Arbitration is a form of alternative dispute resolution (ADR). In arbitration, the parties to an agreement — say, a real estate purchase agreement — forego a formal court action, agreeing instead to be bound by an arbitrator’s decision.
The arbitrator is a neutral third party appointed by a court or selected by the parties to the agreement to hear the dispute. The arbitrator makes the final decision, awarding judgment in favor of one of the parties. [Calif. Code of Civil Procedure §1297.71]
An arbitration provision may be included in multiple types of real estate agreements, including purchase agreements, listing agreements, escrow instructions and leasing agreements. However, consumer mortgage agreements may not include mandatory arbitration provisions. [12 Code of Federal Regulations §1026.36(h)]
Arbitration leaves consumers at a disadvantage, but it used to be much worse.
Prior to 2002, arbitration in California was conducted in secret, the basic facts veiled entirely from the public. This made it impossible for interested consumers or non-consumers to learn the outcomes of a case. Without knowing the outcomes, zero precedent was available for those interested in pursuing or preparing to pursue similar cases. Thus, arbitration shirks the critical legal framework our system inherited from English common law.
Then, in 2002, AB 2656 was passed to require California arbitration companies to make public certain information regarding the cases they arbitrate each quarter. These facts include:
- the nature of the dispute;
- when the arbitration occurred;
- the name of the non-consumer party to arbitration;
- whether the consumer is represented by an attorney;
- the result of the arbitration, including the amount claimed and awarded, if any;
- the number of occasions the non-consumer party has been to arbitration;
- the name of the arbitrator; and
- the arbitrator’s fee and how it is allocated between the consumer and non-consumer. [CCP §1281.96(a)]
While this was a significant step forward for arbitration transparency, the reports were not always useable to the public, nor did they carry the same weight as case law. In 2014, AB 802 was passed to ensure the information reported by arbitration companies was searchable on the arbitration company’s websites by consumers.
Flash forward to 2019. SB 707 recently passed to add another fact to the list of details required to be reported. Beginning January 1, 2020, arbitration companies will need to include demographic data of their arbitrators in the aggregate, including their self-identified:
- disability status;
- veteran status;
- gender identity; and
- sexual orientation.
Requiring this demographic data to be made publicly available is part of a wider effort to promote transparency and lessen some of the implicit biases that inevitably come up during arbitration. However, these recent updates still don’t correct the inherent shortcomings of arbitration.
Making arbitration less-worse isn’t the answer
All of these steps to make arbitration more transparent and fair are positive steps in the right direction. But they’re not enough to make arbitration the best option – or even a good option – for alternative dispute resolution.
An arbitrator’s decision still:
- does not need to follow legal precedent;
- is difficult to appeal;
- may take longer than a court case since it is not bound by the same time requirements; and
- lacks judicial review, and thus is more likely to include errors and be biased.
Along those lines, bias in arbitration is a well-documented issue for consumers. That’s because the non-consumer party — perhaps a lender — may choose and rely on the same arbitration company for each of their disputes. It’s thus in the arbitration company’s best interest to reach a more favorable outcome for the lender — which continues to send them business with each dispute — rather than the consumer who they will most likely see just the one time.
The arbitrator’s clouded and conflicted interest makes arbitration a bad deal for consumers. A better option for alternative dispute resolution is mediation.
In mediation, a mediator works with the persons who are involved in a dispute to come to a mutually agreed-to solution.
The cost of mediation is minimal compared to arbitration and court action. Further, mediation is typically a quick process, depending on the number of disputants, their willingness to reach a resolution and the complexity of the facts and issues involved. There are no lengthy waits for court hearings or the need for witnesses since the resolution is in the hands of the participants themselves.
However, mediation does have its limits. In real estate matters, mediation is limited to resolving disputes involving buyers and sellers. Landlord-tenant disputes and mortgage defaults are based on specific statutory requirements for performance — which are either satisfied or unsatisfied — leaving little room to dispute the facts, the law and the procedures involved.
Going to court cannot always be avoided, but mediation is the preferred first tool — not arbitration.
Real estate professionals: your clients do not need to initial the arbitration provision included in trade union agreements. In fact, arbitration is only enforceable when both parties initial the arbitration provision.
Editor’s note — As a matter of best-practices, RPI forms do not include arbitration provisions. RPI forms encourage mediation as the preferred alternative dispute resolution.