Arbitration Used by Home Builders to Subvert Consumer Laws
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." Unfortunately, her "Dream Home" quickly turned into a Nightmare attributed to foundation problems.
The contract prepared by the builder had a Mandatory Binding Arbitration clause. Since her claim was for $50,000, including attorney fees, she paid a $750 filing fee to the American Arbitration Association (AAA). Approximately two weeks later, AAA required her to pay an additional fee of $2,235. Obviously, since she had already spent her life savings on the house, she did not have the money for arbitration. Her attorney asked the court to allow a trial by jury since she could not afford arbitration. The court said no, and the fourth court of appeals upheld the decision, denying 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, the dispute was taken to arbitration. The arbitrator ruled that the BUILDER was allowed to keep the $140,000 house along with their fixtures and earnest money, and the BUILDER was awarded $100,000.
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 awarded $10,000 in attorney fees to the BUILDER.
By far, the most damaging effort has been the promotion and use of Mandatory Binding Arbitration clauses in homebuilder contracts to avoid warranty responsibility. In order to buy a home in today's market, homebuyers must give up their Constitutional rights. Even more incredible, law does not apply in arbitration. Attorneys point out that in arbitration there is no requirement for due process, right to discovery, or rules of evidence or procedure, and that it subverts all consumer law. Additionally, the decision of the arbitrator can be filed as a final judgment in a court, even if the decision is contrary to consumer law.
Worse yet, over the past 10 years HomeOwners for Better Building (HOBB) has been searching for homeowners who have won in arbitrated disputes against builders. We have found only 10 in the entire nation. One case was in Colorado ten years ago and another one in South Carolina in November of 2001.
Then there is the 10-year old construction dispute case of Robert and Jane Cull who in December of 2002 won the first binding arbitration case in the state of Texas against their builder Perry Homes. However, the builder fought the decision and as of this writing that case is still on appeal at the Texas Supreme Court. Their builder is Bob Perry who just happens to be the biggest campaign contributor to the states highest court, and in fact the most generous political donor in the State of Texas. See: Dream home becomes legal nightmare,
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How Binding Arbitration works
Arbitration services such as AAA and Construction Arbitration Services (CAS) have nothing to do with court of law or a trial by jury; it is a private free-enterprise business that serves the interest of business. Some of AAA's and CAS's biggest and best clients are the homebuilders who put Binding Arbitration Clauses in their contracts and 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 their literature published in 1996 by AAA, it states: "...AAA created the Construction 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 any of their literature.
Since the rules were written by the construction industry, it is not surprising that the rules were written to give the advantage to the homebuilding industry. One rule in particular is Fast Track, which clearly is a disadvantage to the homeowner. The homeowner has only thirty days to find expert witnesses, get estimated cost of repairs, and find an attorney, all while holding down a job and taking care of a family under stressful and very difficult circumstances.
Finding an experienced arbitration attorney in construction is very difficult since many represent the construction industry, including homebuilders. More and more consumer attorneys complain that arbitration is too expensive, with costs increasing dramatically over the past 10 years. Under Fast Track the cost of a $10,001 claim will cost in excess of $5,000 for just one day of arbitration.
Additionally, 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. Since discovery is not allowed, the builder is not required to produce the original set of plans and specifications which are critical in preparing a case involving a construction dispute under the best of circumstances. On the other hand, in a court of law the builder would be required to produce any documents the court deems necessary under rules of discovery to allow the consumer to prepare for trial.
The strategy and growing trend is for the homebuilder to take the homeowner to Arbitration. It is often used early on to stop homeowners from getting their warranty work done or even to complete the home. The builder's strategy is based on the probability that the homeowner will back down because of the high cost of arbitration. It is easy to understand that by requiring binding arbitration agreements in their contracts, homebuilders are soliciting business for AAA that has resulted in thousands of favorable decisions for homebuilders.
