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"Loser-Pays" Provision Invalidates Home Construction Arbitration Agreements

posted by Michael Fortney  |  Dec 2, 2014 09:08 AM in Construction Law:Home Construction Issues

If you are a residential home construction contractor and have an arbitration clause in your building contracts, a recent decision by the Eighth District Court of Appeals may invalidate your arbitration clause. 

It had long been the law of Ohio that residential home construction services were included within the services covered by the Consumer Sales Practices Act ("CSPA").  As such residential home construction contractors were subject to the three times damage penalty provisions allowed by the CSPA.   In 2013, that changed for the most part for projects costing more than $25,000 with the enactment of the Home Construction Suppliers Services Act. 

One item the two acts have in common is the authority granted to the court to award attorney's fees to the prevailing party.  Like the CSPA, the Home Construction Suppliers Services Act has a statutory fee shifting provision that allows a court to order the contractor to pay the homeowner's attorney's fees if the contractor has knowingly violated the statute and to order the owner to pay the contractor's attorney's fees if the homeowner's claims were groundless and brought in bad faith. 

In Hedeen v. Autos Direct Online, Inc., the court invalidated a contractual arbitration clause involving a CSPA claim because it contained a provision that required the losing party to pay the other side's attorney's fees.  The court concluded that the clause violated public policy and was not enforceable because it empowered the arbitrator to order the consumer to pay attorney's fees even if there was no bad faith in the homeowner's pursuit of its claims.  This power effectively nullified part of the statutory protections afforded by the CSPA.  Because the CSPA and the Home Construction Suppliers Services Act contain the same attorney fee shifting provisions, the Heeden decision should be viewed as directly applicable to the Home Construction Suppliers Services Act. 

Whether your contracts are governed by the CSPA or the Home Construction Suppliers Services Act, the Heeden decision provides the authority for a court to invalidate the arbitration clause if it contains a "loser pay" provision.  We recommend that residential contractors review their arbitration clauses to ensure that they are consistent with the Heeden decision and the other statutory requirements of the Home Construction Service Supplier Act.  For more information, please contact the construction lawyers at Fortney & Klingshirn. 


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