Should I agree to arbitration?

Paragraph 22B of the standard Residential Purchase Agreement (C.A.R. Form CA-RPA) is the arbitration agreement. Realtors usually feel strongly that this paragraph should be signed or excluded. They seldom have a neutral opinion on this matter. What should you do when the other side is insisting on a decision that you don’t agree with? What if your realtor says agree to arbitration but the other side won’t? What if it’s reversed? Today, we review this matter and discuss what you need to know.

Party’s MUST agree on Paragraph 22B’s status

Very few terms of the California standard purchase agreement require both parties to agree or waive in writing. Generally, a counter offer that excludes a term or conflicts with the original terms will override the previous term. This is not true with the Arbitration clause in paragraph 22B. The language of the contract states that no contract exists until the parties expressly agree on whether paragraph 22B is included or excluded in the contract.

More often than not, when a dispute arises over this paragraph, one side will give in because they would rather have a house (or a sold house) than a disagreement over this paragraph. The better option is to reach mutual agreement by identifying why the other party feels so strongly and educating him or her to see if that changes their mind. Below, we will talk about common objections and proponents for this clause.

Common Beliefs

Arbitration is cheaper than court

Most proponents of arbitration believe that arbitration is either cheaper or faster than going to court. Although court often involves lawyers, which can be expensive. Arbitration can also be very pricy!

One arbitrator charged $11,000 per day to settle a large dispute. The courts are much cheaper when the arbitrator charges $11,000 per day. According to California Business Law Group, Arbitrators can also be found for as little as $400-$700 per hour ($5,600 per day).¹ For many issues relating to a residential house dispute, this price is excessive.

The good news is that if the dispute is over an amount that is $10,000 or less, the contract excludes claims that are filed through a Small Claims Court, so these smaller claims can be handled in the court system without having an expensive arbitrator involved.

If the amount disputed exceeds $10,000, then small claims is no longer an option, so you may have to pay $5,600 per day for an arbitrator to argue over a $20,000 fix. Very quickly the cost of the dispute will outweigh the benefit of winning the fight.

Courts allow parties to represent themselves, and you can hire an attorney if you feel that you will be better represented. Attorneys will charge $400-$700 per hour, just like the arbitrator, but you have a choice as to whether you hire them.

Compared to the arbitrator, court itself is relatively cheap. It is a publicly funded entity, which means that you are not paying for the judge, the clerk, the bailiff, and all the other parts of the court process. Also, the case is not billed per hour, so if the dispute becomes a long one, the court fees remain the same, because the court is paid by the tax payers.

Ultimately, the arbitrator is a private party paid by the hour. Because they are paid by the hour and because their decisions are generally unappealable (see below), they will often encourage parties to bring in all evidence, and they will spend as much time hearing new evidence as they can to drive up the bill. Hearing more evidence also helps avoid their ruling from being overturned, which means that not only does it drive up the bill, but it also makes the decision more enforceable.²

Arbitration is faster than court

It is possible that Arbitration is faster than court. Because it is a private setting, the arbitrator and the parties have a lot of control over when and how to meet. Arbitration sessions can be set close together allowing parties to get additional information and return.

Court is a public forum, so you must have a court date assigned, and it can be pushed back. Because you are fighting for a judge’s time with every other member of the public, months can pass between sessions.

“Ultimately, the arbitration hearing itself is likely to last at least as long as a court trial. Evidence and arguments are presented much the same manner as in a court trial. Some judges might limit the parties’ time for presentations of their cases, but this is unlikely with arbitrators.”³

Arbitration does not have an appeals process

“Arbitration decisions are nearly non appealable.”⁴ “One of the few grounds on which the arbitration award can be overturned is the arbitrator(s)’ failure to consider relevant evidence.”⁵

Courts are more fair

There is a common rumor that because arbitrators are private that they lean toward the side that is more likely to hire them again. If you ask Bakersfield’s business lawyers at the bar association, they will tell you that, in their experience, this is not true. Because the expensive Bakersfield lawyers often represent the bigger clients who can afford them, they wish that the rumor were true, because it would mean that they would win more cases.

In truth, the arbitrator is often a retired judge, and judges are very good at remaining neutral and unbiased. According to local lawyers, they see no advantage to arbitration, and many will prefer court-room litigation because if their client looses they can fight the decision.

Why I choose to exclude Paragraph 22B

Ultimately, arbitration has its benefits, but one does not know if it is going to be beneficial until the problem arises. Most disputes in residential real estate are “small” values less than $50,000. Being locked into an arbitration agreement can be a very expensive mistake. When the other side really insists on arbitration, I usually include a clause that reads as follows:

“Buyer and Seller agree to consider arbitration as a means of resolving disputes, but neither party is bound by this agreement to chose arbitration as their only means of settling a dispute.”

People often forget that if you exclude an arbitration agreement, that parties can still choose to go to arbitration instead of court when a dispute arises. Excluding the arbitration requirement does not mean that arbitration is no longer an option. In essence, excluding the paragraph gives both parties three options to resolve disputes: mediation, arbitration, and court. But, by signing it, you restrict all disputes into a single solution: arbitration only.

I find that this realization often overcomes most objections and the agreement to consider arbitration as an option makes most arbitration proponents happy enough to sign the agreement.

It’s your choice.

What you choose ultimately is up to you. (See our post on who has final say in your escrow.) Real Estate Agents and Brokers are not actually parties to the contract. They represent you, so YOU have to be the one who is happy with the contract, and you have to make your own decision about this paragraph.

If you like the above option that I often present, feel free to use it. You may copy and paste it, but keep in mind that I am a real estate agent and not a lawyer. It works for me, and if you copy it and use it, you use it at your own risk because you personally think that my way of doing it makes sense to you.