A recent ruling by an Ontario court blocking a joint lawsuit by a group of consumers who signed contracts for preconstruction homes highlights the ways the ancient Latin legal advice “caveat emptor” (“let the buyer beware”) remains all too relevant in 2019.
At particular issue are just a few dozen words in the 40-page Agreement of Purchase and Sale contracts that informed the hopeful purchasers that, if there is any dispute between vendor and buyer, private arbitration is the only legal route open to either party.
In recent years, mandatory arbitration clauses have gained traction in the United States and Canada as a speedier way to resolve disputes in commercial contracts, and the clauses have increasingly turned up in consumer service contracts, too. In Ontario, consumer legislation has banned the clauses for most services, but some transactions – real estate, mortgages and insurance among them – have long been exempted from the ban. But now, even some of the arbitrators hired to adjudicate these disputes wonder whether the system is such a good fit for consumer-corporation conflicts, and are raising concerns over what is essentially an unregulated space. Unlike the public courts, there are no data gathered on the outcome of arbitration hearings, nor are there agreed-upon rules for how parties should conduct the process.
“My main concern is people having to participate without a choice,” said Colm Brannigan, an arbitrator for 20 years who believes it can be a great system when parties have equal bargaining power, a condition he acknowledges is not always present in the preconstruction home-sales market. “The idea that you’re compelled into it, it goes against the idea of arbitration. Once you’re in an arbitration process, you can’t get out of it except on very narrow grounds … and it’s virtually impossible to appeal an arbitration award if it’s written properly.”
A recent attempt to invalidate an arbitration clause came from 15 Ontario plaintiffs in Evans v. Mattamy Homes Ltd. The buyers said they had lined up on a cold February day in 2017 to get a chance to buy a home from the property development giant’s exclusive Oakville, Ont.-area project called The Preserve, but later had trouble closing, due to crashing values of their existing homes. They argued that a high-pressure sales environment robbed them of the opportunity to get legal advice on the contracts, thus making the arbitration clauses invalid.
“Their evidence was the arbitration clause was not pointed out to them,” said plaintiff counsel Jameel Madhany of Lerners LLP. “Actually part of our argument was that given how onerous the clause was, Mattamy should have an obligation to point that out.”
The plaintiffs allege the company gave out 400 tickets to the sales event –“far more than the amount of lots available” – and starting at 9 a.m., “brought 10 to 15 people into the sales centre at any given time. There were not enough sales representatives to assist all of them simultaneously.”
Once inside, the claim alleges, “If a prospective purchaser asked a sales representative for more information about a lot they wished to purchase, the sales representative pointed at the people waiting … and told the purchaser that there was no time to answer questions … a decision needed to be made immediately.” When it came time to review contracts, the plaintiffs claim they were given at most 15 minutes to read the lengthy legal document, and were told “that they did not need to read the APS because it was standard form, it was similar to APSes for other developments, and that in any event, amendments were not permitted.”
Mattamy sought and won a stay and in a July decision, Ontario Superior Court of Justice Master Karen Jolley rejected claims that the arbitration clause was unfair or “unconscionable.”
Mattamy’s representatives have argued in news reports that anyone capable of putting down several hundred thousand dollars in deposits for a $1-million to $1.6-million house is de facto a sophisticated buyer. Mattamy responded further in a statement Tuesday. “Mattamy provides an abundance of information to its prospective purchasers before a sales launch. In this instance, the court found that every plaintiff was advised ‘numerous times’ before the sales event that the agreements were firm and binding. If any of the plaintiffs had brought a lawyer with them to review the agreement on the day of purchase, Mattamy would of course allow that.”
The arbitration clause has become standard in new home contracts, but it’s not clear how often homebuyers end up in private arbitration. By its nature, arbitration is not public, and even industry leaders aren’t sure how prevalent the practice is and how balanced the outcomes are.
“I would say most arbitrators are content at the moment that it is not regulated,” said Janet McKay, executive director of the Alternative Dispute Resolution (ADR) Institute of Canada, “and [I] can’t really say whether I would want it regulated or not.” The ADR Institute provides training and professional guidance to arbitrators and recently began a research project to study arbitrations in Canada to test the long-held theory that the process is better value for money than the public court system. Even though she has no hard evidence, Ms. McKay says that, based on anecdotal information, she believes arbitrations are on the rise. "I get more and more calls from the public asking about it. … I do think it’s definitely in a growth mode; there are just no numbers.”
Arbitrator William G. Horton has written articles criticizing mandatory arbitration for real estate consumers, but accepts that there can be good uses of the process.
“The use of [arbitration] to block access to justice is not a good use," Mr. Horton said. “I would like to see [the real estate exemption] struck down, if not by the courts then by the legislature.”
Your house is your most valuable asset. We have a weekly Real Estate newsletter to help you stay on top of news on the housing market, mortgages, the latest closings and more. Sign up today.