Any active real estate litigator has suffered the frustration of an arbitration award that is flat-out wrong on the law. The decisions of California courts are full of examples of arbitration awards that were confirmed by the courts even though there was an error of law. Many frustrated real estate litigators will receive a California Supreme Court decision on the matter as a welcome change.

Contracting parties in the real estate industry in California now have the option of providing for judicial review of errors of law in arbitration awards. But the catch is that contracting parties must clearly agree that legal errors are reviewable by the courts or the general rule that the merits of an arbitration award are not reviewable will prevail in any litigation over the award.

The California Supreme Court expressly advised parties to arbitration agreements to explicitly and unambiguously provide for judicial review if they wish to avoid protracted and expensive litigation over that issue.

Change is in the air legally as well as politically and economically. The California Supreme Court and the U.S. Supreme Court have rendered decisions this year that have highlighted a growing change in the law of binding arbitration. Some experienced judges and attorneys are questioning whether a change in the law is necessary to improve binding arbitration. Some argue that a change is necessary for binding arbitration to survive.

However, it is likely that most home buyers and home sellers will not take part in this debate because they aren’t likely to be aware of the issues. As a result, the average home buyer or home seller will probably continue to agree to the standard arbitration agreement in use before the Supreme Court decisions. Only sophisticated real estate buyers and sellers will consider the new option of judicial review of errors of law in arbitration awards.

The bottom line is that judicial review of errors of law in private decisions will be an insider’s game that will separate sophisticated real estate investors from the average real estate buyer or seller.

Conflicting court decisions

The issue is complicated by the fact that the U.S. Supreme Court and the California Supreme Court decisions came to opposite conclusions.

The U.S. Supreme Court, in a 6-3 vote, held that the statutory grounds in the Federal Arbitration Act for vacating arbitration awards is exclusive and does not provide for cancellation of an award that is the result of an error of the law. The Supreme Court declined to allow contracting parties to privately expand the court’s review of arbitration decisions. The Supreme Court reasoned that limited review of arbitration awards is needed to maintain arbitration’s essential virtue of resolving disputes straightaway. The three dissenting justices, however, viewed the virtue of expediency to be a legal vice that would cause litigants to flee from binding arbitration.

The California Supreme Court declined to follow the lead of the U.S. Supreme Court on the issue of whether or not contracting parties may provide for judicial review of legal errors in an arbitration award. While the California Supreme Court case does not involve a real property dispute, the case directly impacts the drafting of arbitration provisions in real property contracts, including, but not limited to, listing agreements, purchase agreements, leases, easements, options, etc.

In the California Supreme Court case, the contracting parties agreed to the following provision in their binding arbitration agreement: "The arbitrators shall not have the power to commit errors of law or legal reasoning, and the award may be vacated or corrected on appeal to a court of competent jurisdiction for any such error."

The California Supreme Court held in an Aug. 25 opinion that contractual provisions for judicial review of arbitration awards are enforceable under California law. The Cable Connection case was a state court action and was not bound by the Federal Arbitration Act. Accordingly, the California Supreme Court decided that the doctrine of arbitration finality must give way to the parties’ express agreement to obtain a just result. The California Supreme Court noted that finality can be a virtue, but it also can be a vice when arbitrary arbitrators defeat the parties’ expectation of a just result.

Contracts not clear on court review

My review of the residential purchase agreements commonly used by real estate brokerage companies reveals that those contracts do not explicitly and unambiguously provide for judicial review of errors of law in arbitration awards.

Accordingly, if buyers and sellers of residential homes are not told about the option of contractual judicial review of arbitration awards, they will be stuck with the risk of legally erroneous arbitration awards. But who will inform buyers and sellers of their new right to contract for judicial review of arbitration award? Should real estate agents or brokers attempt to take on the duty of explaining the new law of judicial review of erroneous arbitration awards to their clients? The attorneys I know who represent real estate brokers are of the opinion that advising home buyers on the issue of judicial review of erroneous arbitration awards would be practicing law, which is something real estate agents should not do.

Moreover, the greater loss is that home buyers will most assuredly not be told by the real estate industry that if they want judicial review of erroneous private decisions, their best option is to agree to the appointment of a judicial referee pursuant to California Code of Civil Procedure Section 638.

A review, or a referee?

Over 25 years ago the California legislature passed a law allowing contracting parties the right to agree to the appointment of a referee in the event of a dispute arising from a contract.

Unlike contractual judicial review of arbitration awards for errors of law — which is a new and untested contractual right recently created by the California Supreme Court — the right to the appointment of a referee has been tested in litigation for many years.

As a result, contracting parties who desire judicial review of errors of law in a private decision affecting their legal rights have two choices. One choice is to try and draft an agreement for judicial review of a binding arbitration award, and the other is for parties to a real estate contract to ask for a judicial referee under California code.

These provisions will provide a private decision with a clear path for judicial review of errors of law in the decision. Many prudent real estate lawyers will probably provide their clients with a provision for judicial reference as opposed to a provision for binding arbitration with judicial review of errors of law.

The average home buyer or home seller, though, will probably continue to agree to the standard binding arbitration agreement without judicial review of errors of law because they will likely never be told about the choice of a judicial referee or judicial review of arbitration awards.

Harold A. Justman is a practicing real estate lawyer in San Mateo, Calif. He is also the editor of The Robert Bruss California Real Estate Law Newsletter and regularly serves as an expert witness on the standards of care of real estate brokers.

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