Most people are familiar with arbitration provisions. It’s practically impossible to get medical treatment without signing one. Indeed, it seems that almost every business that involves a contract or an on-going relationship requires that consumers sign an agreement that any disputes will be submitted to binding arbitration.

Judging by widespread use, it appears that many are comfortable with this. Arbitration is perceived to be an alternative to the legal system -- lawyers, courts, and juries – and, to a lot of people, any alternative to that looks good.

When arbitration clauses were introduced into the standard contracts produced by the California Association of Realtors (CAR), brokers, agents, and consumers all received that as a very good thing. The clauses are voluntary. Both parties must agree for the clause to be binding; and, if there is not an agreement, it is possible to have a contract without it.

In the case of a purchase contract, the agreement to arbitrate is between the principals – buyer and seller. The real estate brokers are not parties to the purchase agreement. In the case of a listing contract, the agreement is between the broker and the seller.

Agents, of course, are not supposed to give advice as to whether a principal should sign an arbitration agreement – that would be practicing law. But it’s a fair bet that many agents would explain the agreement to clients in such a manner as to constitute advice (as in: “This clause says that if there’s a dispute, it will be settled by arbitration. You wouldn’t have to put up with the expenses and time of lawyers and the court system.”)

Over the years, though, experience and anecdotal evidence has led many brokers to be wary of commitments to arbitrate. This is because they have begun to discover some of the seldom-publicized downsides of arbitration.

The chief downside of arbitration is this: the grounds for appealing an arbitration award are very, very limited. As a CAR legal memorandum has put it, “The law does provide for very limited review of arbitration decisions where the arbitrator is biased, commits fraud, or violates other basic principles of fairness, but such a review rarely deals with the merits (substance) of the case.” What does it mean that a review rarely deals with ‘the merits” of a case? I suspect that agents – who shouldn’t give advice anyway – and consumers are not sufficiently aware of this.

A recent ruling from the U.S. Court of Appeals for the Ninth Circuit makes these points vividly clear. The case, Bosack et al. v. Soward et al., is not about a real estate issue; but it did involve very big dollars and it vividly illustrates the points being made here. That is: under the Federal Arbitration Act (FAA), (1) courts won’t review an arbitration award even if the arbitrator has made a clear error of law; and (2) the courts will not review an award even if the arbitrator made a clear error about the evidence.

Quoting an earlier decision, the Ninth Circuit court affirmed this: “Neither erroneous legal conclusions nor unsubstantiated factual findings justify federal court review of an arbitral award under the statute the FAA, which is unambiguous in this regard.”

A jury trial or a judge’s decision may contain errors that might be reversed on appeal. And that may be a lengthy process. On the whole, this is extremely unlikely in the case of arbitration. Arbitration may be quicker and more cost effective than typical legal proceedings; but one thing is for sure. It certainly is final.