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Nevada Court Strikes Down Arbitration Clause

Forced Arbitration Clause in Home Warranty

CARSON CITY, NV -- August 9, 2002 -- A mandatory arbitration clause in a home buyer's warranty was unconscionable and could not be enforced, according to a recent Nevada Supreme Court ruling (Burch v. Second Judicial District Court, Case No. 38283, July 17, 2002). The agreement was "oppressive," the Court said, because it gave the developer the right to choose the arbitrators and to create the rules governing the arbitration. Also, the buyers did not have a chance to negotiate the warranty terms, receiving a preprinted standardized contract form and a warranty book with the arbitration agreement buried on the sixth page.

The buyers, Mr. and Mrs. James Burch, had asked the developers to fix problems with saturated floor joists, wet insulation, and a moldy foundation. After attempts at mediation failed, the Burches filed a complaint in a district court for damages. The district court concluded that the Burches had entered into a valid contract, via the warranty, to resolve any home disputes through arbitration. The Nevada Supreme Court disagreed, ordering the district court to set aside its ruling.

Other Courts Ponder Forced Arbitration Agreements

Forced arbitration agreements have come under increased attack in the courts within the last few years. The U.S. District Court, Northern District of California, recently struck down a mandatory arbitration clause that AT&T included in consumer telephone agreements (See AT&T's Forced Arbitration System Illegal). The U.S. Supreme Court allowed the federal Equal Employment Opportunity Commission to protect the rights of a disabled worker even though he had previously agreed to arbitration of workplace disputes.

Consumer groups are hopeful that the tide has turned against forced arbitration, which is common today in service agreements, employment contracts, credit card agreements, automobile purchases, leasing contracts, and health care contracts. They point out that the arbitration process is costly, discourages claims, and often favors business as opposed to workers and consumers.

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