Mediation and Arbitration…What They Mean in a Real Estate Purchase Contract

Westcoe Realtors, Riverside, California…While no one enters any real estate contract with the intent for it to go ”sour,” the simple reality in today’s society is that many times things do go wrong, and generally someone is going to get blamed.  If tempers or damages run hot enough, then legal action will ensue, and if that is the case, just what are the ramifications of the Mediation and Arbitration clauses that come standard in any real estate purchase contract? 

Before embarking down this legal road, let us first include the required caveat that Westcoe is licensed to practice real estate, not law…and you should consult your attorney for any legal matter.  However, that having been noted, Westcoe does have an enormous wealth of real estate experience, so it is this experience we wish to share with you regarding mediation and arbitration.

SO…your real estate transaction has hit the skids, and you want to sue the other party.  It doesn’t matter whether you are the buyer or seller, if you feel you have been damaged, then your remedy is the same…and that is what we will outline below.

Let us first begin with Mediation.  In the standard California Association of Realtors Purchase Contract (upon which we would hazard a guess is used in over 95% of real estate purchases) there is a mediation clause.  This clause does not require any initials by either party, and is therefore a part of the contract unless both parties take the overt action to exclude it from their agreement…which seldom ever happens.  Hence, it is part of your agreement with the other principal (real estate brokers are excluded from this, as the contract is only between the buyer and seller).  So what are you agreeing to?

Basically, two things.  The first is that you agree to mediate your dispute before initiating any legal action against the other party. The second is that if you fail to follow the first, then if by chance you sue the other party and win, you will not get your legal fees as part of any award…and since attorney’s are expensive, you really don’t want to go this route.

Some people have likened mediation to the job a parent does when the kids have a dispute.  Mom or Dad listens to the problem, and then helps the kids come to a solution that is fair and keeps everyone happy.  However, it is not that simple, and the similarity ends there.  In a real mediation, while the mediator will make every attempt to be fair, understand that their main goal is to solve the problem, no matter what is fair or not.  Parents want to be fair; mediators simply want the problem to go away…for if the mediator solves the problem, then the incredibly crowded courts are spared yet another trial.  So if you ever find yourself in a mediation, understand that while the mediator may appear empathetic to your problem, HE/SHE DOESN’T REALLY CARE.  They just want this issue to disappear, and they proceed accordingly.  Whatever they can get the parties to agree too is OK with them…fair or not.

Also, understand that there are real estate issues that are exempt from mediation, the main exemption being any matter that can be handled in small claims court (under $10,000 in damages).  If your damages are less than $10,000, you can mediate if you want, but it is better to head directly to small claims court.  Why? 

For the simple reason that when all is said and done, the mediator doesn’t really have any power…so if either party is not happy with the mediation, then they just get up and leave, and the party is over.  The process is not binding, and no one has to obey the mediator’s suggestions.   Crazy, I know, but such is legal life.  So…if your dispute can be solved in a small claims court, go for it, since that judgement is binding subject to appeal.

The bottom line, as far as mediation goes, is that you will be forced to partake either by your contract or by the courts, so grin and bear it, and maybe you might just get your case resolved.

Now, let us discuss arbitration…which is a whole different kettle of fish.

First, some background.  The arbitration process was established as an answer to the very expensive and very lengthy process of a civil trial.  These days, in Riverside, it can take 3-5 years to get a civil case to court…and if your case is important only to you, but not so important relative to all the other people who want a courtroom, you can expect the time period to be even longer.  And of course, the longer it takes, the more it costs.  So arbitration was created as a way to resolve civil issues without the undue delay and costs of a real civil trial.

Sounds good, but beware of the old saying…”be careful what you ask for, because you just might get it .”  You see, the arbitration process has a few warts….which the legal community considers a trade-off for getting your case resolved quicker and for less money.

While there are many differences between arbitration and a full blown civil trial, the main issues are these:  1) The decision of the arbitrator is binding, even if the arbitrator is an idiot and totally messes-up the law regarding your case, and 2) you have no right to appeal.  What you get is what you’ve got, and you are stuck with it, no matter how wrong you may feel it is.  Doesn’t sound fair, but that’s the way it is.  You wanted a quicker and perhaps less expensive way to solve your issues, so if there is a flaw in your case, such is the price you pay for expediency in time and money.

THAT IS WHY THE ARBITRATION CLAUSE IN A REAL ESTATE PURCHASE CONTRACT IN VALID ONLY IF ALL PARTIES INITIAL THIS PARTICULAR PART.

Do we advise our clients to agree to arbitration?   Yes and No…meaning that it is not our job to advise on this…only to explain and then let you pick.  We are not trying to cop out here, but it is a big decision, and you really should consult your attorney on that one.  We can tell you what saying yes or no involves, but we cannot make that decision for you.  About all we can say is that if you are unsure, then do not opt for the arbitration, and you can always try to get it later, if a dispute arises.  In our experience, most buyers/sellers push for it later anyway when they find out how really long and expensive a civil trial can be.

In the end, seldom is either of these clauses invoked in a real estate transaction if both parties are represented by good real estate professionals.  Yes, there can be issues, but the majority of problems are resolved far short of initiation of either of these remedies.  However, they are occasionally used, and we hope the above “real world” description is helpful in letting you understand what each of these important clauses mean to you.