as to quality, fitness, for a particular purpose,... habitability or
otherwise.' Are we not talking about builders selling a home and a thirty year
mortgage?"

Sadly, appellate courts are upholding arbitration decisions with regularity, even
over issues of Constitutional rights. On July 1, 1999 the 3rd US Circuit Court of
Appeals in Philadelphia upheld the binding arbitration clause. The court said it
didn't matter that the clause was in fine print on the reverse side of the
contract; hence, the consumers were barred from litigating in court.

There is something un-American about all of this. With the stroke of a pen to
obtain the American Dream, one must sign away their Constitutional rights,
resulting in the subversion of existing consumer laws. Indeed, "the pen is
mightier than the sword"!