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Nondisclosure – Arbitration

This is the third installment in our 4-part series discussing the typical steps for a California real estate buyer when defects are not disclosed in a real estate sale, which is likely similar to the steps you may encounter for other real estate disputes as well.

The first step in a nondisclosure allegation is typically to attempt to settle differences through a non-binding, informal mediation, covered in the previous article. If mediation fails, which in many cases may be likely, then you will either file a lawsuit with the court, covered in our final part of the series, or the dispute will be settled in arbitration. Which step you take depends on your contract’s dispute resolution clause.

There is a section where the buyer and seller can agree to arbitration instead of litigation in the “Alternative Dispute Resolution” (ADR) outlined in the California Association of Realtors (CAR) Residential Purchase Agreement (RPA), which is a common purchase contract for residential property in California. Usually, as in the CAR’s ADR, the arbitration is binding, meaning you are giving up your right to a lawsuit. Unlike mediation, however, the arbitration provision is only mandated if the buyer and seller initial that they consent to the provision.

Note: Since there is a section to initial in the ADR, most people assume you have to initial it. However, you don’t have to. While arbitration can be a faster, less costly alternative to a trial, there are also some significant disadvantages, outlined below, and arbitration can in some cases put individuals at a serious disadvantage when up against large corporations. Always consider carefully before initialing an arbitration clause wherever you encounter one.

 

Arbitration

If the disputing parties initialed the arbitration provision, then they have agreed to settle their nondisclosure dispute, and any other disputes related to the contract, through binding arbitration instead of filing a lawsuit with the court. Arbitration is presided over by an agreed-upon or appointed arbitrator who, unlike a mediator, occupies a position analogous to a judge. (Often the arbitrator is a retired judge.)

As outlined in the first installment, the seller and the seller’s agents have a good-faith duty to disclose any issues that may impact the use or value of the property, but the buyer also has a duty to reasonably inspect the property. A nondisclosure allegation thus often turns on this issue then: why did the buyer’s inspection not turn up the defect and did the buyer unwarrantedly rely on the seller’s disclosure?

Like a trial, arbitration begins with discovery, where each party deposes witnesses and gathers evidence. There is then an arbitration hearing, which follows a structured procedure. The hearing proceeds much like a normal trial: the parties submit evidence, call and cross-examine witnesses, and argue their case before the arbitrator. Just like a court of law, you do not have to have a lawyer: you can do all of this yourself. However, just like a court of law, you would have a fool for a client. The arbitration decision is final, and the stakes are often considerable, so you should have a California real estate attorney from the beginning to help prepare your case and represent you in the arbitration hearing.

Once the parties have presented their cases, the arbitrator renders a decision called an “arbitration award.” The award may include the losing party being compelled to pay the winning party’s attorney fees and costs, as mandated in the CAR’s ADR (unless the winning party refused to mediation first!). Unless your ADR defines the arbitration as non-binding, the judgment is incontrovertible—if the losing party refuses to comply with the terms of the award, it can be converted into a court order under the California Arbitration Act (CAA) or the Federal Arbitration Act (FAA).

The arbitration process has the advantage of being faster than a trial, concluding in perhaps months rather than years. Sometimes, the arbitrator can also combine the process of mediation and arbitration, saving the parties even more time and money. However, there are some serious disadvantages to choosing arbitration over litigation, and you should carefully consider whether you want to settle potential disputes in arbitration or court before you sign any real estate purchase agreement.

Disadvantages of arbitration:

  • In binding arbitration such as that outlined in the CAR’s ADR, there is no right of appeal or jury trial in arbitration. There is rarely any recourse if you lose, even if the judgment is unfair, in error, or incorrectly applies the law.
  • Your attorney can cite prior cases, but the arbitrator does not need to follow precedent: his judgment is arbitrary and needs only apply to the specific case.
  • Arbitrators can be biased or connected to the parties in the case. Moreover, arbitration proceedings are not published, so it is impossible to research past judgments to determine whether the arbitrator is equitable or consistent.
  • Large corporations can use these features of arbitration to their advantage: they use arbitration companies whose livelihood depends on arbitrating for the big companies. Think about it: how many times are you as an individual going to need an arbitrator as opposed to a large corporation?

Before you decide whether or not to initial an arbitration provision in a purchase agreement, be sure to talk to a California real estate attorney. If you decided not to initial that provision, though, you will instead proceed from mediation to litigation, the final part of our series.

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