July 5, 2017
Property owners are frustrated when their builder fails to properly complete the agreed upon work for the purchase price. Sometimes these difficulties are relatively minor. Perhaps only a timely warranty claim letter to the builder will get the problems fixed. Not all disputes can be resolved amicably. For relatively simple matters, the owner may be able to sue pro se in small claims court. Many construction disputes require greater commitment of time, know-how and resources to resolve. When the relationship between the contractor and the owner breaks down, it may not be clear to whom should owners turn with contractor complaints. This blog post highlights various options owners may have for obtaining assistance with builder problems.
The Contracting Company’s Leadership:
Owners should first seek to amicably resolve disputes over a contractor’s performance with the company’s representatives. If the concerns can be effectively communicated and negotiated, the owner may avoid having to go to court, arbitrator or governmental agency. Sending a certified letter to the contractor may be necessary under the provisions of a statutory or contractual warranty. Check out my previous post about “Construction Defect Warranty Claims.” Communication can be a useful means of obtaining information. The owner may need to contact the leadership if their inquiries to company employees are ignored.
City or County Government Officials:
In Virginia, the city or county has the legal mandate to enforce the statewide building codes. There are offices staffed with experienced officials who conduct inspections and reviews to determine whether the project meets the building codes. The primary purpose of building code enforcement is to protect public health and safety. The code enforcement process begins long before anyone brings a complaint before the local government. Many projects, especially major renovations and new home construction require drawings to be submitted and a permit granted before work may commence. When presented with a complaint, code enforcement will look at the work on the property and consult the approved drawings and the building codes.
While compliance with the building codes is important, it is not the end of the story. If the contractor only builds to the minimum standard required to pass county inspections, the owner may be disappointed. The concept of a “dream home” includes code compliance, but goes significantly beyond that. Owners have rights not simply to a product that passes code inspection but work that conforms to the contract, warranty and drawings. There are quality control issues that aren’t addressed in most contracts, drawings or building codes. Take caution regarding contractors who talk about “dream homes” before the contract is signed and then only in terms of “code compliance” after getting several payments.
It is important for owners to understand what code enforcement is not. While the officials promote a public function, they do not exist to provide pro bono expert services. They will not provide cost estimates to finish or repair the work. Their job is not to make sure that the owners get what they bargained for in the contract with the builder. In some situations, they may enforce the building code against the owner. If the project is shut down because of code enforcement action, this may cause delays and additional expenses to the owner.
In general, the code enforcement offices do a great job within their specific legal mandate of enforcing the building codes. However, owners must understand that the county or city does not have the broad powers of a court to provide remedies and protections.
If a contractor or owner does not agree with a decision made by code enforcement, there is an appeal process available. However, appeals are rare because of the expenses and delays.
State Board of Contractors:
Contractors must be licensed to engage in the construction services they deliver. The state board performs a useful function in the contracting field. Consumers and the public have good reason to expect the government to protect their health and safety. Also, contractors often take large amounts of money from owners who then expect them to perform on the work. Some people lose motivation once they get the money in their bank account. While we don’t usually categorize contractors as “fiduciaries,” in a sense they are such. The Virginia Board of Contractors deals with the application, issuance and suspension of contractors’ licenses. They also have regulations that can be the basis of a professional disciplinary proceeding if violated. The Contractor’s Recovery Fund provides a means for financial recovery for some consumers in egregious suits where the contractor lacks resources to satisfy a judgment. In a previous post I explored the question, “Should Homeowners Bring Complaints Against Contractors Before Courts or Regulators?” As discussed there in more detail, often there isn’t much benefit to owners to go to the state board until they exhaust remedies elsewhere. However, owners and their attorneys should know what the requirements are for recovery against the state fund so that they can meet those requirements in the lawsuit. The state board will look to the records of the proceedings of the lawsuit in the city or county courts in their investigation. Also, the failure to pay a court judgment is a violation of the licensure regulations. For many aggrieved owners, petitioning the state board only makes sense towards the end of the legal process.
