Contractor Arbitration: Strategies to Avoid Arbitration

Exceptional mastery of Construction Defect litigation, with 35 years experience and $190 million in jury verdict awards, $72 million in punitive damages awarded and millions more in settlements.

Avoiding arbitration with a Contractor or Seller-Developer is often highly desirable due to the high cost of arbitration, the risks associated with having a single arbitrator decide the case, problems with arbitrator bias, with no right of appeal and with little regard for the rules of evidence. In most circumstances, construction defect cases against a Contractor or Seller-Developer are best pursued by the Owner and Buyer in the Superior Court with a jury trial (which every Contractor and Seller-Developer wishes to avoid at all costs) with the all-important right to a jury trial and right of appeal, as well as the cost efficiencies inherent in the Superior Court system.

An analysis of the common arbitration provisions and strategies to avoid arbitration are essential to protecting Owner-Buyer interests and claims for construction defects.

Many contractors insert various self-written arbitration provisions in their contracts with the expectation that they can require the Client to arbitrate a dispute rather than file an action in the Superior Court. However, the standard contractor arbitration provisions are almost always unenforceable and easily shown to be unenforceable. Under Business & Professions Code § 7191, unless the contract complies strictly with the requirements of 7191, the arbitration provision is unenforceable against the Owner. See also, Woolls v. Superior Court (2005) 127 Cal.App.4^th 197, 209.

The B&P 7191 requirements are as follows:

B&P § 7191 (a) states: the provision shall be clearly titled “ARBITRATION OF DISPUTES.”

If a provision for arbitration is included in a printed contract, it shall be set out in at least 10-point roman boldface type or in contrasting red print in at least 8-point roman boldface type, and if the provision is included in a typed contract, it shall be set out in capital letters.

B&P § 7191(b) states: immediately before the line or space provided for the parties to indicate their assent or nonassent to the arbitration provision described in subdivision (a), and immediately following that arbitration provision, the following shall appear:

“NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE ‘ARBITRATION OF DISPUTES’ PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE ‘ARBITRATION OF DISPUTES’ PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE BUSINESS AND PROFESSIONS CODE OR OTHER APPLICABLE LAWS. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY.” “WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE ‘ARBITRATION OF DISPUTES’ PROVISION TO NEUTRAL ARBITRATION.”

If the above provision is included in a printed contract, it shall be set out either in at least 10-point roman boldface type or in contrasting red print in at least 8-point roman boldface type, and if the provision is included in a typed contract, it shall be set out in capital letters.

B&P § 7191(c) states:

A provision for arbitration of a dispute between a principal in a contract for work on a residential property with four or fewer units that does not comply with this section may not be enforceable against any other person other than the licensee.

In other words, if the arbitration provision fails to comply, the arbitration provision may not be enforced against the Owner. However, the Owner may enforce, even a defective arbitration provision, against the Contractor, if the Owner chooses.

Most Residential Purchase Agreements contain arbitration provisions to be initialed by the parties, and many parties initial these provisions without thinking about the consequences of agreeing to arbitration and waiving the right to a jury trial. Frankly, it’s a mistake to accept and initial this provision, waiving the right to a jury trial and agreeing to arbitration.

If a Buyer has initialed the Arbitration provision, then the Seller, and in many cases the Seller-Developer, will, in the event of a dispute and the filing of an action in the Superior Court (after complying with the mandatory mediation provisions) almost certainly seek to enforce the arbitration provision, and compel arbitration. often simply for the purpose of escalating the costs in order to deter litigation and pressure the Buyer.

However, when a Buyer has initialed the arbitration provision and waived the right to a jury trial against the Seller, a Buyer still maintains a right to a jury trial against any contractors, subcontractors or other parties involved in the construction who are not parties to the Purchase Agreement Arbitration Provision.

A Buyer cannot be forced to forfeit this right and the contractor-subcontractors who are not parties to the Purchase Agreement cannot be forced into arbitration. This presents a powerful leverage point for the Buyer, who can assert these rights and indicate the Buyer’s intention to name all subcontractors in a lawsuit in the Superior Court, which will require the Seller to litigate the matter twice: once in arbitration and again in the Superior Court on cross-claims filed by the subcontractors, with the added problem the Seller faces that arises from the fact that arbitrations have no collateral estoppel effect on the subsequent action in the Superior Court under Vandenberg v. Superior Court (1999) 21 Cal.4^th 815, 824.

In most instances, the Seller’s quickly realize that waiving the right to arbitration and having a single unified action in the Superior Court is far better, more efficient, final and much less costly than proceeding on two tracks, one in arbitration with the Buyer, and the other, a stayed action in the Superior Court. Waiving arbitration and proceeding in the Superior Court avoids having to relitigate the case against the subcontractors, who will inevitably cross-claim against the Seller Developer. A unified action in the Superior Court will also bring the subcontractors policies of insurance into play for a global and final resolution.

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