Do you discuss arbitration with your clients before they enter into an agreement containing an arbitration clause?

  • Yes. (73%, 48 Votes)
  • Sometimes. (15%, 10 Votes)
  • No. (12%, 8 Votes)

Total Voters: 66

Unless you’ve been living under a rock, you’ve encountered the “standard” arbitration clause stealthily buried in most purchase agreements. You may have even reassured your clients that agreeing to arbitration saves money and time in the event of a disagreement with the opposing party. Though this may be the standard kneejerk response to the issue of arbitration, is it true?

For many licensees, it’s easy to simply embrace the hyperbole and gloss over the many disadvantages of arbitration. Most destructive, an arbitrator’s award is final and may not be appealed. Thus, it cannot be corrected in a court of law, even when it’s erroneous. Further, arbitrators are not overseen or held to a uniform standard of conduct to ensure faulty decisions don’t occur. As a result, a decision reached by the arbitrator is final— no matter how ridiculous it may be.

Further, most consumers (including real estate participants) have no clue what arbitration is. Many more, ushered quickly through the signing process, aren’t even aware that they are beholden to an arbitration clause even after they have signed on the dotted line.

A recent report by the Consumer Financial Protection Bureau (CFPB) examined arbitration agreements found in credit cards and other financial markets (they did not study arbitration’s use in the housing market specifically, though the trends are fairly universal). The CFPB found:

  • three out of four credit card customers do not know whether or not they are under an arbitration clause;
  • of those consumers subject to binding arbitration, over 93% did not know this meant they are unable to pursue the credit card company in court; and
  • no consumers considered whether the credit card agreement contained an arbitration clause when choosing a credit card company.

Education about arbitration agreements is clearly lacking for most consumers. What about your clients? Do they understand the limitations of arbitration, and if so, do they know their alternatives?

Buyers, sellers and their agents may be concerned about killing the deal if they refuse to initial the arbitration clause found in most purchase agreements (like those published by the California Association of Realtors). However, real estate participants always have the choice to submit a purchase agreement offer without initialing the arbitration provision.

Simpler still, other purchase agreements legal for use in California real estate transactions, including first tuesday’s purchase agreement, do not contain boilerplate arbitration provisions as a matter good practice and policy . [See first tuesday Form 150]

But what about arbitration’s one quoted saving grace, that it saves time and money due to court costs?

There is an alternative that does not waive the right to judicial oversight and is still cost saving and time-efficient: mediation. Mediation is similar to arbitration, in that the disagreeing parties first try to resolve their disagreement outside of the courtroom, with the help of a neutral mediator. Mediation of any dispute may be undertaken as a precursor to filing an action, be it arbitration or litigation, to bring about a mutually agreeable solution. Mediation is a quick process and is the most cost effective method of dispute resolution. Further, if the parties can’t come to an agreed upon resolution, they still have the option to resolve the dispute in court. Alternatively, if your client agrees to the arbitration clause and comes to a disagreement with the other party, there is no hope of mediation, and the final result is left entirely to the whims of the arbitrator.

Simply put, mediation works and is good public policy: the LA Superior court system reports that 63% of courses ordered into mediation are resolved. Nationwide, the mediation success rate ranges from around 60% to 90% and upwards. [See the Final Report of Colorado Governor’s Task Force on Civil Justice Reform, Exhibit 7]

The CFPB, charged with protecting the public’s best interests, is considering regulating arbitration based on the results of their investigation. To this end, they encourage you to submit your stories about arbitration to help them draft these regulations, which you can do here.