In particularly egregious cases of fraud, embezzlement or other wrongful activities, the contractor may have criminal liability. In most cases, inquiring with law enforcement will not result in charges or restitution order. However, owners should not rule out going to law enforcement entirely. Some cases do rise above civil disputes.
As the years go by, more builders put arbitration clauses in their consumer contracts. In many cases, these arbitration clauses do not help owners. Often, they tend to limit or practically eliminate the consumer’s rights to legal remedies. It can be difficult for owners to navigate the arbitration process without legal counsel because of certain delaying tactics that often occur in arbitration. I recently wrote a blog post about a New Jersey case where a consumer overcame obstructionist use of arbitration provisions. Many property owners do not focus on these provisions when they review the contract during the sales process. When a legal dispute develops, the parties should check the dispute resolution provisions of the contract to see if they mandate arbitration, waive the right to a jury trial or limit the courts where claims may be brought.
Judges & Juries:
Last but not least, owners can bring their complaints against builders before state or federal courts. Under our legal system, the judiciary, i.e. judges, have the legal mandate to interpret contracts and statutes and provide remedies for any breach. In Virginia, if the claim is for $5,000.00 or less it may be brought in the Small Claims Division where the parties do not ordinarily have attorneys. However, any party may bring a case out of small claims by retaining an attorney and filing for removal. Claims for money for $25,000.00 or less (not including court costs, attorney’s fees or interest) may be brought in the General District Court for the city or county where the property is located. The General District Court has the advantage that proceedings there tend to be faster and cheaper for consumers. Claims over $25,000.00 may be brought in the Circuit Court where cases may take up to a year to be resolved. Litigation in the Circuit Court tends to have lots of motions, discovery and other pretrial activities. Some of my readers say that consumers and owners should not go to litigation because it can be expensive and uncertain. In my view, there are reforms that the general assembly or the judiciary could take to reduce the laboriousness of litigation. I do not believe that creating an alternative to the court system within government agencies procedures works for owners or consumers. I explored this in a previous post on this point. That makes it too easy for special interests to gain control over the process through lobbying.
The bank exercises a significant amount of control over the construction process. The builder typically looks to the bank for payment. The bank will send out its own private inspectors to look at the progress on the job site and report to the loan officer whether completion of a phase of construction warrants disbursement of a draw. The purpose of the bank inspector is to protect against fraud and to confirm that the payment would be adequately secured by the bank’s lien on the property. This inspector works for the bank and does not focus on whether the owner would ultimately be happy with the work that is being done. Owners should not impede the bank inspection process and take heed if the loan officer calls to their attention that the inspector raises any questions.
Mechanic’s Lien Agent:
In Virginia and some other states, the law requires that a Mechanic’s Lien Agent be appointed at the beginning of the project. The purpose of the MLA is to accept delivery of notices by subcontractors and material suppliers that they have not been paid so that such issues can be resolved without a mechanic’s lien being filed by anyone working or supplying to the jobsite. The MLA is not there to provide a dispute resolution service regarding any threatened lien but may be a source of information for owners seeking to confirm what is happening with their contractor and its subs.
To whom should owners turn with contractor complaints? That depends upon the facts of the case. One of the problems with all these separate venues, officials or information sources is that an owner might focus on one and miss a deadline to obtain the remedy they are entitled to from another. This consumer protection landscape is ripe for confusion by the people it is designed to protect. Ideally, the owner will not need to resort to any of these options and can negotiate a good deal and obtain a great result without having to bring grievances before an official, judge or arbitrator. Many owners experience this. However, owners are at a disadvantage. While they have the money that contractors want, they don’t have the technical or legal experience needed to get what they want out of the process. Contractors have experience preparing and negotiating written contracts and change orders. They know what to say to sell their services. They know the officials that work at the county inspection offices. They have their own lawyers. Consumers look to the builder for both the service itself and information about how to shop for the service. For most property owners, a custom home is the largest purchase they will ever make. Getting an attorney or other experienced person to review the contract before signing it can go a long way towards getting the bargain they seek. Owners should not rely upon their adversary to provide them with useful legal counsel. Seeking legal counsel may not require a commitment to a year of litigation. In fact, it may be the best means of avoiding that.
