Should Arbitration Be Part Of The Deal?

Peter G. Miller
OurBroker®

For a long time the civil court system has been reduced to a kind of legal lottery, a process which routinely produces bizarre results, enormous liability, and huge legal fees -- a situation which raises a question: Is it time for binding arbitration to be part of every realty transaction?

The Supreme Court now has agreed to consider a case where a borrower, Larketta Randoph, sued mobile-home lender Green Tree Financial Corp. over the terms of a binding arbitration clause found in her mortgage. Randolph argued that binding arbitration as arranged in her mortgage agreement could not be used under the Truth in Lending Act and the 11th Circuit Court agreed. A Supreme Court decision will likely address the general standards needed for setting up an arbitration agreement, notification requirements, and parity between the parties.

Arbitration clauses can require both parties to participate in a dispute resolution process that generates a final, binding decision which cannot be appealed to a court. Such arrangements are increasingly found in credit card contracts and other consumer-to-business, and business-to-business relationships.

In the usual case, courts defer to arbitration agreements. As the 11th Circuit Court pointed out in Green Tree, arbitration ordinarily brings both hardships for litigants along with potential efficiencies, there is a strong federal policy favoring arbitration, and even if an arbitration agreement has some "inherent weaknesses" such faults will rarely make an arbitration clause unenforceable.

In terms of real estate, we could set up a dispute resolution arrangement which relies on the rules of the well-regarded American Arbitration Association by adding a proper clause into a local sale agreement. We might also set up an arrangement which both uses typical arbitration rules and includes a few of our own. For instance, we might make each party responsible for its own legal costs, a clause which by itself would do much to terminate needless litigation.

In effect, we can build our own low-cost, high-speed system for resolving disputes outside the general legal process -- something buyers, sellers, brokers, and lenders ought to do with each and every transaction.

However, as many attorneys point out, for all the advantages made plausible by arbitration, like the legal system itself arbitration is hardly perfect. For instance, it's possible to get strange results, and it's also possible to lose certain rights -- such as the right to appeal.

Because real estate involves so many relationships, one can readily see the use of arbitration agreements in several common situations:

• Listing and buyer brokerage agreements between consumers and brokers.

• Engagement agreements between brokers and their associate brokers and salespeople.

• As a dispute resolution mechanism within associations. (Note: The preference here is for arbitration by an outside party rather than a committee of association members.)

• In loan contracts between borrowers and lenders.

• In agreements between closing agents and consumers.

• In agreements between lawyers and consumers. (This is important, otherwise consumers are forced to sue attorneys at enormous cost and on the lawyer's turf -- huge and inherent disadvantages.)

Wonder what Judge Thomas Penfield Jackson really concluded at the Microsoft anti-trust trial? The complete decision is online through the Seattle Times.

Published: April 11, 2000

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .