As you likely know, many construction contracts include an arbitration clause. Such a stipulation mandates that any dispute must go to arbitration instead of litigation. In many instances, there is little argument. But a recent case in Texas called this mandate into question for compelling reasons. 

Details of the case  

Giancarlo and Krystle Perez entered into an agreement with Continental Homes of Texas (Express Homes) to build them a new residence in San Antonio. Express Homes provided the couple with a standard construction contract that included an arbitration clause.  

This clause explained that potential disputes between the two parties—before and after the home’s closing—must be settled via arbitration. According to the clause, the American Arbitration Association (AAA) would administer and conduct the binding arbitration, and all costs would be split between the parties.  

As the building project progressed, the Perezes alleged the home’s foundation was defective and filed a suit in Texas district court against the construction company. The suit detailed claims of negligence, fraud and breach of contract, as well as violations of the Texas Deceptive Trade Practices Act. 

In response, Express Homes argued the contract clearly mandated arbitration and filed a motion to compel such arbitration. However, the Perezes asserted the arbitration clause was unreasonable because the cost of the arbitration was so expensive that they could not afford it. They also argued that AAA arbitration was costlier than litigation. 

As part of the case, the Perezes provided evidence of their monthly income. The couple also submitted resumes for 20 AAA arbitrators whose average daily fee was $2,000. The couple’s attorney also submitted an affidavit estimating the arbitration cost for this dispute could be higher than $10,000 for each party, in addition to his own fee. The attorney noted that for litigation he would offer a monthly payment plan to accommodate his hourly fee, which was much lower than the arbitration cost. 

Express Homes questioned the estimated arbitration costs provided but did not offer alternative estimates. The company also stated the arbitrators used as examples were unqualified for the case, so their fees should not be considered.  

The district court agreed with the Perezes and ruled the arbitration clause was unconscionable since arbitration costs were unaffordable and did not offer an “adequate and accessible substitute to litigation.” Thus, the court denied the motion from Express Homes to compel arbitration. 

What the appellate court determined 

In Cont’l Homes of Tex., L.P. v. Perez, No. 04-21-00396-CV, 2022 Tex. App. LEXIS 7691, the Court of Appeals of Texas (Appellate Court) reviewed the earlier case. It agreed to accept the trial court’s evidence and factual determinations. However, it stated it would examine the legal findings of the district court de novo, or from the beginning.  

The enforceability of an arbitration clause is a question of law, and there is precedence in Texas outlining what factors to consider. These include the arbitration fee compared to the amount of the claim; the parties’ ability to pay for that fee; and the difference in cost between arbitration and litigation. That final cost comparison is the essential factor to determine if arbitration is an accessible and adequate substitution for litigation.   

The Perezes’ evidence proved to be compelling to the Appellate Court. The defendant had implied that the plaintiffs needed to know which arbitrator would handle the case, but the court disagreed. The attorney’s affidavit addressing his experience with AAA and its associated costs was influential, as was his offer to provide a monthly payment plan for his fees.  

Based on the plaintiffs’ monthly income, the court understood arbitration would be a financial hardship. Given that the arbitration costs would exceed the litigation costs, and that the Perezes could not afford arbitration, the court determined that the arbitration clause was unconscionable and unenforceable. The Appellate Court affirmed the district court’s decision. 

What does this mean for contractors?  

Although all parties may sign a contract with an arbitration clause, the case above illustrates there are times when such a clause is not enforceable. If you are entering into an agreement that includes such a clause, be sure to consider whether arbitration is substantially more expensive than litigation—and whether both parties can afford it.  

If you are unsure about arbitration clauses or other contract provisions, take the time to consult legal counsel. Laws can vary from state to state, but an experienced construction attorney can review your contracts, advise you on local laws and help you fully understand what you are signing.  

The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation. 

Trent Cotney is a partner and construction practice group leader at the law firm of Adams and Reese LLP and NRCA General Counsel. For more information, you can contact the author at [email protected] or call 1.866.303.5868.