Contracts 101; Avoid Arbitration

There are two rules in negotiating any contract. The first, before you look at a form or draft, is to make a list of the deal points that are essential to you. The second is to share that list with your lawyer, up front. In a real estate contract your Realtor and your lawyer will work together, but regardless of the nature of the agreement, these two steps will save time and money, and the quality of the product and your satisfaction will go way up.

This article discusses one item that will appear on someone’s list – arbitration. There should be no misunderstanding; arbitration is the tool of one in control to deprive someone, you, if you agree, of an effective remedy for claims. Arbitration clauses appear in contracts more and more frequently. They show up any time you invest with a securities dealer, buy a car, choose a nursing home, and in some real estate contracts. There is a reason the person drafting those contracts inserts an arbitration clause. That clause means there will be no remedy in a court. You will be required to submit any claim to an arbitrator.

Arbitration is almost always more expensive than court, and is usually unfair. Here’s why:

A judge’s salary is paid by the public. You will pay the arbitrator. If the amount is the typical real estate earnest money deposit, add the cost of the arbitration and your own lawyer, and the cost of justice exceeds $500 an hour. Most claims require at least several hours to resolve, so matters that could be arbitrated are not, simply because to do so would cost more than the claim. Only very big claims merit the high cost of private justice.

Often the arbitrator will be a retired or active lawyer, and generally from out of town. The arbitrator will bring to the job whatever experiences, biases and quirks he or she brought to the office every day before he retired from his regular job. You usually won’t know what those are until after the fact, if ever. He can be as opaque and as arbitrary in his opinion as he wants, and chances are he will never answer to, or even see you again.

You have no idea how unreasonable and arbitrary one person can be when he knows he will never have to explain his result and you have no right of appeal. There is no right of appeal from arbitration. Make no mistake. The person writing the agreement that requires you to arbitrate knows the message of this article. If the choices for someone (you), seeking relief were not severely limited, the agreement would never have been drafted to require arbitration.

The last agreement I reviewed that required all claims to be arbitrated was a pension investment plan for a local employer. Employees were required to submit all claims to an arbitrator chosen by the National Association of Securities Dealers (NASD) in Denver, Colorado. Understand what that means. The only way to make a claim against this investment company would be for the employee to go to Denver and present his claims to a person chosen by the very industry against which the claim is made. And the employee would pay for that privilege.

If someone asks you to sign a contract that requires arbitration, or if you’re a sub contractor and the prime contractor signs such an agreement, run. Justice cannot be privatized. With very few exceptions, one asking you to agree to binding arbitration has no interest in justice at all.

Mike Chesser

Chesser and Barr, 1201 Eglin Parkway, Shalimar, FL 32579