Arbitration Clause…What Does it Mean in a Real Estate Contract?

Westcoe Realtors, Riverside, California…If you ever find yourself in the position of purchasing a home in Southern California, you will be signing a lot of paperwork.  A LOT of paperwork.  One of the documents foremost in any transaction is the sales contract (most agents use the California Association of Realtors contract…formally called the California Residential Purchase Agreement and Joint Escrow Instructions), and occasionally I try to highlight here some of the really important parts of this document.  Today, we will discuss the Arbitration provision, because sometimes people just breeze right through this section without really understanding what is happening here.

Before I begin, let me first address all the “Legal Beagles” out there who are already jumping out of their computer screens at the mere mention of a legal topic in a real estate blog.  Real estate agents are well aware they are not licensed to practice law, nor would any intelligent agent attempt to do so.  For legal expertise, please see an attorney.  So…chill out all you attorneys…we are not treading in your backyard.  

However, from a lay standpoint, since we get asked this question all the time by our clients, and we do want to offer them some idea of what is happening, I will preface the following conversation about arbitration  with the caveat that this is coming from a real estate standpoint, not a legal opinion…and is merely an attempt to shed some elemental light on a detailed subject.  If this is enough of a legal disclaimer for you, please read on.  If not, then hop back in bed, pull the covers over your eyes, and maybe tomorrow will be a better day.

Background

To understand the theory behind arbitration and how it potentially relates to your real estate transaction, you will need a little background on the subject. 

Suing someone is expensive…and takes a lot of time…and is expensive..and takes a lot of time.  You get the point.  Entering our court system is a serious trip into the legal Twilight Zone, where no one is really sure what is going to happen.  Couple this uncertainty with the large cost and massive time to finally get before a judge (in Riverside, our courts are so crowded with criminal cases that a conservative estimate on how long it would take to get a routine real estate matter to court would be 3-5 years), and you have the atmosphere in which the arbitration process was born.

ARBITRATION is a lower cost and quicker alternative to the court system.  It was designed to reduce both the time and money required for a court trial.  You can still have an attorney, but the process was designed to give every person their “day in court” at a lower cost and quicker pace. Instead of a judge, you have an arbitrator decided upon by both parties (often a retired lawyer or judge), cases are presented, and a ruling is made.  Quick (by relative court standards), neat, and done.  However, be aware that this reduced cost and time period can come with a price…and that is what we will discuss today.

Your real estate transaction.

In the contract I mentioned above, the arbitration clause is found on Page 5, paragraph 17B…and you can immediately tell it is important because it requires additional signatures for both the buyer and seller in addition to the signatures at the bottom of the page.  A note:  anytime you are required to initial a specific paragraph in a contract in addition to the normal places to initial, someone is trying to tell you this is an important part of the contract…so pay attention and ask questions.  If only one party initials this paragraph, then it is not a part of the contractual agreement.   Both parties must initial for this to be valid.  The exception to this may be for the purchase of a foreclosure, as the lender/seller may have different language in their addendum’s…so if you are buying a repo, please be sure to check the addendum’s for something different.  However, in a normal sale with a normal buyer and seller, this paragraph must be initialed by both parties to be binding.

Now…for the guts of the arbitration clause.  Bottom line: there are two major differences between an arbitration and a lawsuit in court, and you need to understand what these differences are.

First, when you agree to arbitrate, you are waiving your right to a jury trial, and agreeing to have your case heard by an arbitrator…not a judge, not a jury, but an arbitrator.  In most cases, when both parties are ready for “battle”, each party is presented with a list of potential arbitrators, and each has the right to refuse a particular person.  In essence, you can decline who you don’t want, but cannot pick whom you do want.  Some cases vary, but usually this is how the arbitrator is decided.

Secondly, in picking arbitration, you are also waiving your right to some discovery issues, and you are also waiving YOUR RIGHT TO APPEAL THE ARBITRATORS DECISION.  This last one is a biggie (hence the caps) because it means that even if your arbitrator makes a mistake in the law, goofs up a ruling, etc, you have no appeal of the decision.  Once the decision is made, it is over (there are rare exceptions, but no too many) and you are left with the ruling…period. There is no going back.

Is this fair?  As many of my attorney friends will tell me off the record, the law is not necessarily about being fair!  Remember, the arbitration process is all about saving time and money…so the old saying “you get what you pay for” is apropos here.  Arbitration is definitely faster and less expensive than a court trial, but the courts take the position that if you want faster and “cheaper” then that comes with some side issues.  You picked your poison here.  Your choice was more time, more money, and potentially a more thorough examination of your case, or less time, less money, and perhaps a “slimmed down” version of your case that is over when the decision is made.

What is better?  That is not ours to say.  With reference to this paragraph in your purchase contract, all we as real estate professionals are trying to do is make sure that whatever decision you make is an informed one.  After that, it is up to you.  As a note, even if you choose to not initial this provision of the contract (thereby not making “arbitration” a part of your transaction), if the parties end-up wanting to sue one another later, trust me…you will be offered the chance arbitrate.  Most courts really push arbitration as a way to clear a really clogged system…so you can always potentially agree to do this later.

In the end, the legal system is complicated, and yes, and attorney is the best person to consult with your legal questions (another nod to the disclaimer Gods here).  However, for a basic understanding of the arbitration process itself, just remember that you waive two very important aspects of the trial process: the jury, and the discovery and appeal processes.  If you are cool with that, then initial away…if you are not, then pass…and if you are still unsure, then call an attorney…it makes them happy.

Good luck, and as always, if you have any comments or questions about real estate, call or email us…we will be happy to get your issues addressed here.