A buyer entered into a purchase agreement for an apartment complex with ownership vested in the name of a trustee under a trust agreement with the owners. The trustee withdrew from the sale and the buyer sought damages from the trust itself due to the trustee’s failure to sign the closing documents. The trustee claimed the buyer could not be compensated by the trust since the trustee held title to the property, and the trust arrangement did not. A California appeals court held the buyer was not entitled to compensation from the trust since trusts by their nature are not individuals or entities and cannot hold title to property, only a trustee can hold title to property when a trust arrangement is established. [Portico Management Group, LLC v. Alan J. Harrison et al.(December 28, 2011) _CA4th_]

Editor’s note – This case stems from an erroneous arbitration award. The purchase agreement included an arbitration provision providing if the contract was breached, the outcome would be handled by an arbitrator. The arbitration provision also stated an arbitration award is “subject to judicial review.” The contract was breached when the trustee withdrew from the sale and the arbitrator awarded compensation to the buyer from the trust, even though the trustees individually held title to the property, not the trust.

This obvious arbitration error was not corrected by the buyer who obtained the award, even though it had 10 days to seek a correction from the arbitrator and 100 days to petition the court to correct the award, as provided by California Code of Civil Procedures §§1284, 1288. The buyer sought to confirm the arbitrator’s judgment, which the court rejected as it named the trust and not the trustees. Since the court did not have the authority to alter an arbitrator’s decision, as the arbitrators’ decision had become final, it could not change the award to name the trustees instead of the trust once the deadline for seeking a correction had passed.

By their very nature, arbitration judgments are precarious. Arbitration clauses attempt to avoid litigation, which results in both parties losing their right to judicial oversight to assure the arbitrator’s award is fair and correct, unless the requirement for judicial review of the arbitrator’s award is included in the wording of the arbitration provision.

Further, arbitrator decisions are – you guessed it – arbitrary, not bound by legal precedent.

Thus, an inherent aura of uncertainty surrounds real estate contracts with arbitration. As a matter of policy, first tuesday’s purchase agreements and addenda have never from inception in 1978 contained an arbitration provision to better protect buyers and sellers from the perils of arbitration.[For a further discussion of arbitration, see the March 2011 first tuesday article, Bargaining for justice: arbitration and the loss of judicial review.]