Article by NAHB  July 5, 2019

In a case with relevance to the home building industry, the U.S. Supreme Court held in Lamps Plus v. Varela (April 24, 2019), that the Federal Arbitration Act (FAA) envisions the use of traditional individualized arbitration, consequently, a party cannot be forced under the FAA to submit to class arbitration unless it is clearly and unmistakably permitted by an arbitration agreement (class arbitration is a type of arbitration that permits parties to bring an arbitration action on behalf of others with similar claims).

Under Lamps Plus, for example, in a matter governed by the FAA, a builder who has built multiple homes that suffer from a product defect could not be forced by those homeowners to arbitrate their claims collectively in one proceeding unless their contracts with the builder expressly provided for class arbitration. Absent that provision, the builder would be entitled to arbitrate each claim individually.

Notwithstanding this decision, to avoid any confusion, builders may wish to consult with their attorney about including an express agreement for individual arbitration.

Today, more than ever, builders need an alternative to litigation and the Lamps Plus case provides a good opportunity to revisit the subject of arbitration.

Why Arbitration?

Arbitration and other alternative dispute resolution (ADR) processes can have advantages over filing lawsuits. Using litigation to resolve disputes is an expensive and time consuming process – often taking years to move through the courts, requiring expensive legal counsel and consuming significant amounts of time for defendants and plaintiffs alike.

Use of a mandatory arbitration agreement provides the builder with a degree of certainty that if a dispute arises, costs associated with resolving the dispute will be contained. Similarly, arbitration offers the home buyer a cost effective means of dispute resolution. Due to the higher costs of litigation, home owners are frequently left with insufficient funds to perform repairs once legal fees and costs are deducted from their recoveries.

While not all conflict situations may be suitable for ADR, in many instances it can represent a faster and less costly alternative to lawsuits. NAHB strongly supports the use of ADR, including binding arbitration, in consumer contracts.

The primary form of ADR – arbitration – is a process in which the parties to the contract agree to submit their dispute to a neutral third person or panel of individuals (arbitrators) for a final and (if the contract provides) binding resolution.

Arbitrators are generally professionals and therefore may be more likely than a judge or a jury composed of laymen to understand the technical aspects of a construction controversy. Importantly, the parties can specify arbitrators with construction experience. In Lamps Plus the Court noted arbitrators “derive their powers from the parties’ agreement,” which can generally be shaped “to their liking by specifying with whom they will arbitrate, the issues subject to arbitration, the rules by which they will arbitrate, and the arbitrators who will resolve their disputes.”

The Importance of an Arbitration Agreement

A majority of states follow the lead of the federal policy favoring arbitration as an alternative to litigation embodied in the FAA.  If the subject of the contract involves interstate commerce (for instance, the building materials come from across state lines), then the FAA will govern the arbitration agreement and may supersede special requirements of state law. The national policy favoring arbitration places arbitration agreements on equal footing with all other contracts.

Because arbitration requires the waiver of the constitutionally protected right to a jury trial, mandatory arbitration clauses will be strictly construed, typically against the person that drafted the clauses, and may not be enforced if they are vaguely worded or ambiguous. Some states require a larger type size, specific contract locations, or even an additional signature or initialing to make mandatory arbitration agreements valid. It is a good practice to consult with a local attorney, knowledgeable with the requirements in your state.

Both the FAA and all individual state arbitration acts provide that if a contract has a valid arbitration clause, one party may compel the other into an arbitration proceeding. Typically the arbitrator’s decision is final and binding and neither party can appeal the decision except in the case of improprieties or fraud on the part of the arbitrator.  A mere error in the law or failure on the part of the arbitrators to understand or apply the law is not subject to review by a court.

Finally, fairness of arbitration clauses is essential to their viability. Indeed, the courts are closely scrutinizing arbitration agreements and will strike down those arbitration clauses that are deemed to be overreaching or unfair. Some of the items crucial to a finding of fairness include:

• Access to information about the process;
• Independent and impartial neutrals including independent administration of the ADR process and consumer participation in neutral selection;
• Reasonable costs, location and time frames; and
• Clear notice of all arbitration provisions.

During or after construction, a disagreement may arise between the builder and the home buyer that cannot be resolved through negotiations. Because of the expense of a lawsuit and the long wait to have the case heard in court, litigation may not be a wise or efficient method of resolving the matter. Builders who specify in their contract that disputes arising out the performance of the contract will be resolved with binding arbitration by an arbitrator knowledgeable in residential construction may help themselves and their home buyer with a cost effective means of dispute resolution. And to avoid class arbitration, consider language specifying individual arbitration.