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Why Arbitration Provisions in Contracts

are Usually Unfair to Plaintiffs

Written by Attorney Michael T. Chulak

When parties to a contract (including CC&Rs) agree to settle disputes that may arise by arbitration, they are waiving their right to a jury trial conducted in an impartial court. If each party is equal in all respects, this may not be a bad thing. However, parties are not always equal. This means that one of the parties has an advantage over the other making the process unfair.

To understand why the arbitration process can be unfair to plaintiffs, it is important to focus on the fact that arbitrations are conducted by individual arbitrators who are paid by the hour. Their billing rates often exceed $500 per hour making it a highly lucrative business. If an arbitrator can stay busy, he or she can earn a fortune.

Another important fact to consider is that arbitrators obtain the vast majority of their business from the attorneys hired by insurance companies to defend clients such as home builders and other manufacturers of defective products.

These insurance companies often have their own “in-house” law firms or use certain law firms exclusively or semi-exclusively to represent defendants.

A good example of unfairness can be demonstrated by examining a typical construction defect case:

1. A homeowner or homeowner association files a lawsuit against a developer because of construction defects.
2. The CC&Rs and/or purchase agreements require arbitration to settle disputes.
3. The parties select an arbitrator who must be acceptable to both sides.
4. The arbitrator hears the case.
5. The plaintiff is represented by a competent law firm.
6. The developer defendant is represented by a law firm selected by the developer’s insurance company.
7. The arbitrator has been hired one thousand times more often by the defense attorney (hired the insurance company) than the plaintiff’s attorney.
8. The arbitrator is earning $500 to $600 per hour and wants future business.

Do you think the arbitrator may be influenced by the fact that the insurance defense attorney hires him or her far more often or has the potential of providing the arbitrator substantial future business? Even the most ethical arbitrator may be influenced by the facts.

It is clear to the author that arbitration provisions in CC&Rs and contracts work to the absolute disadvantage of plaintiffs and to the advantage of defendants and their insurance companies. If you have insurance coverage and expect to be sued, an arbitration provision will generally work to your advantage. If you must assert your rights as a plaintiff, such provisions nearly always work to your disadvantage. This does not mean that plaintiffs never receive a fair decision, but it’s reasonable to expect absolute fairness. At one time, home builders in California could not enforce arbitration provisions inserted into CC&Rs because the courts considered them to be against public policy and unconscionable. Today, that is not the case. The California Supreme Court has decided that such arbitration provisions may be enforced if included in the CC&Rs of a community association by the developer, thus eliminating, what at a time, was the right to a jury trial. The California State Legislature could change the law, but like our Supreme Court, it is more interested in protecting developers of defective homes and insurance companies than the rights of the victims who buy homes with serious soil problems, water intrusion, and mold.

It does not appear that the current California Legislature will correct existing injustice imposed by our Supreme Court.

Call attorney Michael T. Chulak at 818-991-9019 for a no cost initial consultation regarding any legal matter.

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