What Is This Clause?
A clause that requires any dispute between the buyer and the builder to be resolved through private arbitration instead of a court of law. This means the buyer gives up the right to a jury trial and typically cannot appeal the arbitrator's decision.
How It Works
Arbitration is a private dispute resolution process where a neutral third party (the arbitrator) hears both sides and makes a binding decision. Unlike a court case, there is no jury, no public record, and very limited ability to appeal — even if the arbitrator makes a legal error.
In new construction contracts, mandatory arbitration clauses require buyers to resolve all disputes through this process. The arbitration provider is usually specified by the builder in the contract and is often the American Arbitration Association (AAA) or JAMS. The builder, as a repeat customer of the arbitration provider, may have a structural advantage.
These clauses are nearly universal in large production builder contracts. They are supported by the Federal Arbitration Act, which generally favors enforcement of arbitration agreements, making them difficult to challenge in most states.
Why It Matters
You lose the right to have a judge or jury hear your case — even for claims involving fraud, negligence, or building code violations.
Arbitration proceedings are private, so other buyers never learn about the dispute or its outcome.
The arbitrator's decision is typically final and binding, with extremely limited grounds for appeal.
Arbitration filing fees can be substantial, and the process may still require legal representation to be effective.
Real-World Cases
Damico v. Lennar Carolinas (South Carolina, 2022)
The South Carolina Supreme Court found Lennar's arbitration provision unconscionable as part of a broader contract of adhesion, holding that the provision was not severable from other unconscionable terms.
AT&T Mobility v. Concepcion (U.S. Supreme Court, 2011)
While not a construction case, this landmark ruling held that the Federal Arbitration Act preempts state laws that prohibit contracts from disallowing class-wide arbitration. This decision significantly strengthened the enforceability of arbitration clauses across all industries, including residential construction.
Which Builders Use This Clause
The following builders have been documented using this clause type in their purchase agreements.
State-by-State Enforceability
Mandatory arbitration clauses are generally enforceable under the Federal Arbitration Act (FAA) in most states. However, courts in some states have found specific arbitration provisions unconscionable when combined with other one-sided terms, particularly in contracts of adhesion. The enforceability of individual provisions often depends on state unconscionability law.
What Buyers Can Do
- 1Identify whether your contract requires mandatory arbitration and which arbitration provider is specified.
- 2Understand that under the Federal Arbitration Act, these clauses are generally enforceable, but state courts may still evaluate them for unconscionability.
- 3Ask the builder whether arbitration is negotiable. Some builders will agree to optional (rather than mandatory) arbitration.
- 4If you proceed with the contract, keep detailed records of all communications and issues — these will be important if arbitration becomes necessary.
- 5Consult with a local attorney who has experience with construction arbitration in your state.