Blog Topic

Should You Say "No" To The Arbitration Clause In The CAR Agreement?
Posted by: Kenny Tan
December 21, 2010

We know there are mediation and arbitration clauses in the standard CAR listing and purchase agreements. The CAR's attorneys think it's a great idea to resort to alternative dispute resolution (ADR) instead of litigation.

Mediation Is Great Way To Avoid Litigation

I personally think the mediation clause is great. It gives the parties an opportunity to resolve disputes arising out the real estate purchase contract without spending a lot of money in litigation.

Though it is voluntary, it carries with it a penalty for not attempting mediation before filing a lawsuit. You would lose your right to recover attorney's fees from the other side even if you ultimately prevail, if you refuse to mediate or simply neglect to attempt mediation before filing a lawsuit.

Courts will enforce the mediation provision. I represented a seller on a case involving a dispute over the CAR standard listing agreement. Though we lost the case, we successfully convinced the trial court that the agent was not entitled to any attorney's fees because he failed to attempt mediation before filing suit and prevented the listing agent from recovering a whopping $500,000 in attorney's fees!! Thanks to the mediation clause.

(You'll be surprised how many attorneys -particularly those who don't handle real estate disputes very much- neglect to advice their clients to mediate before filing suits. This could be a potential malpractice trap for the inexperienced attorneys)

Arbitration May Not Save You Money And Time

But I don't feel the same way about the arbitration clause.

Is arbitration always better than litigation when it comes to resolving disputes in real estate transactions? This question is subject to debate.

What should agents advice their clients regarding the arbitration clause in the standard CAR purchase contract?

I've done a little informal survey of clients (buyers and sellers) that came to consult me on disputes over the CAR agreements. I would usually ask them why they agreed to the arbitration. I estimate more than 80% of them would tell me their agents told them they MUST initial the arbitration clause or there cannot be a deal. Many didn't even understand that when they initialed the arbitration clause, they gave up their right to jury trial and the right of appeal.

Some people believe arbitration is cheaper and quicker. But that's not necessarily true.

There are some costs associated with arbitration that you don't incur in litigation. The filing fees are proportional to the amount in dispute. In many cases,the filing fees alone are several thousand dollars where you'd pay only $395 in the superior court and there's no limit on the amount you can sue for. On top of the filing fees, you pay administrative fees to their staff. In litigation, the judges are paid by the tax payers whereas in arbitration, the arbitrators are paid by you and typically charge $400 to $500 per hour. I've had cases that went to arbitration that cost over $200,000 in fees and costs (out of which $40,000 went to AAA for administrative fees and arbitrator's compensation).

Arbitration can take just as long as, if not longer, than litigation. I've had cases that took longer than two years to go from filing the claim to the final hearing.

Arbtirators May Ignore The Law In Deciding Cases - And There's Nothing The Loser Can Do About That

It is settled that the outcome of an arbitration is generally not reviewable. In fact, errors of law are not reviewable in court, no matter how egregiously the arbitrator has ignored the laws - this is the single most frustrating part for me.

It is frustrating for me because as an attorney, I expect cases to be decided in accordance with the law. I hate being called a liar by the client after an arbitration is over and my client is the loser. Clients come to me for help with a great deal of respect for my knowledge of the law. When an arbitrator doesn't follow the law and the client loses a case and I have no recourse, that's the worst feeling in the world for me as an attorney.

Punitive Damges May Be Awarded In An Arbitration And Not Reviewable For Errors

It may shock some people to know that punitive damages may be awarded in an arbitration proceeding, perhaps even more shocking to know that it is practically not reviewable.

Puntive damages are only recoverable on proof by clear and convincing evidence (not preponderance of the evidence) that there is fraud or some intentional wrong doing. This is a higher standard of proof.

A defendant in any lawsuit is very concerend about the possibility of punitive damages being imposed. In litigation, there is a contitutional limit on the amount of punitivfe damages that may be imposed on an individual. For instance, the amount is generally limited to no more than 10% of aperson's net worth and not more than twice the amount of the compensatory damages.

The CAR arbitration clause is very broad and certainly broad enough to include possible fraud claims against the agents in the case of an Exclusive Listing Agreement and the buyers and sellers in the case of the Residential Purchase Agreemetn and Joint Escrow Instructions.

It's a scary thought to know that you may be hit with punitive damages in an arbitration and there is no right of review on the award - and you had no ideal that's what you signed up for when you agreed to the arbitration clause on the CAR agreement.

Clients Should Be Advised That They Don't Have To Agree To The Arbitration Clause

I think real estate agents owe it to their clients to inform them that they have the option not to agree to the arbitration clause, or at a minimum, to advise them that they should consult an attorney on whether to agree to it. Agents should never tell their clients that they have to agree to the arbitration clause or there's no deal. You'll be surprised how many clients would say no to the arbitration clause once they understand it better and the legal consequences of having agreed to it.

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