Thursday, July 10, 2008

Good Blog on Real Estate Contract

Arbitration Provision in Home Builder’s Form Contract Not Unconsionable Posted by Stephen D. Richman, Esq. 10:59 AM , , 0 comments »

In March of this year, the Supreme Court of Ohio, in Taylor Bldg. Corp. of Am. v. Benfield, 117 Ohio St. 3d 352 (2008) upheld the validity of an arbitration provision in a construction contract between a married couple and a home builder. The Ohio Supreme Court reversed a decision of the 12th District Court of Appeals that declared the arbitration provision, and the entire contract, unconscionable (legally unfair) and unenforceable.The builder (“Taylor”) and the married couple (the “Benfields”) entered into a contract whereby Taylor agreed to build a small home in Clermont County, Ohio for the Benfields, for approximately $90,000. The Benfields refused to pay Taylor, claiming building code violations and defective workmanship. Taylor sued, but asked the trial court to send the matter to arbitration, per the contract. The trial court did so, finding nothing wrong with the arbitration provision. Unhappy with that decision, the Benfields then appealed.The 12th District Court of Appeals reversed the trial court’s decision, “buying” the Benfields’ argument that the contract was a one-sided, form contract, with unconscionable provisions, including an unconscionable arbitration provision. The court of appeals also asserted its right to hear the case “De Novo” (in effect, a re-trial of the case at the appellate level). Taylor then appealed the 12th District Court’s decision to the Ohio Supreme Court.The Supreme Court of Ohio agreed that the appeals court had the right to hear the case De Novo, however, it disagreed with the 12th District’s decision on unconscionability and enforceability of the contract. The Ohio Supreme Court explained that for a contract to be held unconscionable, in Ohio, it must be procedurally unconscionable, and substantively unconscionable.The Ohio Supreme Court held that the use of Taylor’s printed form contract was not procedurally unconscionable, per se, and there was no evidence that the Benfield’s were treaded unfairly or forced to sign the (arguably) one-sided contract. The court also noted that the arbitration provision was not buried in “fine print”, and the Benfields initialed the clause, signaling that they read and understood it. What’s more, the court pointed out that there was a choice; the Benfields could have used another builder.As to the arbitration clause itself? The Ohio Supreme Court declared that the clause was not substantively unconscionable, even though it did not detail what the costs of arbitration would be, nor warn that rights to a jury trial were being relinquished (“loss of the right to a jury trial is a necessary and fairly obvious consequence of an agreement to arbitrate”; See Taylor at 364, Para. 54, citing Pierson v Dean, Witter, Reynolds, Inc. 742 F.2d 334,339 [7th Cir 1984]). While the Taylor contract did contain a provision calling for the arbitration to be held in Louisville, Kentucky vs. Clermont County, Ohio (which provision was held void, per Ohio law), the contract’s “severability clause” served to remove that provision and keep the rest of the contract intact (“severability provisions are agreements directing a court or other decision maker to strike out any provision held invalid, but uphold the rest of the contract).The Ohio Supreme Court also dismissed the Benfields’ arguments that the entire contract was unconscionable because of the presence of egregious clauses, in addition to the arbitration provision, such as a “liquidated damages clause” (a clause providing, ahead of time, what the amount of damages for a breach of a contract will be, regardless of the actual damages) and a clause holding the Benfields responsible for Taylor’s attorneys fees. The court held that it was improper for the court of appeals to have even reviewed whether or not the rest of the contract was unconscionable, because those types of arguments should be made in the arbitration that was designed to resolve, “any claims”. “The court of appeals erred by determining the issue of unconscionability regarding the parties’ entire contract, rather than just the arbitration clause”. Taylor at 368, Para. 68. Having said that, the Ohio Supreme Court went out of its way to hint, without officially deciding, that the $950 liquidated damages provision was not outlandish, and that a “one-sided attorney fees clause” is permissible in Ohio, in certain circumstances. “Even a ‘contract of adhesion’ [standardized contract prepared by one party, and offered to the weaker party, usually a consumer, with no realistic choice as to contract terms] is not, in all instances unconscionable per se.” Taylor at 363, Para. 68.What does this all mean if you are a home buyer? Most importantly, do not assume that a seemingly “one sided contract” is just “boilerplate”, and not enforceable. Read everything, seek legal advice, negotiate clauses you don’t like, and consider other contractors if you are told the form contract presented to you must be signed as is.If you are a builder, take note that arbitration clauses are enforceable in homebuilding contracts, but:1) Ensure there is no “fine print” in your contracts;
2) Consider highlighting any arbitration provisions (explain them, and have the homebuyer initial them);3) Ensure that your contracts have a “severability clause”;4) Read and appropriately change your “standard” forms (preferably, with legal advice), before giving them to the homebuyer. Why invite litigation? If there are seemingly one-sided, unfair provisions, simply have them modified to be fair. For example, a clause to the effect that: “the prevailing party shall be entitled to reasonable attorneys’ fees”, is more fair than: “homebuyer shall pay all of Builder’s costs of enforcing its rights under this contract, including attorney’s fees”. The fairer these types of provisions can be, the less likely an aggrieved party will look to challenge them, and the more likely they are to be upheld by a judge or arbitrator, if challenged.