Arbitration, Or Not

Every printed form real estate contract calls for mediation, and if it fails, arbitration. The standard bromide to explain the push to arbitrate is that courts take a long time, cost a lot of money, and the only one who makes money in a court proceeding is the lawyer. This article asks the question whether that explanation is really true, and whose goose gets cooked by arbitration?

The procedures for arbitration are set forth in Florida Statutes and in the American Arbitration Association Rules. Normally, arbitration calls for three arbitrators: one chosen by each side, and a third chosen by those two. The arbitrators are paid by the parties; at today’s rate, about $250 per hour, each. The lawyers for each party are paid by the person who employs the lawyer. The agreement between the parties will usually dictate that the arbitrators are paid by the two parties jointly, and at the conclusion of the matter legal expenses may be paid by the losing party, or that it is not provided in the agreement, then each party pays his own lawyer.

In most arbitration matters, the arbitration panel alone will cost about $10,000 if the matter takes only one day before the panel. Arbitration can probably be resolved within three to four months.

On the other hand, the parties have already paid a judge’s salary and most of the expenses of court. Most specific performance or damages lawsuits will be resolved in six to eight months in court, and probably less expensively than arbitration.

Usually there are three occasions when one of the parties will call for mediation in a contract. The first is where there is a significant disparity between the parties’ finances. While a rich man can afford half of the arbitrator bill, a poor man may settle the matter badly instead of running the risk of paying half of an arbitrator fee. Obviously, if an arbitration requirement is inserted for this reason, the side benefitting has money. The second is where the amount in dispute is not significant, or where one side wants to encourage doing nothing. The philosophy is that when it costs several thousand dollars to pay arbitrators, even if a party wins the arbitration, he will think twice about making a dispute. Finally, the third occasion for arbitration is when the parties both have adequate financing and they want specialists to determine an issue, quickly. An example is a high-priced construction contract where the parties need specialists in engineering, construction, or some other narrow field to serve as arbitrators, and they need to act on the decision without delay.

In most real estate contracts, I delete the requirement for arbitration. I do that because I want my client to have an economical, professional decision made, retaining the right to appeal to another court if I believe the circumstances or the case deserve it.

The only instance I’ve ever seen in which arbitration is required by a contract with any real expectation of a fair, economical outcome, is when the parties have relative economic parity. An industry-sponsored or arbitrated outcome, such as a securities related arbitration by the NASD, should not even pretend to be unbiased, in my opinion.

In summary, unless the subject of a contract requires such narrow fields of experience that expert arbitrators are useful, I delete arbitration provisions from contracts. Realtors serve their clients best who ask themselves why a form is prepared as it is, who benefits from any provision, and whether, for their specific deal, the form should be changed to better protect their client.