May 5, 2017
When owners have disputes with their condominium or HOA boards, sometimes it is unclear where or how they must go about seeking redress or defending their rights. Owners must understand how association dispute resolution procedures work so that they do not prejudice their own claims or defenses by failure to go to the proper forum or meet deadlines. What options are available will depend upon the facts of the case and the governing documents. Sometimes it can feel like a labyrinth without an aerial view of sorts. The following is a summary overview and is not intended to explain everything:
In the absence of other dispute resolution procedures, owners have the option of filing or defending a lawsuit. The Property Owners Association Act and Condominium Act both provide that owners or associations may bring suit in order to enforce the declaration of covenants. They also provide that the prevailing party shall receive an award of reasonable attorney’s fees. The Supreme Court of Virginia recently made an owner-favorable decision on the issue of attorneys fees. See my post, Condo Owner Prevails on her Request for Attorney Fees.
Some suits where the amount in controversy is $25,000.00 or less can be brought in the General District Court (GDC) for the city or county where the property is located. The advantage of the GDC is that cases go to trial faster and are in most situations less expensive to litigate. Suits over $25,000.00 or where equitable remedies are sought by the owner must be brought in the Circuit Court. The procedures there are more complex. This blog post explains how they usually start, The Beginning of a Virginia Circuit Court Case. Community association cases usually don’t end up in the U.S. District Court. If one of the parties is in bankruptcy, the case may end up in the U.S. Bankruptcy Court. While litigation is more time-consuming and laborious than some other dispute resolutions options, the outcomes tend to be more favorable because of the independence of the judiciary.
Internal Nonjudicial Dispute Resolution:
The most common “venue” for resolution of disputes between owners and boards is internally within the association’s governance structure. Declarations of covenants, bylaws, architectural standards, rules & regulations and articles of incorporation may provide for claims to be brought by owners or the association before the board of directors or the architectural review committee.
The most notorious form of this is where the association issues a notice to an owner that she has violated a covenant, rule or regulation and must appear in a hearing before the board or committee. See, Don’t go it alone on a Notice of Violation. The courts allow this under the statutes, but there must also be provisions in the covenants that allow for the association to assess nonjudicial fines. These procedures are controversial because they allow the association to act as prosecutor, judge, jury and collection agent in their own case.
Sometimes owners have disputes with one another over party walls or boundary fences. Many covenants have provisions that require them to submit disputes over party walls or boundary fences to the board of directors as arbitrator. I don’t like these provisions because board members typically don’t have experience or training as arbitrators. Arbitration is not the same as rules violation hearings. Board members may have a vested interest or bias in the outcome of the party wall arbitration.
Some newer governing documents have internal dispute resolution procedures that seem all-encompassing. For example, an owner may be required to exhaust detailed procedures under the governing documents before acquiring the legal right to bring suit. Rules may require deadlines and procedures for seeking board of directors “appellate” review of decisions adverse to the owner. This may require an owner or their lawyer to compare multiple governing documents and to analyze them under Virginia statutes and case-law to determine whether action is necessary in order to protect one’s property rights. If the owner fails to first exhaust the” internal remedies” before going to court or fails to follow some dispute resolution procedure, they may be prejudiced in their ability to get a judge (or arbitrator) to consider it on its merits.
In general, the world of these internal nonjudicial procedures favors the boards. Not only do they sit as decision makers, they also may have authority to record liens, foreclose or even act as trustee in condominium termination proceedings. That said, owners should not ignore these procedures. If the board fails to follow its own internal rules, then that may position the owner for a favorable outcome in litigation or arbitration. The board has no authority outside of what the covenants and statutes create. See, Do your association’s parking rules pass the small test?
