A mediation provision is contained in the standard real estate purchase contract produced by the California Association of Realtors® (CAR). That provision requires either buyer or seller to mediate any dispute or claim, prior to resorting to arbitration or court action. Any party who ignores this provision does so at his or her own peril. That is because the provision provides that anyone who commences an action without first attempting to mediate, or who refuses to mediate when the other party requests it, will not be entitled to attorney's fees, even if they prevail in a subsequent proceeding.

The mediation provision "means what it says, and will be enforced." Thus says California's Court of Appeal for the Fourth Appellate District in the recent case of Frei vs. Davey. Moreover, as will be noted later on, this is not a trivial economic matter.

In September of 2000, the Freis (buyers) and the Daveys (sellers) entered into a purchase agreement. About a month later, the Daveys cancelled. The Freis sought to have the agreement enforced, but first requested -- actually, demanded -- mediation. After some weeks, the Daveys' attorney informed the Fries' attorney that the Daveys were not interested in mediating. There actually had been some attempt to negotiate the dispute, but the parties were unable to resolve the matter. Davey declared that he believed "mediation would be fruitless."

Mr. Davey might have been right about that, but he should have mediated anyway. Even though the Daveys won the case -- they didn't have to comply with the purchase agreement -- because they had refused to mediate, they were not allowed to recover attorney fees from the Freis.

The Court rejected the Daveys' argument that by negotiating -- making "a concerted and good faith attempt to settle the case" -- they had substantially complied with the mediation provision. The court noted that in mediation, "a neutral third party analyzes the strengths and weaknesses of each party's case, works through the economics of litigation with the parties, and otherwise assists in attempting to reach a compromise resolution of the dispute." It is not the same as negotiation.

The Court also rejected the position that the Daveys should be excused from having refused to mediate because they believed mediation would be unsuccessful. Indeed, the Court noted that they were actually quite close to a settlement when negotiations broke down. All the more reason to believe that they would have benefited from the guidance of a mediator.

Finally, the Court rejected the Daveys' claim that they really didn't refuse to mediate because they finally did participate in an unsuccessful mediation just prior to trial almost a year later. Rather, the Court pointed out that the purpose of an early mediation requirement is "…to minimize the costs of litigation and arbitration. To allow a party to wait one year until the eve of trial to accede to a request for mediation would defeat that purpose." Indeed, the Court noted, by waiting so long the parties had already invested so much money in attorney fees that their positions had become entrenched.

How much did they invest in attorney fees? The Daveys were into the dispute for $157,885 and the Freis had spent more than $127,000. Moreover, the Daveys had also spent an undisclosed amount in a cross-complaint with the listing broker.

How far apart were they when the Daveys refused mediation? Approximately $18,540. Yes, you guessed it; they were "just a commission away" when intransigence set in. By refusing to mediate, even though they prevailed in the underlying action, the sellers wound up shelling out over $150,000 in attorney fees.

There's a lesson in there somewhere.

Published: February 22, 2005

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Bob Hunt is a former director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .