How Binding Arbitration Works

If you're considering adding a clause to your construction contracts that would make all disputes with customers throughout construction and the warranty period subject to binding arbitration, here's how the process works:

Binding arbitration is a mechanism to resolve disputes between builders and homeowners that arise during or after construction and that can't 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 a court hearing.

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 may 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 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.

Since arbitration requires the waiver of the right to a jury trial, courts have refused to enforce vaguely worded or ambiguous arbitration. And 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.

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 homeowners' initials or signature indicating that they have read it and understand it.
• Don't have the clause favor you at the expense of the homeowner (some arbitration clauses have been found to be invalid because they have been unreasonably favorable to the builder).
• Consider paying the homeowner'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 homeowner a say in selecting the arbitrator.
• Don't limit the remedies available in the arbitration clause. Don't deprive homeowners of remedies 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.

The information provided here is intended to familiarize you with the law on this particular subject. It is not intended to be an exhaustive presentation of legal information on the 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.

Reprinted with permission from Nation's Building News, published by the National Association of Home Builders.