Virginia law allows community associations to put binding arbitration clauses in their covenants. This means that in the event of a dispute, an owner may find out that they cannot simply bring the case before the judiciary. Arbitration clauses typically designate a company such as the American Arbitration Association as the “venue” that acts in the place of a court. Sometimes, arbitration can be more expensive to the participants than litigation. Significant up-front fees may be required. The covenants may require the case to be arbitrated through an agency that has cozy relationships with real estate industry people and doesn’t have a consumer protection orientation. The arbitration process doesn’t favor the “little guy.” See, Overcoming Delay Tactics in Arbitration.
Office of the Ombudsman of the Common Interest Community Board:
If there weren’t already enough potential venues, the General Assembly created another one. If an owner has a grievance against a board or licensed property manager, they may submit an adverse decision to the state Common Interest Community Board for review. This has been touted by some as a way of having a government regulator review the legality of a board or property manager action without having to court or arbitration. As my previous blog post explains, the Ombudsman does not render decisions adverse to boards where the parties are arguing opposing interpretations of statutes or governing documents. See, Condo Owner Prevails on her Request for Attorney Fees. Since both sides need to take opposing interpretations for a dispute to arise in the first place, this is not a useful process for an owner to pursue when they are concerned about the outcome.
In my practice, I prefer to help clients to understand and protect their rights without unnecessary legal action. Ideally, boards and owners can negotiate a mutually acceptable outcome without going to court or arbitration. Unfortunately, this is not always possible in many owners’ circumstances. When a HOA or condominium board seems to be taking improper action or failing to fulfill its obligations under the governing documents, owners need to know where they can turn to obtain useful and cost-effective relief. As this survey shows, in Virginia there is a potentially confusing array of procedures and venues. An owner can potentially become focused on one or two and run the risk of having a deadline expire on bringing the claim properly. When owners need some help making sense out of the governing documents, laws and correspondence from the association, they need an attorney who practices community associations law but isn’t allied with the boards or association industry. That’s why I started my little firm where we don’t accept cases where we represent boards.
March 23, 2017
On March 9, 2017, the Supreme Court of New Jersey delivered a significant victory to consumers against an auto dealership attempting to use an arbitration agreement to obstruct claims from being heard. Roach v. BM Motoring, LLC shows a strategy for overcoming delay tactics in arbitration so that consumer protection claims can be considered on the merits. Arbitration clauses appear in all sorts of contracts all over the country, including many real estate and construction matters. BM Motor Cars put a clause in its contracts requiring that disputes be decided under the rules of the American Arbitration Association. The AAA is a commonly used alternative dispute resolution service. After the consumers submitted their cases to the AAA, BM refused to pay its $3,200.00 portion of the arbitration fees required for them to proceed. Consequently, the AAA dismissed the claims. When the consumers filed lawsuits, the court referred the case back to AAA. BM used this revolving door tactic to continuously delay hearing of the consumers claims by a judge or arbitrator. Finally, the Supreme Court of New Jersey short-circuited these tactics, finding that BM breached the arbitration agreement by failing to pay the required fees. The opinion provides insights on how arbitration clauses may expand or restrict a party’s substantive rights under an agreement.
Arbitration clauses find their way into all sorts of contracts these days, in employment, consumer, HOA, condominium and many other matters where industries find themselves in risk of litigation. Many consumer advocates have a low opinion of arbitration clauses, and for good reason. Before diving into an analysis of the BM case, let’s first consider how arbitration differs from litigation.
- Cost to Initiate. To get into court, the consumer may have to pay an attorney but the court fees are low. The operational costs of the judiciary are subsidized by the government. To get a case heard by an arbitrator, someone must also pay the AAA (or another arbitration agency) and the arbitrator. AAA arbitrators are typically experienced attorneys who charge the parties by the hour. If the defendant refuses to pay the fees required by the AAA, the consumer is forced to up-front those costs herself, file a lawsuit in court to compel arbitration or abandon the case.
