Home Construction Arbitration Rules

The American Arbitration Association, commonly referred to as the “AAA” provides numerous structures for dispute resolution.  What many businesses and contractors are unaware of however is that to leverage to the most beneficial set of rules they typically need to be specified in a party’s contract.  All too often, contractors and businesses have formed utilizing “off the rack” documents that simply make generic reference to “Arbitration” without specifying any particular form or forum, or even a specific set of rules.  

Accordingly, just as some individuals think they are doing themselves a favor and “avoiding probate” by creating a trust, haphazardly attempting to form or create such documents without the advice of counsel can lead to inconsistent and sometimes unfortunate results. Recently, I had an opportunity to assist a contractor whose contract documents required “Arbitration.”  However, unfortunately, the documents didn’t specify what forum or agency was to handle the dispute.  Complicating matters, the Claimant’s attorney desired to proceed under the most inexpensive set of rules available, but those rules would have deprived a client of one of the hallmarks of arbitration, which is to supposedly have access to an experienced attorney or arbitrator versed in the topics and issues in dispute.  Further, in situations where the parties have not specified, or cannot agree to the governing set of rules, the AAA reserves the right not to administratively handle thereby effectively removing any arbitration agreement from the party’s contract.

As a means of addressing these issues and potentially undesired consequences, the American Arbitration Association has modified the Home Construction Arbitration Rules, effective August 1, 2018. Now, where a contractor has a provision in its agreement that any disputes be handled pursuant to AAA arbitration, if the agreement involved home construction or remodeling, the Home Construction Arbitration Rules will be applied as the default rules so long as the agreement is dated on or after the effective date of the rules (August 1, 2023).  For clients and contractors who have agreements that were prepared prior to August 1, 2018, and which do not specify which rules (or even which arbitration forum) should apply, those agreements should be revised and revisited with counsel. 

The cost savings in specifying the Home Construction Industry Arbitration Rules can be significant.  In a typical commercial or construction industry case, the AAA assumes that disputes will be less than $75,000 or greater than $75,000 and then has break points above $150,000 that move in six figure increments, and sets their filing fees based on those assumptions.

In contrast, the Home Construction Industry Arbitration Rules contemplate three (3) different levels of dispute, 0-$25,000, $25,000to less than $100,000, and $100,000 to less than $1,000,000.  For the smaller classifications, level 1 and level 2 disputes, which compromise a majority home construction disputes, a contractor and a homeowner may be able to efficiently, and confidentially, conclude an arbitration proceeding for less than $2,500, for the AAA’s fees and the Arbitrator’s compensation.

Accordingly, the foregoing is just another illustration of why an annual review of your contract documents is advisable.

If you have any questions concerning the Home Construction Arbitration Rules or Contractual Arbitration provisions contact Michael W. Sandner at Pickrel, Schaeffer & Ebeling Co., L.P.A. via email at [email protected] or call 937-223-1130.