MEDIATION & ARBITRATION IN PURCHASE AGREEMENT
By: Roman P. Mosqueda, Esq.
You would like to sell or buy a house or condominium. You pick a real estate broker, whose agent-salesperson presents you with a purchase agreement.
Either as seller or buyer, you are faced with paragraph 17 on Dispute Resolution of the California Residential Purchase Agreement And Joint Escrow Instructions of the California Association of Realtors, Inc.
Indeed, paragraph 17A of the Purchase Agreement form incorporates a mandatory mediation clause for any dispute or claim arising between seller and buyer out of the Purchase Agreement, or any resulting transaction, before resorting to arbitration or court action.
And paragraph 17B(1) of the same Purchase Agreement form contains an arbitration of disputes clause for any dispute or claim in law or equity arising between seller and buyer out of the Purchase Agreement or any resulting transaction, which is not settled through mediation.
Both seller and buyer are required to initial the space indicated, for the neutral, binding arbitration to be effective on both parties.
By using aforesaid Purchase Agreement form, the seller and buyer automatically agree to mediate any dispute or claim arising out of the purchase or any resulting transaction, before resorting to arbitration or court action.
The mediation provision applies even though the arbitration provision is not initialed in the Purchase Agreement form.
Mediation fees paid to the mediator, if any, shall be divided equally among the parties involved.
Mediation under this provision is initiated by one party requesting mediation of the other party or parties involved. If the request is granted, both parties have to agree on a neutral mediator and his/her fees.
The mediator chosen by both parties schedules a mediation meeting among the parties. A mediation brief from the parties may be required by the mediator to be submitted to him/her before the mediation meeting.
At the mediation meeting, the mediator’s role is to bring the parties together, attempt to close the gap between their respective positions, and hopefully settle the dispute or claim, without deciding the matter for the parties.
Any party who commences a court action without first attempting to resolve the matter through mediation, or who refuses to mediate after a request has been made, shall not be entitled to recover attorney fees, even if such attorney fees would otherwise be available to that party in any such action.
By initialing the space indicated in the Purchase Agreement form, both seller and buyer voluntarily agree to submit their dispute or claim to neutral and binding arbitration, which is not settled by mediation.
They waive their rights to litigate their dispute or claim in a court of law or equity by a judge or jury, as well as, any appeal from a decision or verdict thereon.
The arbitrator shall be a retired judge or justice, or an attorney with at least 5 years of residential real estate law experience, unless the parties mutually agree to a different arbitrator, who shall render an award in accordance with substantive California law.
Although not specifically provided in the arbitration provision contained in the Purchase Agreement form, arbitration fees, if any, shall be divided equally among the parties involved, just like mediation fees, unless the parties agree differently.
Before the arbitration hearing, the parties shall have the right to discovery, in accordance with Section 1283.05 of the California Code of Civil Procedure on the right to discovery and procedure and enforcement thereof.
In all other respects, the arbitration shall be conducted in accordance with Title 9 of Part III (Sections 1280 to 1294.2) of the California Code of Civil Procedure on arbitration.
Similarly, an arbitration brief may be required by the arbitrator to be submitted to him/her several days (usually five (5) days) before the arbitration hearing.
At the hearing, the parties present their evidence and arguments before the arbitrator, who decides the dispute or claim by issuing an award.
Judgment upon the award of the arbitrator or arbitrators (if the parties agree on more than one arbitrator) may be entered into any court having jurisdiction, usually the Superior Court having territorial jurisdiction over the real estate property involved.
Curiously enough, the arbitration provision contained in the Purchase Agreement form also states that interpretation of this agreement to arbitrate shall be governed by the Federal Arbitration Act, not by California arbitration law stated above.
As stated in the Purchase Agreement form, the following matters are excluded from mediation and arbitration provisions:
1. judicial or non-judicial (trustee’s sale) foreclosure or other action or proceeding to enforce a deed of trust, mortgage or installment land sale contract as defined in California Civil Code Section 2985;
2. an unlawful detainer (ejectment) action;
3. the filing or enforcement of a mechanic’s lien; and
4. any matter that is within the jurisdiction of a probate, small claims or bankruptcy court, under paragraph 17B(2) of the Purchase Agreement.
But the filing of a court action to enable the recording of a notice of pending action (lis pendens), for order of attachment, receivership, injunction, or other provisional remedies, shall not constitute a waiver of the mediation and arbitration provisions of the Purchase Agreement.
Both seller and buyer may agree to mediate and arbitrate disputes or claims involving either or both brokers, under paragraph 17A and B of the Purchase Agreement, provided either or both brokers shall have agreed to such mediation or arbitration prior to, or within a reasonable time after, the dispute or claim is presented to the brokers, under paragraph 17B(3) of the Purchase Agreement.
But any election by either or both brokers to participate in mediation or arbitration shall not result in brokers being deemed parties to the Purchase Agreement.
And if a party refuses to submit to arbitration after agreeing to it, such party may be compelled to arbitrate under the authority of the California Code of Civil Procedure.
Arbitration Case Law:
On May 26, 2004, Coleman A. Swart, presiding Judge of Department A of the Pasadena Superior Court, denied the Motion To Stay Proceedings Until Arbitration Is Had, filed by the defendants-sellers in Case No. GC 033355.
The Author personally represented the Plaintiff-buyer, whose identity is withheld to protect her identity, and who filed Complaint for breach of contract and specific performance with damages because of the refusal of Defendants-sellers to close escrow.
The sellers and buyer therein entered into a California Residential Purchase Agreement and Joint Escrow Instructions, with the sellers not initialing, and the buyer initialing, the arbitration provision.
In denying defendants’ motion to stay proceedings, Judge Swart agreed with the Author, who cited Marcus & Millichap Real Estate Investment Brokerage Co. v. Hock Investment Co. (1998) 68 Cal. App. 4th 83, in his opposition papers that general California contract law requires all the parties to agree to the arbitration provision to be binding on them.
Since the sellers did not initial the arbitration provision, the offer of the buyer to submit any dispute or claim to binding arbitration was not accepted; and therefore, not binding on the buyer.
Judge Swart declined to adopt the earlier and contrary opinion in Grubb & Ellis Co. v. Bello (1993) 19 CA 4TH 231, 238-240, which was criticized in Sterlin v. Supercuts, Inc. (1997) 51 Ca. App. 4th 1519, as not having “been relied upon by other courts and is hard to reconcile with other pertinent cases requiring mutuality of the arbitral obligation.”
(The Author, Roman P. Mosqueda, has been a licensed Real Estate Broker (DRE I.D. No. 01261973) in California since June 29, 1999; and is practicing Real Estate Law.)