Thursday, May 21, 2009

Forced Arbitration

Public Citizen
May 20, 2009
Home Court Advantage
How the Building Industry Uses Forced Arbitration to Evade Accountability

Executive Summary

“An Army soldier between stints in Iraq and his wife were told just before closing that their new house came with a warranty to provide “extra coverage just in case something went wrong.” But the warranty John and Michelle Rechtien received 45 days after moving in to their Savannah, Ga., house actually did the opposite. It severely restricted the builder’s responsibilities and, further, required any future legal dispute to be settled before a private arbitration firm that was approved by the warranty company – a requirement that a Georgia law appears intent to prohibit.

After nearly two years of battling the builder over gross construction flaws, the couple had to pay $2,500 to seek relief from the arbitration firm. The arbitrator rejected more than three-fourths of the Rechtiens’ claims.

The arbitrator ruled the builder was not liable for broken wood trim, incomplete dry wall work, a leaking back door and mold, among other problems, because he deemed the items excluded from the warranty or determined that there was no record that the couple had asked the builder to fix the problems within one-year of moving into the house.

The arbitrator ruled that the builder was responsible for 39 repairs. But he calculated the award primarily with bids solicited by the builder – which were dramatically less than estimates that John and Michelle had obtained. After the arbitration was completed, Michelle called the contractors that had provided the builder with its low-ball estimates. They refused to honor the prices.

John and Michelle’s story is a variation on one that has occurred countless times throughout the United States. New home buyers are told (often at the last minute) that they will receive a warranty, which is often characterized as a “gift” or a “bonus.” When buyers actually receive the warranty (often after they move into their house), they learn that whole classes of problems are excluded from coverage. Home warranties typically forswear coverage for mold, violations of local building codes or “consequential damages,” such as financial losses suffered by buyers who are forced to move out of their houses while repairs are made.

The warranties also dictate that any disputes between buyers and builders must be settled through mandatory binding arbitration, or forced arbitration. This privatized adjudication system provides the ultimate home court advantage for builders and warranty companies. Arbitration firms rely on builders and warranty firms for their business. They have every incentive to keep builders and warranty companies happy.

HBW Insurances Services LLC tells builders that its “2-10 HBW warranty requires mandatory and binding arbitration with every homebuyer. The arbitration is critical in the event of a dispute between you and the homeowner.”

For home buyers, forced arbitration is often a nightmare. They are pitted against a cabal of builders, warranty companies and arbitration firms. These companies are often interconnected in complicated and opaque ways and seem to have a limitless ability to generate “heads-we-win, tails-you-lose” scenarios. Secretive arbitration tribunals provide very few checks against misconduct, conflicts of interest, ignorance of the law, or even deliberate disregard for the law. Indeed, an arbitrator’s failure to adhere to the law is specifically precluded as a ground for appeal. The system is also costly. Consumers are often charged fees many times greater than those they would pay in court – and they run the risk of being charged tens of thousands of dollars to pay for the other sides’ lawyers.”

From page 10:

“As the Rechtiens lost faith in the builder, they decided to seek an expert opinion on the condition of their house. In February 2008, they hired professional engineer John A. Tanner to inspect the house. Tanner reported that the house had five building code violations, including those involving roof trusses, drainage, and requirements for construction of houses built within a 110-mph hurricane zone. He based his assessment in part on his observations of nearby partially completed Wardlaw houses where the framing had not yet been covered by siding and drywall.

Tanner also found seven “questionable conditions” that “could affect the sale value of the house” and seven examples of “poor workmanship.”33 He also wrote, “Several doors do not meet the jamb stop and you can see through the crack between the door and the doorframe jamb stop.”34 Those doors had been taken down, refurbished and rehung after Michelle had complained to the builder that they were blemished with marks similar to those a frosty beer can leaves on a wood surface.35”

From page 14:

“On another track, Michelle tried to get a ruling from Chatham County that Wardlaw had violated the building code in constructing her house.

The building inspection form for the Rechtiens’ house indicates that the house is in the 110-mph hurricane zone. County officials say the current code for houses built in the 110 mph zone did not apply to the Rechtiens’ house at the time it was built.75 Tanner, the engineer who inspected the house, disagrees with that interpretation of the law and insists that the code applied at the time.76“


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