Construction Contracts: Binding Arbitration

As a bit of foreshadowing, I thought I'd work on a short series of posts on construction contracts. And I wanted to start with the subject of binding arbitration clauses.

A binding arbitration clause says that in the event of a dispute over the work product or other aspects of the contract, you and the contractor agree to resolve the dispute in arbitration rather than in court. With no exceptions at all, I think it is a bad idea to sign a contract with such a clause.

The first reason is that a clause that prevents you from suing in court limits your options. You can still use arbitration without a binding arbitration clause. But with one, you cannot use the courts. That's a bad thing for you as a purchaser. When a contractor asks you to sign a binding arbitration clause, he's saying, "When i screw up this project, I don't want you to be able to use the full range of legal options to make yourself whole."

The second reason is that arbitration is biased towards the contractor from the beginning. If you think about it, you might go to arbitration once in your life, if you are unlucky. But if you are an incompetent or just a lousy contractor (like some we have hired), you're going to be in arbitration pretty much annually. So while the courts give you a jury who have never seen you before and probably never will again, the arbitrator has probably seen your contractor before many a time. They know that that contractor is making money for them: a lousy contractor who spends a lot of time in arbitration spends plenty of money on arbitration as well. Nobody is outraged on your behalf. Getting everybody out the door and the fees paid is what arbitration is all about. When a contractor asks you to sign a binding arbitration agreement, they are saying, "When I screw up on this project, I want the deck stacked in my favour when you try to resolve it."

The third reason is that there are no appeals in arbitration. So you've gone through the process and the arbiter has decided the case in a way you don't agree with. Want to appeal? Nope. That's what the "binding" part of binding arbitration means. Whatever decision they make, you are stuck with, and you have no right to appeal or try to reach a more equitable agreement elsewhere. In mediation, for example, you can simply refuse to come to an agreement. But in arbitration there is no refusal. You are given a decision by the arbiter, and you must take it. A contractor who asks you to sign a binding arbitration agreement is saying, "When I screw up on this project, and my friends decide to resolve the dispute in my favour, I don't want you to have any other recourse."

The fourth reason, and this is important to me but may not be to you, is that arbitration usually comes with a non-disclosure agreement. So if when we found out about some cases where a former contractor had gone into arbitration, we could not find details on those cases because the parties involved had signed an agreement to not discuss them. So if somebody really messed up on your house, they can keep doing so on other people's houses with impunity, because nobody is allowed to talk about it. By asking you to sign a binding arbitration agreement, the contractor is saying, "When I screw up on this project, and my friends decide it in my favour, I'm going to make you keep silent about it so I can keep doing it to other people."

Now, it's true that not all contractors who insist on binding arbitration clauses are screwups who will make a mess of your project. But when you sign a contract you're trying to spell out the parameters of your interaction with the contract not just in the best of circumstances, but in the worst.

The supporters of binding arbitration are uniformly anti-consumer (and remember, you're the consumer here, so they're against your interests). They are people who rave about lawsuit abuse when they mean the use of the legal system to keep companies accountable for their actions. The legal system is set up to discourage frivolous lawsuits; it costs at the very least tens of thousands of dollars to go to court; a prudent person would expect to spend $100,000 to get through the case. It is incredibly, unbelievably stressful to go through the process, including depositions that last for hours and may drag over days, expert testimony and responses to discovery. Nobody is going to court for no good reason, and nobody goes to court not expecting to win. Maybe you think some reasons are unsound, but the person who is doing the suing made the decision that it was worth the amount of money to be spent on the process.

So by giving up your right to go to court in the case of damage, you are saying, "there is no amount of damage this person could do to my house that would ever be worth going to court. Even if I came home tomorrow and found that the roofer had taken off the roof and left the top of the house exposed, and it had started to rain and water was pouring into the house and destroying everything I owned, and he said it was not his fault because rain was a natural phenomenon and I should have planned for it, I'd be unwilling to sue."

To which I say, "Oh, really?" Because I can think of much less drastic situations where I would want the right to see the bastard on the defense side of a courtroom.

And of course, we're all sanguine about insurance coverage, but remember that insurance companies do not make money by paying out claims. They definitely are not going to be accommodating when you want $150,000 to fix what the incompetent contractor did to your house. You will have to take legal steps to get money out of them. If you've signed a binding arbitration clause, that's going to be your only recourse.

Speaking as people (who are not lawyers, of course) who have spent much of the last five years wending our way through the legal process, we definitely do not recommend signing a contract with a binding arbitration clause. If you decide you want arbitration, that's always an option. We recommend mediation, which is not binding, or non-binding arbitration, which allows appeals to a court when you are not happy with the results. If your contractor balks at the suggestion, it's time to ask yourself what he knows about his own work history that might be hidden from you.

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posted by ayse on 08/25/09