Q: My husband and I (residents of Utah) are close to making an offer on a condo in California. It is disturbing that in the California Residential Purchase Agreement it requires that we agree to dispute resolution and then to binding arbitration. "You are giving up any rights you might possess to have the dispute litigated in a court or jury trial." My temptation is to X it out, but it’s part of the standard form used by Californians. What would you advise your clients to do?
A: As an attorney, it’s sometimes surprising to me how much anxiety and stress consumers experience around alternative dispute resolution (ADR) clauses, especially because the intent of such clauses is generally to minimize the cost and angst of a legal dispute. While you should certainly obtain your own attorney’s personalized opinion and advice that accounts for your own circumstances and exposure, I’m happy to provide my two cents.
First: some definitions. There are two forms of ADR referenced in the California Residential Purchase Agreement: mediation and arbitration. Mediation comes first, and is a process in which the buyer and seller exchange a limited set of documents, submit those documents and a written argument making their case for why they feel they have been damaged (or why they feel they are not liable for the other side’s damages) to a local attorney with experience in similar cases, and sit in different rooms into which that attorney (mediator) goes back and forth helping them agree upon a settlement.
If they don’t agree, they go to binding arbitration, which is a similar process, except that most arbitrators are actually retired judges and instead of mediating a settlement, they actually make a decision, which is binding, final and cannot be appealed.
The fact is, consumers today waive their rights to sue and agree to binding arbitration every single day — they are simply not aware that they are doing so. When you join a health maintenance organization (HMO), park your car in a lot, buy a ticket to an amusement park or purchase a membership to a health club, nine times out of 10 you agree to mediation and arbitration — and waive your rights to sue — automatically and, most often, unwittingly, as part of the terms of service.
While this might sound like you’re truly giving up a major right, the fact is that many legal authorities believe that ADR is in the best interests of the parties who agree to it. ADR is much faster and much less expensive for all sides than litigation is. The legal fees are significantly less costly, causing many to believe that the damaged party, and not the attorneys, stands to benefit the most from ADR when compared to full-blown litigation.
Though the parties do technically give up the right to appeal and the rights to the same extent of document discovery they would have in the courts, California real estate ADR rules mandate the same level of document exchange, and the lack of appeal rights translates into a quicker arrival at closure than a full-blown court case does.
Also, what happens in mediation and arbitration is that the parties cite legal authorities and essentially plead their case based on what they would argue in a court of law; it is on these same bases that the mediators "nudge" the parties and the arbitrator makes her decision.
Those are the various arguments for and against ADR. And in my experience, most California homebuyers and sellers opt in to the ADR clause to which you are referring. Some buyers and sellers see it as a deal-breaker, and simply won’t agree to the contract unless the other party agrees to be bound by the ADR clauses.
However, you should be aware that under the California Residential Purchase Agreement, all contracts require mediation as the first step of resolving any post-sale dispute. However, the parties must actually initial the arbitration clause to be bound by it. You have every right not to agree to be bound by the arbitration clause, and you can remain free from it by simply refusing to initial it.
Again, I encourage you to discuss the matter with your own broker and even an attorney who is familiar with your personal and legal particulars. But hopefully, I’ve given you some background on the clauses and food for thought to consider as you make your decision.