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Navigating Arbitration Clauses in Residential Construction Contracts
October 24th, 2024
As a homeowner in California, there may come a point when you want to remodel part of your house, or even rebuild entirely. Maybe you want to construct a new deck, upgrade your existing landscaping, or build a custom home on a vacant parcel of land. In any event, you are likely going to enter into a construction contract with a reputable general contractor whom you will entrust with bringing your vision to life. Ideally, the project will be completed at (or under) budget, you will be thrilled with the result, and your contractor will walk away with their agreed-upon margin.
Unfortunately, the “ideal” outcome does not always occur, and sometimes that can lead to disputes between homeowners and contractors. Given the likelihood of some type of construction defect or other related claim arising, and because contractors want to resolve any such dispute quickly, they frequently propose arbitration, a popular form of Alternative Dispute Resolution (ADR). This ADR method promises efficiency – both in terms of time and money for both parties.
As a real property owner who may have a viable construction defect (or breach of contract or other) claim, it is imperative that you not only understand how arbitration operates, but how a construction contract’s arbitration clause affects your legal rights.
What is Arbitration?
Arbitration is a formal ADR method allowing parties to resolve contractual disputes out of court. Arbitration is designed to promote the efficient disposition of legal disputes by saving both parties time, energy, and money. Arbitration typically requires the consent of each party in the form of an arbitration clause contained in the contract in question.
An arbitration clause renders going to court no longer an option for the parties, as they must have the case independently adjudicated by an arbitrator. An arbitrator is usually an experienced attorney or retired judge, with specialized expertise in a particular legal area. The arbitrator acts like a private judge, and their decision is binding – either favoring one party over the other or deciding on a compromise.
In signing contracts with arbitration clauses, parties agree that should a contractual dispute arise, they will forego a long and expensive trial in favor of fast-tracking the dispute to final resolution through private arbitration.
Is the Arbitration Clause Enforceable Against Me?
If you own a residential property in California with four or fewer units and hire a general contractor to either construct or do work on that property, there are requirements the arbitration clause must meet for it to be enforceable against you and your general contractor. If it fails to meet any of these specific requirements, then the clause is only enforceable against the contractor. These requirements are outlined by the California Business & Professions Code.
First and foremost, the provision must be clearly titled “ARBITRATION OF DISPUTES.”
Assuming you are working with a printed contract, the arbitration clause must be written in at least 10-point roman boldface type, or in contrasting red print in at least 8-point roman boldface type. Assuming the contract is typed, the clause must be in all capital letters.
Immediately before the space for both parties to initial their agreement to arbitrate, the arbitration clause must put the parties on notice that each is waiving its respective jury trial rights. The Business & Professions Code provides the exact language that must be used.
If drafted properly, the arbitration clause is enforceable by either party against the other, meaning that neither can unilaterally decline to have a dispute heard in arbitration.
However, a contractor’s failure to comply with any statutory requirements in residential construction contracts renders the arbitration provision unenforceable against the homeowner. In such a scenario, the homeowner may either enforce the arbitration clause against the contractor, or waive their right to arbitration and pursue a jury trial.
Whether to agree to arbitration in the contract can be a difficult decision, balancing several competing factors and considerations.
Differences Between Arbitration vs. Court
While arbitrations are typically known to expedite disputes and save both parties time and money, there can also be downsides.
First, there is no jury in arbitration. Rather, the arbitrator acts as a type of judge and jury. Some arbitrators may consider what they perceive as apparent fairness to the parties, rather than a strict application of the law that is more common to be applied in a formal trial.
Additionally, arbitration decisions are almost always binding, meaning there is no real opportunity for appeal. If you are on the losing end of an arbitration decision that you find erroneous, there is very little that can be done to correct it.
Finally, despite its reputation for economic efficiency, arbitration can be costly in its own right. Quality arbitrators can demand fees that do not always apply in court – often in the five-figure per day range. Therefore, the potential cost savings from pursuing arbitration over trial may be insufficient to overcome the possible advantages of having a jury present to hear your claims.
Contact a San Francisco Real Estate Attorney Today
If you have questions about any current or future construction contracts you may be considering, or questions about arbitrating a construction defect claim in general, it is important that you speak to an experienced real estate attorney. Our knowledgeable team at Zacks & Freedman, PC, can help advise you on the risks and benefits of certain contractual language as applied to your legal situation. Feel free to contact us to request a consultation.
*Neither this website nor this post are intended to create an attorney-client relationship.*
Categories: Real Estate Litigation