Throughout the United States, major residential developers are scamming new home buyers, according to a report from non-profit consumer watchdog Public Citizen, offering fatally-flawed warranties and forcing disputes over flawed construction into arbitration.

Misleading Warranties, Forced Arbitration Shackle Homeowners

The cards are stacked against homeowners, analysts at Public Citizen say, as warranties exclude coverage for “consequential damages,” mold and even building code violations. Adding insult to injury, many home builders offer these restrictive, if not useless, promises of warranty as “gifts” or “upgrades.”

Signing Home Warranty Contract

More troubling, warranties and contracts rarely leave homeowners any recourse but an alternative dispute resolution (ADR) procedure that is gamed in favor of contractors and developers. After catastrophic water damage or black mold have forced them out of their houses, most families are forced to participate in the sham justice of arbitration, where supposedly-neutral arbitrators work hand-in-hand with home builders to avoid liability.

Nine of the country’s ten largest home builders in 2008 included arbitration clauses in their warranty agreements, pushing families into a parallel “justice” system that differs from court action in almost every relevant aspect.

Arbitration Firms Tied To Home Builders

As Public Citizen writes, “this privatized adjudication system provides the ultimate home court advantage for builders,” including Toll Brothers, a company now facing dozens of lawsuits in Pennsylvania over allegedly defective stucco installation. Most construction disputes, Public Citizen found, are funneled through the same three arbitration firms: the American Arbitration Association, DeMars and Associates or Construction Arbitration Services. As Public Citizen reports, these companies all have deep, hidden links to the residential construction industry.

In some cases, the suspicious ties between home builders and arbitration companies aren’t even hidden. The American Arbitration Association, for example, admits that its own rules were “developed in conjunction” with major players in the construction industry, including the National Construction Dispute Resolution Committee, which features a roster of engineering and architecture associations, along with prominent residential developers.

Some arbitration firms don’t even attempt to appear neutral. On its website, Demars and Associates lists 20 businesses as “satisfied clients” – leaving little doubt who the company’s arbitrators really work for. Focusing on “home warranty disputes,” Demars highlights Keystone Builders, 2-10 Home Buyers Warranty and the Residential Warranty Corporation among their clients. Needless to say, homeowners aren’t represented.

ADR Stacked Against Homeowners

Arbitration is a hopeless process for most families. More expensive than pursuing a court case and often riddled with glaring conflicts-of-interest, arbitration occurs hidden from public or judicial oversight. After losing in arbitration, some homeowners have even been ordered to pay their opponent’s legal fees, a penalty almost never imposed in the court system.

Whatever happens in arbitration stays in arbitration. Most sessions are necessarily confidential, as are most of the decisions rendered in those sessions. Likewise, arbitration firms keep their own records close to the chest, Public Citizen reports, circumventing even the few state laws that require case reports to be made public. When a California law forced the American Arbitration Association to release information on 61,000 cases, results were only disclosed for 4.3% of the arbitrations – in contravention of the State’s statute. Tellingly, every single case for which the arbitrator’s decision was made available had been decided in favor of consumers. In reality, businesses are far more likely to be handed victory.

When homeowners attempt to speak out about their own experiences in arbitration, they can get sued. Other penalties are even more pro-active. The Residential Warranty Company, for example, forces families who seek judicial review of their arbitration determinations to reimburse the firm for all costs and expenses, including attorney’s fees. Most decisions rendered by an arbitrator can’t be appealed in court, even when the arbitrator violated federal and state law.