Arbitration Clause Protects the Builder or Developer

Purchase contracts used by builders and developers of new homes often contain clauses that require all disputes between the parties to be submitted to binding arbitration.  This clause is included in purchase contracts because it protects the interests of the builder or developer.  A typical arbitration clause requires arbitration before the American Arbitration Association (“AAA”), and may require the use of the AAA’s Construction Industry Arbitration Rules.  This article gives a brief overview of the arbitration process under those rules, and describes some of the differences between arbitration and litigation.  This information is one of the factors that new home buyers should consider before signing a contract to purchase a new home from a builder or developer.

The American Arbitration Association

The American Arbitration Association is an independent organization that provides arbitration and mediation services for many different types of disputes.  The AAA maintains panels of arbitrators and mediators who are trained in dispute resolution, but do not necessarily have any prior judicial experience.  When parties submit a dispute to the AAA for resolution via binding arbitration, the ultimate decision as to the outcome of the dispute is made by an arbitrator.  The parties effectively waive their right to have their dispute litigated in a court of law.

Initiating the Arbitration

In order to initiate an arbitration proceeding under the standard track procedures of the Construction Industry Arbitration Rules, the claimant submits a demand for arbitration to the AAA, together with the applicable administrative filing fee and a copy of the arbitration clause in the contract.  Along with the demand, the claimant can submit a form of complaint that sets forth the pertinent facts and legal theories supporting the claims.  The other party, known as the respondent, then has the opportunity to file an answering statement, and may file an answer to the complaint.  The respondent may also file a counterclaim if applicable.  At this point in the process, the arbitration has been initiated, but no arbitrator has yet been selected.

Telephonic Administrative Conference

Prior to selection of the arbitrator, the parties or their counsel may participate in a telephonic administrative conference with a representative of the AAA.  The purposes of the administrative conference are to determine how to best expedite the arbitration, to address the process for selecting the arbitrator, and to discuss mediation or other alternative forms of dispute resolution.

Selection of the Arbitrator

The first method for selecting an arbitrator is for the parties to agree on the person who is to serve.  If no agreement can be reached, the AAA may forward an identical list of arbitrators to each party, and ask each side to strike those who are objectionable and rank the remaining names in order of preference.  These lists are then returned to the AAA, which selects the arbitrator based upon the rankings provided by the parties.

Once the arbitrator is appointed, he or she is required to disclose any conflicts of interest or bias that may affect his or her impartiality.  Based upon the disclosure, a party can file an objection to the arbitrator due to lack of impartiality, and the objection is ruled on by the AAA.  If the AAA determines that there is a problem with the arbitrator’s impartiality in the particular case, then another arbitrator is selected.

Telephonic Preliminary Management Hearing

Shortly after the arbitrator is selected, the parties or their counsel participate in a telephonic preliminary management hearing with the arbitrator.  The arbitrator may address several issues at this hearing, including the nature of the claims and defenses, the expected length of the arbitration hearing, the date and time for the arbitration hearing, the discovery to be allowed if any, the schedule for discovery, the deadlines for disclosure and exchange of evidence, the deadlines for submission of witness and exhibit lists, the deadlines for submission of certain motions, and similar matters.  This hearing allows the arbitrator and the parties to set up cost-effective management procedures for the arbitration.  The arbitration hearing is normally set within a few months of the preliminary management hearing.  Therefore, the time frame for arbitration is much shorter than the time frame for litigation.

Limited Discovery

During the interval between the preliminary management hearing and the arbitration hearing, the parties exchange evidence and engage in any discovery allowed by the arbitrator, such as the taking of depositions of witnesses.  One major difference between arbitration and litigation is that in arbitration, discovery is usually quite limited.  For example, the arbitrator may not allow the taking of depositions of witnesses.  Although these limitations on discovery are intended to reduce the cost of the arbitration, they also hamper the ability of the claimant to obtain the evidence necessary to prove the claim.  This is significant, because the claimant has the burden of proof, and without evidence the claimant cannot meet this burden.  Therefore, in cases brought by homeowners against a builder or developer, the party that usually benefits from the limitation on discovery is the builder or developer.

Fees

Prior to the arbitration hearing, the parties have to pay all of their filing fees, administrative fees, and arbitrator fees to the AAA.  The filing and administrative fees vary depending upon the nature of the case.  The arbitrator fee for each party consists of their share of the estimated fees the arbitrator will charge for the arbitration.  In an arbitration involving a homeowner and a builder or developer, each side must pay one-half of the estimated fees of the arbitrator prior to the arbitration hearing.  Independent arbitrators normally charge between $300 and $600 per hour.  The arbitration hearing is not held until the fees are paid.

Arbitration Hearing and Award

The arbitration hearing is conducted by the arbitrator, who has broad discretion over the order of proof and the methods for presenting evidence.  The proceedings can be recorded by a court reporter, provided prior arrangements are made by the parties.  The rules of evidence applicable in a court of law do not apply at an arbitration hearing, though the arbitrator may use them for guidance.  For example, the parties can submit witness testimony contained in written declarations and affidavits, even though the witness is never subject to cross-examination by the opposing party.  The arbitrator is entitled to give this evidence the weight that the arbitrator deems appropriate.  In a court of law, the testimony of a witness is not admissible unless the witness is subject to cross-examination.

After the hearing has been closed, the arbitrator reviews the evidence and issues a decision that is set forth in an arbitration award.  The prevailing party can file an action in court to have the arbitration award converted to a judgment.  Although a judgment based upon an arbitration award can be appealed, it is difficult to win such an appeal.

Conclusion

This article provides an overview of the arbitration process under the AAA’s Construction Industry Arbitration Rules.  Arbitration differs significantly from litigation.  In an arbitration, the dispute is decided by an arbitrator rather than a judge or jury.  In addition, the time frame for arbitration is short and the ability to obtain evidence is limited.  Also, in an arbitration, the parties can submit evidence to the arbitrator that would not be admissible in a court of law.  Arbitration may be beneficial for all parties if the amount of money at issue is relatively small.  However, if a homeowner has a significant claim against a builder or developer for a construction defect, it is questionable whether arbitration benefits the homeowner.  On the other hand, arbitration certainly benefits the builder or developer.

This information is one of the factors a new home buyer should consider prior to signing a purchase contract with a builder or developer that contains a binding arbitration clause.  New home buyers who do not want to submit all potential disputes to binding arbitration can ask the builder or developer to strike the arbitration clause from the contract.  However, builders and developers may be reluctant to do so, because the arbitration clause protects their interests.

Craig Stephan
Attorney at Law
480-621-8281
website: www.craigstephanlaw.com
email: info@craigstephanlaw.com

Arbitration Clause Protects the Builder or Developer
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