To Arbitrate or Not to Arbitrate
Many real estate contracts include an “arbitration provision,” whereby the parties to the contract agree that they will resolve any disputes which may arise between them through arbitration, and not through the judicial system. When deciding whether to agree to such a provision, a party should consider both the advantages and disadvantages – and there are several of each – of mandatory arbitration.
Although people oftentimes confuse the two, arbitration is not the same thing as mediation. The confusion between the two may result, in part, from the fact that the same person oftentimes fills the role of both an arbitrator and a mediator. There is, however, a huge difference between the two, in that a mediation is a settlement conference, whereby with the assistance of the mediator the parties attempt to resolve their differences by through a negotiated settlement; whereas an arbitration is an adversary proceeding whereby the arbitrator is called upon to adjudicate the dispute and render an award comparable to a judgment that is rendered following a trial. While a mediator in the course of a mediation may strongly suggest a resolution to the parties, a mediator cannot force the parties to accept his or her suggestions. An arbitrator, however, can and will impose his or her decision on the parties, who will be forced to accept it if they have contractually agreed to participate in an arbitration.
As a general rule, although it’s not always true, arbitrations are speedier and less costly than litigation in court, which is probably what makes arbitration desirable to many people. Part of what keeps the cost down in arbitration, in most cases, are limitations on discovery, including costly depositions. Other advantages include the ability of the parties to usually pick their arbitrator, instead of being stuck with whatever judge is randomly assigned in a court proceeding. Additionally, an arbitrator will usually have specialized knowledge about the subject matter, which is not always true with a judge.
One of the other “advantages” of arbitration, which is that the award issued by the arbitrator is final and not appealable (with limited exceptions) is also probably the biggest disadvantage. Even if the arbitrator has made a mistake of fact or law, the losing party is stuck with the arbitration award, as there is no recourse to an appellate system comparable to that which exists in the event that a judge makes such a mistake at trial. It is not uncommon for arbitrators to issue awards based upon their own perception of “fairness,” without regard to applicable law or judicial precedent. In agreeing to arbitrate a dispute, the party is in large part “rolling the dice” that the arbitrator will come to a fair result, as opposed to knowing that a judge operating in the court system must issue a judgment based upon the law, or be subject to reversal upon appeal.
There are several other advantages and disadvantages to arbitration, which can be explained in detail by any attorney who is familiar with the arbitration process. All of this should be considered by a party before signing a contract that compels all disputes to be arbitrated rather than litigated through the courts.
About the Author: David Allen, a partner in the Phoenix law firm of Jaburg & Wilk, has been representing clients in both transactional and litigation real estate and business related matters for over thirty years. He is licensed as an attorney in both Arizona and California, and is also a licensed Arizona real estate broker.