- Fewer Procedural Rules. In arbitration, there are fewer procedural rules. The overall expense of the process can be lower because of reduced discovery, depositions, motions practice, disclosures, appeals, etc. However, if the consumer or small business finds themselves unable to initiate the proceeding, it does not offer much value. Because arbitration clauses are created by contract, there is potential for creativity in the agreed dispute resolution procedures. However, detailed arbitration clauses tend to work against the interests of the party to the contract most likely to find themselves trying to bring claims. Often, consumers do not understand how arbitration clauses may practically limit their right to a fair hearing.
- Does Arbitration Save Money Overall? Some people say arbitration clauses “save” consumers the cost and trouble of a lawsuit. However, arbitration can also be time consuming and expensive. The claimant or her attorney must prepare a detailed written claim and file it with the arbitration agency and maintain momentum.
- Do Arbitrators Suffer from Bias? The next step is the selection of the arbitrator from a panel of experienced lawyers and retired judges. The AAA will send the parties a list of potential arbitrators narrowed by geographic area and subject matter experience. The risk of bias is mitigated by the opportunity to cross names they don’t like off of the list. There are other arbitration agencies which cater to specific industries. Some providers have arbitrators who never attended law school or passed the bar exam. Parties are wise to consider whether an arbitration company functions as a vendor for their opponent.
- Hearing or Meeting? Once the arbitrator is determined the parties will receive a schedule of deadlines in preparation for the arbitration hearing. In a court trial, there are all sorts of formalities required for parties to make motions, disclosures and objections. In arbitration, there are few rules of evidence. The parties sit in a conference room instead of going into a courtroom. There are no juries.
- Judicial Review Strictly Limited. If the arbitrator makes a monetary award, the prevailing party can then go to court to get the result confirmed as a judgment. Unless there is fraud or other extreme irregularities, there is no judicial review of the merits of the arbitration result.
I believe that parties ought to be able to contract for whatever alternative dispute resolution provisions of their own choosing. However, the devil is in the details of the arbitration clause language and the rules of the arbitration forum. The arbitration process works well for wealthy parties looking to reduce their annual legal expenses and keep their disputes out of the public eye. Consumers are better off with the judiciary, especially with juries or in small claims court.
Consumers often sign arbitration agreements for economic reasons, lack of consumer choice or by ignorance. Because parties often find themselves bound by arbitration clauses, the victory won by Mmes. Jackson & Roach is significant. These women (separately) purchased used cars from BM Motor Cars in Rahway, New Jersey. The Dispute Resolution Agreement provided for arbitration in accordance with the rules of the AAA before a single arbitrator who shall be a retired judge or attorney. The DRA also require that, “Dealership shall advance both party’s (sic) filing, service, administration, arbitrator, hearing or other fees, subject to reimbursement by decision of the arbitrator.” They subsequently submitted demands for arbitration against BM with the AAA. They asserted claims under consumer protection statutes. Ms. Jackson alleged that BM refused to sell the car for the advertised price, overcharged from title and registration and misrepresented the terms of the extended warranty. Ms. Roach also sued under consumer protection legislation. The AAA repeatedly requested that BM pay the arbitration fees required by its rules. The AAA suggested to the consumers that they simply pay BM’s fees and later seek recovery of them from BM in the arbitral award. After BM ignored these requests, the AAA dismissed the consumer’s cases. The AAA became so fed up that it sent BM a letter instructing it to remove the AAA arbitration language from its agreements. Undeterred, the consumers filed lawsuits in court. The judges granted BM’s motions to dismiss the cases and compel arbitration. The court wanted the plaintiffs to go back to AAA and for BM to pay the fees. When the women went back to the AAA, the arbitration company dismissed their claims again because BM failed to pay the fees. As you can see, BM was trying to deny the consumer a decision on the merits of their claims by leading through the revolving door from court to the AAA and back again.
