The arbitration provision — found in all purchase agreements produced by the California Association of Realtors® (CAR) — remains popular despite its obvious drawbacks. Initialing the arbitration provision compels buyers and sellers in real estate transactions to resolve disputes through a typically unvetted third party.
A recent first tuesday poll found that 65% of respondents had only a tiny fraction of their clients (10% or fewer) refuse to initial the binding arbitration provision. This result is consistent with previous polls.
Many consumers, of course, simply initial the arbitration provision reflexively, even when their agent has discussed arbitration with them. Some clients will even initial on the advice or suggestion of their agent without being aware of its disadvantages.
In fact, a 2015 CFPB report found a majority of consumers don’t fully understand what arbitration entails. Even when real estate agents take the time to advise their clients on the basics of arbitration, clients often aren’t aware they’re beholden to such a strict agreement.
Although the Consumer Financial Protection Bureau (CFPB) attempted to implement new limits to arbitration in 2017, the U.S. Senate struck down the rule, leaving the state of consumer obliviousness untouched.
The drawbacks of arbitration
While arbitration is touted as cheaper and speedier than taking a dispute to court by its proponents, it often proves to be more detrimental than not down the road.
For one thing, the arbitration provision in a purchase agreement requires that the buyer and the seller eschew their rights to a trial by jury regarding the dispute. As such, the arbitrator’s decision may not be appealed by either party. Their ruling — and by extension any award — is final, even when the decision is erroneous.
Further, the arbitrator doesn’t need to rely on legal precedent — their decision is a pure judgment call untethered from traditional legal proceedings. As a result, rulings often rely on inaccurate or faulty reasoning.
Arbitrators are also not governed by any rules regarding conflicts of interest. Arbitrated disputes often involve arbitrators with a connection to one of the participants, casting doubt on whether the other participant will get a fair shake.
In addition, it pays to keep in mind that the arbitration agreement is an agreement separate from the purchase agreement — even while the former is implanted within the latter. This is known as severability, and means the arbitration agreement remains enforceable even when the purchase agreement is not. [Prima Paint Corporation v. Flood & Conklin Mfg. Co. (1967) 388 US 395]
Yet, for all the inaccuracies and inconsistencies associated with the arbitration provision, it remains not only popular but nearly ubiquitous.
A new direction
The good news is arbitration agreements are only enforceable when both participants in a transaction initial the provision — and is by no means required for the completion of a real estate transaction.
However, the fact remains that taking disputes to court is costly for all participants.
Mediation is a quicker and cheaper method for dispute resolution than litigation, without the hobbling restrictions that come with arbitration. The process is informal, confidential and non-binding, and still allows for the possibility of judicial intervention in the event of an unresolved issue.
For those brokers and agents who are tired of CAR forms’ restrictive arbitration provisions, RPI forms instead offer a mediation agreement to leave clients’ options open. [See RPI form 150]
Fear not — advising a client about the pitfalls of arbitration agreements is perfectly in keeping with an agent’s fiduciary duty, and ensures your clients will be better informed about all their options, rather than blindly signing away their right to a fair resolution for any future conflict.