Know How: Alert


Court Decision Approves Arbitration Provisions for Home Builders.



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Thanks to a recent Supreme Court of Appeals of West Virginia decision, residential builders received an early Christmas gift in the form of approval of arbitration provisions in their “form” contracts with residential home purchasers. The home purchasers argued that the arbitration provision was too one-sided and that no separate consideration was paid for it. This argument, used for many years by residential home purchasers suing builders to attempt to escape arbitration, has been put to rest.

The case, Dan Ryan Builders, Incorporated v. Norman C. Nelson and Angelia Nelson, involved a home constructed by Dan Ryan Builders, Inc. (Ryan), where a contract was signed by the home purchaser that contained an arbitration clause. The arbitration clause stated that Ryan reserved the right to seek arbitration, or to file an action for damages, if Mr. Nelson (the owner) “defaulted by failing to settle on the property within the time required under the Agreement.” After moving into the home, The Nelsons sued Dan Ryan Builders for concealing its knowledge of an illegal septic system, previous basement flooding, and substandard concrete. Ryan filed a petition seeking to compel the Nelsons to submit their claims to arbitration.

The Nelsons argued that the contract lacked mutuality because the arbitration provision forced them to give up all rights to pursue claims in a court, while Ryan had the right to go to court to compel the Nelsons to pay for the home. The trial court concluded that since there was adequate consideration for the contract, as a whole, there was no lack of mutuality.

While mutuality of obligation is not a required factor for formation of a contract, it is a factor for a court to consider when assessing whether a contract is unconscionable. If a provision creates a disparity in the rights of the contracting parties such that it is one-sided and unreasonably favorable to one party, then a court may find the provision is unconscionable and refuse to enforce that provision.

The Court held that as long as the overall contract is supported by sufficient consideration, there is no requirement of consideration for each promise within the contract, or of “mutuality of obligation,” in order for a contract to be formed. Further, a court in its equity powers may determine, on a case-by-case basis, whether a contract provision is so harsh and overly unfair that it should not be enforced.

What is “too one-sided” has not been made clear by the Court. Further litigation is to be expected by residential home purchasers claiming that arbitration provisions are too unfair, too one-sided, and should not be enforced by the courts.

Our Advice: Careful contract drafting is required if your construction contract allows you to choose arbitration or litigation but restricts the other contract party to arbitration. Contracts with individual consumers, such as home buyers, containing arbitration provisions have historically been interpreted in favor of consumers and against businesses, resulting in arbitration provisions being rejected. Contracts between businesses, such as contractors and subcontractors or between commercial owners and contractors, which contain arbitration provisions have historically been interpreted in favor of enforcing the arbitration provision.

Finally, careful consideration should be given to whether arbitration will actually benefit you. If you have any concerns about your construction contracts or the arbitration process, please contact Eric Hulett or Caroline Kelly.