Arbitration Trumps Litigation: Home Builder Construction Disputes

Filed in Business Management, Legal by on September 12, 2018 2 Comments

Arbitration agreement resolution of commercial disputes on a desk.You may have heard that President Trump uses an arbitration provision in his confidentiality agreements to settle disputes. No fake news there!

Arbitration is widely used in most industries. But it is particularly beneficial for home builders and home owners to expeditiously settle construction disputes, which are often technical in nature.

It is often said that no one wins in litigation except the attorneys. Arbitration, when compared to litigation in the court system, is fast, cost-effective, more predictable, fair and private. The final arbitration decision is legally binding and non-appealable (unless, in very rare cases, there are arbitrator procedural violations).

NAHB policy supports initiatives that promote binding arbitration in residential construction contracts. Having an arbitrator with construction experience is much better than going before a judge and/or jury who will need to be educated about the construction issues involved in the dispute.

Construction litigation is causing court backlogs in many states. Thus, home builders and home owners are seeking an alternative expedited dispute resolution process. All parties can more efficiently settle disputes by agreeing to an arbitration provision in the warranty and in the general construction contract.

All leading third-party new home warranty companies typically include an arbitration provision. Warranty companies generally offer pre-arbitration conciliation for both home owners and home builders.

Home builders may also include arbitration provisions in subcontractor agreements so that all potential parties involved in a dispute can settle on an agreement in a single arbitration. A local attorney should review all legal documents to ensure they are consistent throughout the process and comply with the law.

Home owners always have a constitutional right to sue for any reason. However, it is generally in the home owner’s and home builder’s best interest to settle construction disputes outside the courtroom in a fair, equitable and expeditious manner. The home builder and home owner should agree to and sign the construction contract and warranty document with arbitration provisions prior to closing.

The average total cost for a home warranty arbitration is $750-$5,000 (commonly split evenly between the parties), compared to $25,000-$50,000 for litigation. The entire arbitration process takes an average of 6-10 weeks (some as little as two weeks), compared to 2-6 years for litigation. The average arbitration hearing takes 1-3 hours, compared to 5-10 days for a court trial.

Arbitration is particularly effective in home building, due to the often technical nature of construction disputes. It is fast, cost-effective, fair and equitable for all parties. Construction dispute arbitration held in a dining room is much preferred over litigation held in a courtroom.

This post was adapted from an article on the Construction Liability Resources page of nahb.org by Walt Keaveny, MS, PE, PG. Keaveny is the Risk and Underwriting Manager for 2-10 Home Buyers Warranty.

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  1. Thanks for this. I am confused by the statement that the home owner has a constitutional right to always sue–does this mean that if the contractor and home owner in a contract document (say, the AIA A-101) agree to arbitration in lieu of litigation in a court that the home owner can still sue the contractor? If this is true, then why bother to put the arbitration provision in the contract document? Thanks.

    P. S. I am a former NAHB member; I hope to be back in soon.

    • NAHB Now says:

      Thanks for your comment, Charles. No, the right to sue means that the homeowner cannot, in the first instance, be forced into arbitration without his/her consent. Arbitration is a choice. Once the homeowner agrees to enter into binding arbitration and knowingly waives the right to pursue their case in court, however, they cannot, with rare exception, sue the contractor.

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