Nash Law Firm, PLLC
By: Stephen J. Nash
Each seller and buyer has to make a decision as to whether they will agree to the arbitration agreement as a part of the purchase agreement. Some agree to it because they feel that it wouldn't be a offered if it wasn't a good option. Others agree to it because they listen to the advice from others telling them it is the best option.
The following are the top three reasons why sellers should not sign the standard real estate arbitration agreement.
I. The Seller Will Never Bring A Claim Against the Buyer
One argument in favor of arbitration is that it is easier to bring a claim through arbitration rather than through the court system. Arbitration can be cheaper, quicker and has less rules than does litigation. Assuming this is true, why would a seller want to agree to a system that makes it easier for the buyer to bring a claim against them? Since a seller rarely, if ever, will bring a claim against the buyer, how would the seller ever benefit from this easy system to bring bring a claim?
II. The Arbitrator is the Law - Yikes!
The arbitrator does not have to follow the law when making decisions and an arbitrators decision is virtually unappealable. Some arbitrators know the law, many do not do, but none of them have to apply the law to the case they are deciding. This leads to a great deal of uncertainty when faced with an arbitration claim. In litigation, where the law will be applied, there is greater certainty because you know what law will be applied and can look to past cases to predict future results.
A. If Something is Wrong, Somebody Must Pay
When an arbitration claim is brought, generally something is broken, defective or is not what the buyer expected. Quite often it seems that if the buyer can establish that something is wrong, that the only remaining question is how much and who shall pay. If the seller is the only defendant, it is not too hard to predict who will have to pay. More and more, we are seeing the real estate agents brought into the arbitration process and they quite often will share in the liability.
In litigation, establishing that something is wrong does not establish liability. The claimant has to prove that a particular defendant is legally responsible for the wrong. This is often a significant hurdle for a buyer to overcome in litigation.
B. The Buyers Contractor (a friend or friend of a friend) Says The Cost to Fix is X (of course, he wants the job so no sense going low)
In litigation, an expert must be qualified to testify as an expert. There are ample ways to determine the qualifications and biases of the expert before they ever testify in court. In arbitration, the seller knows little to nothing about the person who will testify as to damages. Most arbitrators do not allow or appreciate a true cross examination of a witness so it is very difficult to explore the qualifications and biases of the so-called expert. Frankly, the so-called expert could testify to just about anything and you are helpless to challenge them. They say that they they have dealt with this exact situation many times - how does the seller know if this is true or not?
Of course, the seller can have their own expert testify for them at the arbitration. Unfortunately, the arbitration process limits the effectiveness of the expert for the seller. The buyers expert has free access to the property to view it and to research his/her position. The sellers expert has to guess what the buyers expert will testify to and, often, sees the property for the first time at the arbitration. This is not a fair fight.
C. You Lose - Live With It!
It is difficult to impossible to appeal an arbitration decision. The arbitrator may have appeared unknowledgeable about residential real estate. The arbitrator may have appeared to be biased towards the other party. The arbitrator may have appeared to be totally unreasonable. Sorry, you are going to have to live with his or her decision.
We all have biases. Our own experiences and what we read and listen to all influence our view of the world. I don't believe that arbitrators knowingly go intoarbitration with a preconceived notion of who should win but I also believe that many of them have strong biases that can and do influence decisions. If I'm a seller I don't want an arbitrator who feels that he/she got burned by their seller when they bought a home. I don't want an arbitrator who believes that if something is wrong with the house, that the seller should always pay. While judges and juries also have biases, they still have to follow the law which tempers their bias and, if they fail to follow the law, their decision can be appealed and overturned.
III. Arbitration Encourages Buyers to Bring Bigger Claims
My experience with arbitration is that when a buyer finally decides to bring a claim, their claim suddenly includes many more complaints and they seek a great deal more in damages. Buyers appear to follow the theory that says that if you have to bring an arbitration claim you may-as-well throw everything into the mix to see what will stick. While this can happen in litigation, unsupported claims will be knocked out long before getting to trial and inflated claims are exposed during the discovery phase of litigation. In arbitration unsupported, inflated claims are not exposed prior to the hearing and, since the law does not have to be followed, the buyer may actually prevail on them and there is no real penalty for the buyer taking a flyer.
You can't state that a seller should never agree to the standard residential real estate arbitration agreement. I can state that there have been few instances where I have advised a seller to agree to the arbitration agreement and few times where the seller has wanted to agree to arbitration after they understood the consequences.
If a seller asks for your advice as to whether they should agree to arbitration be careful with your response. Don't repeat arbitration "facts" that you don't know to be true. Don't assume that because one arbitration worked out well that they all do. If your advice works out, you will not get a pat on the back or additional compensation; however, if your advice does not work you can surely expect an unpleasant phone call and in some cases a lawsuit.
Be extremely careful when giving advice to a seller or buyer regarding arbitration. If you do not have a legal license you do not have the right to provide legal advice and have no E & O coverage for claims made against you based upon the legal advice given. In addition, do not repeat information regarding arbitration that you do not know is true and do not assume that because one arbitration went well or poorly that you can generalize with respect to all arbitrations.