Arbitration has long been touted as a better way to resolve disputes. Its proponents usually make bold statements that arbitration is easier, faster, and cheaper than litigation. While each of these points may be debated, arbitration offers homebuilders distinct advantages to litigation in disputes with their customers.
Parties are free to determine how claims will be resolved. The most common “alternative dispute resolution” method identified in contracts is arbitration. Although arbitration can be non-binding, it is typically binding and a judgment may be entered on an arbitration award. Thus, if a provision provides that “all disputes arising out of or related to the contract will be resolved by binding arbitration,” the parties must arbitrate their claims unless they both agree to litigate them.
Some builders have been hesitant to use arbitration clauses. The primary reason is probably the perception that arbitration is “arbitrary.” While it is true that arbitrators are not bound by either the procedural or substantive law, since most arbitrators are attorneys, the risk of them making up the law as they go along is relatively small. Some builders also believe they have a better chance of “winning” in Court than in arbitration. However, this notion is incorrect. As most builders know, it is exceedingly difficult to win a case against a homeowner, regardless of the facts. Thus, it seems more likely homebuilders will obtain better results with an arbitrator they select. To allow a jury, i.e. six other homeowners, to decide whether the builder or homeowner is right, is a risky proposition at best. In the hands of skilled plaintiffs’ lawyers, a real prospect exists for runaway jury verdicts against builders. In arbitration, because of the relationship between defense counsel and the arbitrator they selected, this risk is dramatically reduced. Further, including arbitration clauses in every contract would prevent class actions against the builder.
One of the biggest threats to homebuilders are claims based upon alleged violations of the Colorado Consumer Protection Act (“CCPA”). A violation of the act entitles a claimant to treble damages and attorney’s fees. Because such a damages award is probably not covered by a builder’s Commercial General Liability insurance policy, the presence of a CCPA claim often forces builders to settle on unfavorable terms rather than risk a substantial uncovered loss. However, since CCPA claims are subject to broadly drafted arbitration clauses, the risk of a treble damages award may be eliminated for all practical purposes. Only in the most egregious of circumstances can one imagine an arbitrator awarding treble damages against a builder.
Builders should also consider drafting their arbitration clauses so that only they have the right to appoint the arbitrator. Although there is limited authority that such clauses are unenforceable, Colorado has not specifically addressed this issue. A provision which allows the builder to appoint the arbitrator would benefit it substantially. Although the arbitrator appointed could not have a conflict of interest with the builder, i.e. he’s the builder’s brother, nothing would prevent the builder from naming someone else in the industry more sympathetic than the average juror to the challenges builders face.
Finally, arbitration is generally private. As such, in the absence of a confirmation proceeding, few people will ever know of the dispute or how it was resolved.
Although arbitration has certain drawbacks, including the inability to join any third-parties (in the absence of appropriate language) and the lack of any meaningful appeal, on balance builders should utilize arbitration to resolve disputes with their customers. If they do so, the risk of class actions and of large uninsured losses can be eliminated or significantly reduced.
Disclaimer: The foregoing discussion is not intended to constitute legal advice but is provided solely for informational purposes. You should consult with a competent construction attorney regarding any of the issues discussed herein.
Karl Berg is a Colorado Springs construction lawyer and a partner at Mulliken Weiner Karsh Berg & Jolivet, P.C.. He can be contacted at kberg@mullikenlaw.com or 719-635-8750.
