Lennar, Centex, KB Home, D.R. Horton and Airbnb are among a bevy of companies that include forced arbitration clauses in contracts, according to a new study.

Imagine buying your newly built dream home, and then finding out it has issues. Maybe the windows leak. Or the roof has a defect. There could be foundation issues, plumbing problems or even some material that produces unhealthy side effects.

For many homeowners in this situation, the obvious next step might be to take the builder to court. But if they bought their house from one of several large companies, they may also be in for a rude awakening: Many housing firms include forced arbitration clauses in their contracts, requiring consumers to settle disputes privately, and effectively blocking them from using the court system.

A growing movement is now arguing that such clauses are unfair, poorly understood by consumers and that the system needs to change. That movement has coalesced around support for the Forced Arbitration Injustice Repeal Act (FAIR), a bill that federal lawmakers are currently considering and which is designed to make it easier for consumers to take companies to court.

Consumer advocacy nonprofit Public Citizen supports the FAIR Act and has documented dozens of companies that include forced arbitration clauses, including many in the housing sector. Some of those companies are among the best-known builders in the country, including Lennar, Centex, KB Home, Beazer Homes, D.R. Horton and others. Airbnb also enforces forced arbitration clauses.

Though these companies did not immediately respond to Inman’s request for information on their arbitration clauses, Public Citizen has gathered various examples of contracts and other legal documents showing how they require consumers to go through arbitration to settle disputes. Lennar, for example, provides homebuyers with a warranty but also states in a contract obtained by Public Citizen that “you should be aware that this Limited Warranty includes a requirement that all disputes be submitted to binding arbitration.”

Beazer Homes has a similar requirement, stating in its contract — which Public Citizen has also obtained — that “this agreement contains a binding arbitration provision, which may be enforced by either party.”

Other companies reply on similar language, and the end result is that homeowners with disputes against the companies who constructed their houses are more likely to see their cases before an arbitrator than a judge.

Remington Gregg

Remington Gregg, a consumer rights attorney with Public Citizen, told Inman that these kinds of clauses have their origins in the Federal Arbitration Act, which was passed in 1925. That law, however, was originally meant to help businesses resolve disputes between themselves, and for decades that’s largely how it was applied.

“That’s the way it was used for about 40 years or so, merchant to merchant,” Gregg explained.

However, things started changing after a 1984 U.S. Supreme Court ruling known as Southland Corp. vs. Keating. Gregg described the case as a turning point that has allowed arbitration clauses to increasingly be applied to merchant-consumer relationships, rather than just relationships between businesses. And since the 1980s, such clauses have become more and more common.

“This is something that is really 30 years in the making,” Gregg said. “Suddenly you got to a point now where it’s so ubiquitous that it’s almost malpractice for a lawyer not to put it in a contract.”

In many cases, the companies that include arbitration clauses in their contracts describe the process as superior to the court system, and arbitrators themselves are supposed to be impartial third parties. An entire organization, the American Arbitration Association, exists to provide both rules and arbitrators.

But Gregg argued that there are a host of problems with this situation.

For example, unlike a case that is adjudicated in court, it’s difficult and in some cases impossible for consumers to appeal the outcome of a dispute that is settled through arbitration. Gregg also said that consumers often don’t understand what they are getting into when they sign contracts with forced arbitration clauses, and that the clauses often contain non-disclosure agreements preventing the parties from sharing information after the fact.

Hank Johnson

Rep. Hank Johnson, a Georgia Democrat who introduced the FAIR Act to Congress in February, has expressed a similarly dim view of forced arbitration clauses. In a statement, he said that arbitration agreements “undermine our indelible constitutional right to trial by jury, benefiting powerful businesses at the expense of American consumers and workers.”

“Americans with few choices in the marketplace may unknowingly cede their rights when they enter contracts to buy a home or a cell phone, place a loved one in a nursing home, or start a new job,” Johnson continued. “We must fight to defend our rights and re-empower consumers.”

Rising Democrat star Rep. Alexandria Ocasio-Cortez has also spoken critically about forced arbitration clauses, saying during a congressional hearing earlier this year that corporations can use them to “absolve” themselves “from almost any form of corporate misconduct.”

“I find these extremely concerning that you can almost, before misconduct happens, already waive your right to seek justice in court,” Ocasio-Cortez said during the hearing.

Sen. Richard Blumenthal, a Connecticut Democrat and the FAIR Act’s sponsor in the Senate, has also criticized forced arbitration clauses as depriving Americans of their right to use the court system.

“There is a lot of use of the phrase ‘rigged system’ these days,” Blumenthal said in a statement earlier this year. “One of the systems that is truly rigged against consumers, workers, and the American people is our current system of forced arbitration. Forced arbitration is unfair, unjust, and un-American.”

Significantly, the FAIR Act would not eliminate arbitration altogether. Instead, it is designed to prevent forced arbitration, thus increasing consumers ability to take their disputes to court if they so please.

So far, the FAIR Act has only been introduced and referred to a U.S. House committee, meaning it still has a long road to travel before becoming law. But Gregg said that awareness about the issue is increasing, and he expressed optimism that actual legislative changes are on the horizon.

“This is picking up steam,” he added. “It’s coming more and more into prominence.”

Email Jim Dalrymple II

Show Comments Hide Comments

Comments

Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
Success!
Thank you for subscribing to Morning Headlines.
Back to top