Why does first tuesday contradict the California Association of Realtor’s (CAR’s) recommendation that agents have their clients initial the arbitration provisions in purchase agreements? Does first tuesday’s recommendation interfere with the fiduciary duties imposed on agents?
CAR’s longstanding defense of arbitration is based on their opinion of proper real estate practice, not legal requirements to initial arbitration agreements. In other words, their recommendations are just recommendations.
first tuesday’s contrary recommendation may make brokers and agents unaware of the law uncomfortable, but rest assured our stances do not contradict any real estate laws or regulations controlling proper practice. We simply don’t think the trade union’s recommendations are practical for consumers entering into real estate agreements.
The risks of arbitration
Arbitration was born out of a genuine desire to save on court costs, expedite the dispute resolution process and improve the efficiency of the real estate marketplace. In practice, however, arbitration often results in absurd legal consequences, in direct conflict with the reasons and practical purposes for its inception.
Many pre-printed brokerage and purchase agreements, such as those published by CAR, perfunctorily include a boilerplate arbitration provision. The arbitration provision included in a purchase or listing agreement requires persons that initial the provision to use arbitration — a type of alternative dispute resolution (ADR) — to settle any disputes. The provision forms a contract with a third-party arbitrator and defines their powers and limitations. [Calif. Code of Civil Procedure §1297.71]
While arbitration proponents claim arbitration is quicker than a court battle, binding arbitration often results in erroneous settlements that cannot be corrected by law. [Hall v. Superior Court (1993) 18 CA4th 427]
Unless the arbitration provision states an arbitration award is “subject to judicial review” — not the case for CAR forms — the award resulting from arbitration brought under the clause is binding and final. Defects in an arbitrator’s award resulting from an error of fact or law are only reviewable or correctable when:
- the arbitrator exceeded their authorized powers;
- the arbitrator acted with fraud or corruption;
- the arbitrator failed to disclose grounds for their disqualification of a dispute;
- the award was procured by corruption, fraud or other misconduct; or
- the refusal of the arbitrators to postpone the hearing substantially prejudiced the rights of the party. [CCP §1286.2]
Thus, arbitration provisions lead to:
- frequent misapplication and misinterpretation of the law;
- erroneous awards;
- a bar to discovery in preparation for hearings;
- waiver of the right to judicial review; and
- a lack of legal precedent for future application to conduct of buyers, sellers, brokers and agents.
The myth of “standard” practice
Despite arbitration’s many drawbacks, real estate agents and brokers are inculcated to all but coerce their clients into initialing the arbitration provision.
Arbitration’s virtues are passed down as “standard,” while harmful widespread ignorance of its risks persists among agents and most sweatshop brokers.
A recent Consumer Financial Protection Bureau (CFPB) report on arbitration found that most consumers do not understand or even know that they are subject to arbitration. [See CFPB: We took a look at arbitration agreements and here’s what we found]
Arbitration provisions are not included in trust deeds, consumer mortgage agreements or rental or lease agreements, and for good reason: rules of law, not an “arbitrary” arbitrator, control fair results. [12 Code of Federal Regulations §1026.36(h)]
The myth of “unauthorized practice of law”
Even knowledgeable agents often avoid informing their client about arbitration’s risks due to an unfounded fear they may be engaging in the unauthorized practice of law.
To be absolutely clear: A broker or agent who explains the potential consequences of initialing the arbitration provision is not engaging in the unauthorized practice of law. It is a broker’s fiduciary duty to explain transaction documentation to the best of their knowledge. Doing so does not compromise an agent’s fulfillment of the fiduciary duties they owe to their clients.
Think before you reject an offer
The California Bureau of Real Estate (CalBRE), the regulatory agency which controls licensee behavior, does not require the initialing of arbitration provisions. CalBRE does, however, require brokers to present all offers, unless the client has specifically indicated they do not want a certain type of offer.
As the broker or agent, your duty is to explain the consequences of the arbitration provision — initialed or not. Without this conversation, a blanket refusal of offers which do not contain initialed arbitration provisions is a violation of your fiduciary duties. Saying your union told you to do it isn’t a defense.
To avoid arbitration and better protect your client use a purchase agreement form that includes a mediation provision. [See first tuesday Form 150]
Mediation is an informal, confidential, non-binding ADR. When agreed to, the buyer and seller are compelled to use it in good faith. Designed to help the parties reach an accord, mediation puts disputes to rest without litigation, while still allowing for judicial intervention if a resolution is not found.
Download a free copy of any first tuesday purchase agreement from our Forms Download page. We’ve been publishing forms since 1978 — and none of them include arbitration provisions.
If other agents refuse to break out of their CAR safety nets, and insist on using a purchase agreement with an arbitration provision, you can still protect your client. Let them know they are not required to initial the provision to enter into a binding agreement or to close the deal — even if the other party to the purchase agreement has initialed it.