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Unenforceable Arbitration Agreements in Homebuilder Contracts

California Courts have been refusing to enforce arbitration provisions that appear in homebuilder’s contracts.  These provisions often appear in the purchase agreement, home buyer’s warranty application, and even the project’s Declaration of CC&R’s recorded before any houses are sold.  The Courts are finding the provisions to be “unconscionable.”

An unconscionable contract provision has two elements.  First is the element of surprise.  The provision is not negotiated for, but is presented to the buyer as a take-it-or-leave-it decision.  The second element is whether it is one-sided, allocating all the risk to the buyer.  Courts find these arbitration provisions to be one sided because the builder never has cause to sue the buyer after close of escrow, but every claim the home buyer has against the builder will not be discovered until after closing.  Builders who want to avoid a similar fate must ensure their agreements are not unconscionable.