At the Supreme Court of New Jersey, BM Motor Cars argued that the contract did not, “contemplate using AAA as the forum and venue for arbitration” and that it, “consistently not arbitrated disputes with its customers by utilizing AAA . . . because of the excessive filing and administrative fees charged by AAA.” However, BM never asserted this argument before the case reached the Supreme Court. The justices asked some pointed questions to BM’s lawyer about this at the January 3, 2017 oral argument. It sounds like they found BM’s belated objection to AAA as the arbitral forum to be disingenuous. The consumers responded to this by pointing to AAA’s rules which provide that if the contract requires that arbitration be conducted under AAA rules, then the AAA is a proper venue for the case.
The consumers argued that the requirement to advance the fees was a material term of the Dispute Resolution Agreement. By breaching that term, BM Motor Cars precluded itself from the right to force arbitration. BM waived its right to deny the consumers the ability to go to court instead. Roach & Jackson argue that BM should not profit from its own breach of the arbitration agreement’s language. The court rejected BM’s argument, finding that the consumer’s filing with the AAA was consistent with the terms of the arbitration clause.
In its opinion, the Supreme Court of New Jersey mentions that judges have not always been so inclined to enforce arbitration clauses. Under the common law, judges were averse to arbitration. Courts strictly construed these clauses as like they would with restrictive covenants or covenants not to compete. To encourage arbitration, congress and the states enacted legislation to place arbitration agreements upon the same footing as other contracts. Now a court cannot subject an arbitration agreement to more burdensome requirements than ordinary contract law doctrine. But the Supreme Court doesn’t end its analysis by affirming pro-arbitration public policy. Roach v. BM Motor Cars illustrates that ordinary contract law doctrine provides protections against abusive practices. Generally applicable contract law defenses can be applied in proper cases. Ambiguous provisions may be construed against the drafter of the agreement, especially in a take-it-or-leave-it consumer contract. Under contract law, breach of a material term relieves the non-breaching party of its obligations. The court observed that the federal Ninth and Tenth Circuit Courts of Appeal previously held that a party’s failure to pay required fees constitutes a material breach of an arbitration agreement.
The N.J. Supreme Court held that BM’s refusal to comply with the arbitration procedures was a material breach of the Dispute Resolution Agreement. This breach prevents BM from later compelling arbitration if the matter is brought to court before a judge. The case will proceed in the courts. The Supreme Court reversed the previous decisions that the trial judge and intermediate appellate panel made in favor of BM. Consistent with its finding that arbitration clauses are subject to generally-applicable contract law defenses, the Court refrained from setting rules about refusal to pay arbitration fees that could be applied in every case:
Nevertheless, we establish no bright-line rule. The determination of whether refusal to respond to a written arbitration demand within a reasonable time period constitutes a material breach of an arbitration agreement that precludes enforcement by the breaching party must be made on a case-by-case basis after considering the agreement’s terms and the conduct of the parties.
If consumers encounter this obstructionist tactic in the wake of these appellate decisions, they must consider whether it is easier to simply up-front the defendant’s fees or to initiate court motions practice on whether the defendant’s breach waived their right to enforce arbitration. In the wake of these decisions in New Jersey and the federal courts, I expect that parties preparing arbitration clauses will react accordingly. Some will seek to specifically burden the complaining party with the burden of up-fronting the arbitration agency and arbitrator fees. Roach v. BM Motor Cars represents a balanced approach to judicial enforcement of arbitration clauses. Perhaps there are additional contract law doctrines that parties can assert to protect their interests? Often builder contracts or community association restrictive covenants are ambiguous, contradictory or unclear in whether the remedies provided are exclusive. Consumers, property owners and family-owned businesses should not rely upon their opponent or their opponent’s lawyers to give a fair assessment of how a judge or arbitrator would read the agreement. When one’s investment, home or business are on the line, a qualified attorney can help navigate a path to a solution that may not be immediately apparent.
Opinion and Video:
Jan. 1, 2017 Oral Argument Video: http://www.judiciary.state.nj.us/webcast/archive.html