If you ever made an offer on a property in California, you have read an Arbitration Clause. This clause only becomes a part of the contract if both buyer and seller agree to it, meaning they both initial the clause in the contract. And more than likely your agent told you to agree to it because “everyone does” or “it’s better than court” or for no reason at all. Well, agreeing to Arbitration may not be the right decision for you. Let me break it down for you.
Before You Get to Arbitration There’s Mediation
If a dispute arises in a real estate transaction over more than $10,000, buyers and sellers in California are required to go to mediation. Mediation is designed for both parties to find a compromise. You may find yourself in a situation where you don’t believe you should compromise. It doesn’t matter — you have to go to mediation. However, as long as you show up to mediation, you have met your contractual obligation. You aren’t required to come to a meeting of the minds. (If the value in question is less than $10,000, you would go to small claims court which is a lot cheaper and expedient.)
Next Step Arbitration
Assuming you have tried Mediation or you showed up for Mediation and promptly left, then your next step is Arbitration if you have agreed to it. Arbitration is voluntary but the decision is binding.
Advantages of Arbitration over Court
1. Your case will be heard faster.
2. The case will be resolved more quickly.
3. It will cost less.
Disadvantages of Arbitration
1. You don’t get a jury trial. If you go to court, your case will be heard by a jury of your peers.
2. There is no appeal process; the decision is binding.
3. Although it’s cheaper than court, you have to pay for it in a shorter amount of time while court & lawyer fees are spread out over
a longer period of time.
When I explain this to my clients, they typically don’t sign the Arbitration clauses. They understand that it’s still an option later on. But if a seller is dead set on it, then it can be agreed to in a counter offer. I will say that I’ve never had an client who’s an attorney that was willing to sign an Arbitration clause. And for that matter, the E&O insurance companies typically don’t want Brokers to sign these clauses in listing agreements, because they want to leave their options open.
It’s always a good idea to ask legal counsel if you are unsure of what to do.