As a real estate professional, you’ve encountered the “standard” arbitration provision stealthily buried in most purchase agreements. Agents are often trained to reassure clients that agreeing to arbitration saves money and time in the event of a dispute, but many agents fail to discuss the arbitration provision at all.
71% of voters in our recent poll say they discuss arbitration with clients before entering into an agreement containing the provision. 19% only discuss it sometimes and 10% do not discuss it at all.
Though this indicates a majority of licensees take initiative to advise their clients, comparisons to poll results from last year reveal fewer licensees are discussing arbitration with clients now. Then, a greater 81% said they discuss arbitration with clients, while 14% said they discuss it sometimes and only 4% said they did not discuss it.
Given arbitration’s many drawbacks, failure to advise clients leaves them in a vulnerable position.
The risks of arbitration
When a dispute arises in a real estate transaction, the participants may grant an arbitrator the authority to hear and resolve the dispute, rather than take it to court.
Many pre-printed brokerage and purchase agreements, such as those published by the California Association of Realtors® (CAR), include a boilerplate arbitration provision which participants may initial voluntarily. The arbitration provision requires persons who choose to initial the provision to use arbitration to settle any disputes, forming an agreement with a third-party arbitrator and defining their powers and limitations. [Calif. Code of Civil Procedure §1297.71]
Editor’s note — As a matter of policy, Realty Publication, Inc. (RPI) forms do not contain boilerplate arbitration provisions.
Arbitration is intended to avoid court costs, expedite the dispute resolution process and improve the efficiency of the real estate marketplace. However, in practice, arbitration often results in absurd legal consequences, which 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 provision 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.
Despite arbitration’s many drawbacks, arbitration’s virtues are passed down as “standard.” Harmful widespread ignorance of its risks persists among agents and most brokers, as they are inculcated to all but coerce their clients into initialing the provision.
Further, many homebuyers and sellers — even some agents — assume they need to initial the arbitration provision to submit the purchase agreement at all. This is not true and initialing the provision is always optional.
Attempts to protect consumers
The Consumer Financial Protection Bureau (CFPB) found most consumers have no idea what arbitration is, despite agreeing to arbitration at one time or another.
To combat this, the CFPB implemented new rules in 2017 which prohibited providers of certain consumer financial products and services from using consumer agreements that require arbitration and prevent consumer participation in a class action lawsuit. Further, the rules required service providers already involved in arbitration to provide arbitration records to the CFPB.
However, members of the Senate soon determined the ban was excessive regulation of the financial market and overturned the ban. The Senate’s decision means consumers under these arbitration agreements will continue to be prohibited from joining together to sue a company for wrongdoing.
Given that individual consumers rarely pursue legal action on their own due to the high expense, the Senate’s decision returns all power to large service providers whose vast financial and legal resources leave consumers with no recourse when they are harmed.
Thus, once again, it becomes clear arbitration agreements do not work in favor of consumers and those who agree to arbitrate, but effectively block consumers from obtaining legal relief.
The good news: despite the rollback, mandatory arbitration agreements are still prohibited in residential mortgage agreements. This prohibition is codified in the Truth in Lending Act (TILA). [12 Code of Federal Regulations §1026.36(h)]
Further, homebuyers and sellers do not need to agree to arbitration. Simply refusing to initial or sign an arbitration provision is enough to save them from the perils of arbitration when a dispute arises.
So, take initiative to advise and protect your clients. Inform them of the risks and consequences of agreeing to arbitration, and always make clear that initialing the provision is not required to enter into a binding agreement or to close the deal — even if the other party has initialed it. Advising your clients about arbitration before they agree to it ensures your client is protected and you meet your fiduciary duties — a win-win situation for all.