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Arbitration Results Can Be Annoyingly Arbitrary

Written by on Monday, 11 January 2016 2:54 pm
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We have discussed the fact that arbitration clauses in real estate contracts have "teeth". If the principals to a transaction sign or initial a clause that commits them to arbitrate, rather than litigate, any future disputes then they will be held to that. Courts will enforce such an agreement. (To be sure, the standard real estate contract enumerates certain exceptions to the arbitration agreement, but those are unusual circumstances that need not be addressed here.)

Left undiscussed has been the more basic question: Is arbitration, as an alternative to litigation, a good thing? Are both buyers and sellers well-advised to agree to an arbitration clause? (We are NOT saying that agents should be doing the advising.) Clearly, there are two sides to the issue, and a definitive judgement is not going to be reached here.

The pro arbitration position appeals to widespread sentiments against both the court system and legal costs that often seem excessive. Many see arbitration as an alternative that is faster, considerably more comprehensible, and significantly less expensive than involvement in a lawsuit.

On the other hand there are those who are less sanguine about the surrendering of important legal rights when one commits to arbitration. Although they may seem distant and abstract issues, when it comes to a real situation it is no light thing to have given up one's right to a jury trial and, often more importantly, the right to appeal.

When, somewhat more than two decades ago, arbitration clauses were first introduced into the standard real estate purchase contracts produced by the California Association of REALTORS®(CAR) the reaction was overwhelmingly positive. For the positive reasons listed above many brokers were happy to sign on to arbitration clauses, and many were happy to see their clients do so as well.

But sentiment has shifted over the years, at least within the community of brokers and their legal representatives. Yet, acknowledging that my evidence is purely anecdotal, it appears to me that there has been no corresponding shift of sentiment among members of the real estate buying and selling public.

There is a straightforward explanation for this disparity. Members of the public, by and large, have no on-going experience with arbitration proceedings and their results. Thus whatever might have appealed to them twenty years ago would still have appeal. Brokers, on the other hand, deal with the process year in and year out; and many of them are no longer sold on the arbitration process. Why? Because, in a nutshell, arbitration rulings often seem so arbitrary.

It has come as a surprise to many to learn that arbitrators are not bound to follow the law. They can render a judgement based on their particular version of common sense or fairness, even though it might differ from what would be prescribed by the applicable code(s). Now this might be appealing to some, but to practitioners who believe they have rules to follow it introduces a worrisome element of uncertainty.

To be sure, an arbitration clause can be drawn to require that the arbitrator must follow the law where applicable. But such customizing of the provision would be unlikely to occur in the context of a typical real estate transaction. It certainly wouldn't be something for an agent to draft.

This is where the concern about the right to appeal comes in. Suppose you lose an arbitration in a proceeding where it is blatant that the arbitrator neither applied the applicable law nor rendered a decision in accordance with the evidence. Don't count on a higher court to review it.

The CAR standard purchase agreement contains an optional arbitration clause between the principals. The broker is not a party to it, though he or she could always agree to arbitrate if a dispute were later to occur. As noted, though, many brokers might be disinclined to do that.

In the CAR listing agreement there is an optional arbitration provision between the seller and the listing broker. Whether it is to be initialed by the agent representing the broker is something that should be a matter of clear company policy.

Bob Hunt is a director of the California Association of Realtors®. He is the author of Real Estate the Ethical Way. His email address is This email address is being protected from spambots. You need JavaScript enabled to view it..

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