Subcontractors beware — the “boilerplate” arbitration clauses in those standard-form subcontracts used by large scale homebuilders may be broader, and ultimately more costly, than you realize. It is not unusual for a builder to require a homebuyer to arbitrate construction defect claims. Likewise, it is not unusual for a builder to include within its standard-form subcontracts a provision requiring the subcontractor to be joined into any such arbitration between the builder and a buyer. The reasons for including such provisions are often fairly straightforward for a builder.
For an established builder dealing in volume construction and/or with a high public profile, arbitration can represent a quicker (and therefore, potentially cheaper), and more confidential dispute resolution model than a standard lawsuit. However, it is not necessarily as ideal for all participants. For a party to an arbitration, such as a subcontractor, who faces limited liability exposure or has purely legal defenses to claims (like a statute of limitations defense), being joined to an arbitration can be a costly and generally inequitable affair. Arbitrators’ fees can be expensive (for example, a simple ruling on a preliminary issue can result in a $3,000 bill directed toward an unsuccessful party), and arbitrators sometimes operate more as peacemakers than judges, choosing to resolve matters without making early or definitive holdings on legal grounds. And arbitrators’ rulings can be overturned on only very limited grounds, which typically do not include a finding that an arbitrator made a mistake in applying the law.
One tactic used by builders to force more disputes into arbitration is to embed arbitration agreements into the warranty deeds that are issued with the initial sales of their properties. These agreements therefore “run with the land” (much like deed restrictions), and require that any design or construction defect claims raised by any owners of a property be privately arbitrated, and not addressed through a civil court proceeding, regardless of whether the owners are original buyers of the property or subsequent purchasers. To add another layer of defense, builders often add arbitration joinder provisions to their standard master subcontract agreements that cover any and all of a subcontractor’s work for a builder, so that subcontractors can be joined to arbitrations involving a seemingly infinite number of homes across multiple communities.
The result is that an unwary subcontractor, with little or no exposure and/or strictly legal defenses, may be pulled into numerous costly arbitrations with remote subsequent purchasers, with few, if any, avenues for a quick exit.
So, what can a subcontractor do to protect itself from such situations? We recommend:
Cole, Scott & Kissane, P.A.’s Construction Group is experienced in litigating issues leading up to and that arise in construction arbitrations involving subcontractors. If a member of our team can assist you, please do not hesitate to let us know.