Homebuilder complaints are at epidemic proportions, making arbitration a thriving business nationwide. 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, produced similar results. Homebuilders in some states are totally unregulated.
Frustrated with arbitration and his inability to get his home builder to correct multiple defects, one young attorney stated publicly; "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 with a thirty year mortgage?"
Sadly, appellate courts are upholding arbitration decisions with regularity. On July 1, 1999, the 3rd US Circuit Court of Appeals in Philadelphia upheld the 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 a stroke of a pen to obtain the American Dream, one must sign away their Constitutional Rights, resulting in subversion of all existing consumer laws. Indeed, "the pen is mightier than the sword".
Texas Senate Interim Committee On State Affairs
In 1998 the Texas Senate Interim Committee on State Affairs held public hearings. Consumers testified about their heart-breaking stories. Bubba Claridge, a native Texan, had difficulty holding back the tears as he testified on behalf of his ailing mother, Gladys Claridge.
Home Owners for Better Building presented the following report on Binding Arbitration to the committee.
ARBITRATION DEADLY FOR THE CONSUMER
FOR THE CONSUMER, ARBITRATION IS NOT A JUST ALTERNATIVE TO A TRIAL BY JURY FOR THE FOLLOWING REASONS:
1. AAA INDUSTRY FRIENDLY, NOT CONSUMER ORIENTED
2. COST - VERY EXPENSIVE
3. TIME RESTRAINTS
- Hearing is held 30 days after choosing Arbitrator (faster than JP courts), representing a clear Builder advantage.
4. NO DISCOVERY OR CONTINUANCE
- Rules of Law not applied to arbitration process
- Rules of procedure do not apply under AAA
- No additional time granted for discovery
- No procedure requiring other side to produce requested discovery
- Hearsay accepted over sworn testimony
- No procedure to appeal Arbitrator's decision
5. METHOD FOR CHOOSING ARBITRATOR
- Qualifications and fees of arbitrators designed to be confusing to consumer
6. NO APPEAL TO JUDGE
- No opportunity to appeal matters of law, discovery, or time restraints of Fast Track, etc.
DISTINCT ADVANTAGES FOR BUILDER
- Builder's expertise and what she or he does for a living. All of which is related to protection of profits through limiting Builder responsibilities and warranties to Buyer and through arbitration of all disputes, which is only paperwork to the Builder.
- Relationship with and close ties to AAA
- Experienced legal council (most likely on retainer)
- Expert witnesses readily available to Builder
- Buyer must educate her or himself about arbitration, warranties, relevant legal issues, etc., and take time from work to search for an attorney, an arbitrator, expert witnesses, discovery, etc., all WITHIN 30 DAYS!
- Years of industry experience writing contracts designed to limit (if not eliminate) Buyer's rights and protections
HOME BUYER (CONSUMER) DISADVANTAGES
- Builder's contract uses unclear, ambiguous language along with narrowly worded, specific language to Builder's advantage
- Consumer believes Realtors protect Buyers interests
- No arbitration training in curriculum or continuing education
- Realtor unable to point out contract problem areas related to arbitration
- Extreme difficulty finding an attorney
- Bar Association referral lists no one with construction industry arbitration experience
- Most attorneys tell Buyer arbitration is quicker and cheaper. This usually indicates attorney has not handled Builder/Homeowner cases.
- Attorneys only available on hourly basis, not on contingency basis
- Difficulty finding expert witnesses; while builder has his subcontractors as expert witnesses
- Buyer/Consumer has other full time obligations
- Under old contracts without binding arbitration, Builder did not sue Buyer because the builder did not honor the warranty
- AAA keeps the construction industry informed of all changes to rules of arbitration; Buyers must educate themselves - painful, expensive education
- Home owner arbitration expenses are greater than cost of repairs
- Home buyer does not realize and is not informed they are giving up Constitutional Rights when they sign a contract with the Builder
THE THREAT OF ARBITRATION IS BUILDERS LETHAL WEAPON!