Arbitration is a thorny issue for real estate, and one first tuesday has touched upon on numerous occasions over the years.
Arbitration is a form of alternative dispute resolution (ADR). In arbitration, the parties to an agreement forego a court action and agree to be bound by an arbitrator’s decision. The arbitrator is (supposed to be) 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 to the agreement. [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, residential mortgage agreements may not include mandatory arbitration provisions. [12 Code of Federal Regulations §1026.36(h)]
Arbitration’s popularity stems from claims it is a faster and less costly method of dispute resolution than a court action. But there are several big drawbacks. Namely, participants in arbitration give up the right to:
- appeal the arbitrator’s decision, even when it goes against legal precedent or is based on faulty information;
- have an unbiased arbitrator, since arbitrators are usually chosen by the company involved in the dispute and thus have a monetary incentive to continue to represent the best interests of the company (not the consumer); and
- have their decision published in the public record, since the results of arbitration are not required to be published like court cases.
The fact that the results of arbitration are not made publicly available is what first tuesday proposes to alter slightly.
Unlike in a court of law, an arbitrator is not required to share anything that arises in the arbitration proceedings, thus they aren’t obligated to report violations of real estate law. Imposing a duty on arbitrators to report violations of real estate law by licensees in cases before them to the Department of Real Estate (DRE) for remedial disciplinary action ensures unethical, dishonest or grossly negligent licensees are subjected to a licensing review. This exposes improper conduct in the real estate industry to better protect members of the public.
Therefore, first tuesday proposes all arbitrators be required to report violations of real estate law by California licensees to the DRE.
Editor’s note — As a matter of policy, RPI (Realty Publications, Inc.) forms do not include arbitration provisions. RPI forms include a mediation provision to be followed in case of a dispute. Like arbitration, mediation is usually less costly than heading directly to court. But unlike arbitration, decisions negotiated in mediation can always be brought to court when the individuals involved are unsatisfied with the outcome.