What is Binding Arbitration?

September 7, 2017

What is Binding Arbitration?When purchasing your new home, it is important to understand the contract you are signing.  Whether this home is a new construction or a resale property, your contract to purchase may have a clause in it that notes “binding arbitration”.  What is binding arbitration and who does it protect?  

Dictionary.com defines “binding arbitration” as “a judgement made by a third party to settle a dispute between two other parties, which is obligatory (both parties agree in advance to abide by the result)”.

The excitement of buying a home can be overwhelming, especially when and if a dispute or concern arises.  The paragraph in your contract that includes binding arbitration is not to scare the participants, but to avoid litigation or frustration in the event there is a dispute.  Binding Arbitration and Home Warranties

An arbitrator is a mutual third party that negotiates for all parties to settle a concern.  The arbitrator is typically from an arbitration company that charges a fee for this service.  All parties who sign a purchase agreement that has this clause, agree to binding arbitration before pursuing litigation.  In our world of frequent lawsuits, binding arbitration is a simpler cure to try to extinguish disagreements without ending up in a courtroom.

When you purchase your new home, your home builder may be offering a home warranty. In addition to a purchase agreement, most home warranties have a binding arbitration clause.  This clause protects both buyer and seller, and binds all parties to arbitration.  An arbitrator will review any disputed concerns, review the written, expressed warranty that the builder has purchased, make an evaluation as to the remedy of the circumstances and determine, if in fact, this is an item that the builder or homeowner is responsible for cure.  At the time of determination, the decision is made clear to all parties and the case is typically closed.  If, at the time of determination, either party would like to dispute the decision, they typically have a window of time to do so with evidence of reason.   If either party attempts to skip the process of arbitration and move directly to litigation, it could be a costly mistake.  In particular, we have evidenced a judge dismissing a buyer out of his courtroom when they attempted to avoid the binding arbitration step that they had agreed to in contract.  

Binding arbitration protects all parties involved in a home purchase.  It reduces time and money  when a dispute or concern arises.  You can purchase with confidence knowing that arbitration with an independent negotiator as well as a home warranty are written into your contract.  

For additional information about how a home warranty and binding arbitration will benefit you in your new home sale, contact your PWSC Regional Sales Director today!