Mediation and Arbitration Clauses in Purchase Contracts

Dispute Resolution in the CAR and PRDS purchase agreements

Both the CAR and PRDS purchase contracts have a mandatory mediation clause and an optional arbitration clause. The parties to an agreement need to initial the arbitration clause in order to invoke it, while the mediation clause is built-in as a part of the purchase agreement. Both are alternative dispute resolutions that allow the parties to resolve matters privately rather than through litigation. However, mediation and arbitration should not be confused with each other as they have significant differences.
 
What is Mediation?

Mediation is a method to resolve matters before a mediator in a private setting prior to resorting to arbitration or litigation. The mediator, usually a retired judge or experienced practitioner, will attempt to help each side reach a compromise. The parties may, and generally do, hire legal counsel to represent them throughout the mediation process. The result of a mediation is not binding, and is considered a voluntary settlement between the parties if successful.

Mediation is mandatory as stated in the CAR and PRDS purchase agreements. With some exclusions, the parties agree to mediate any dispute or claim arising between them out of the agreement before resorting to arbitration or court action. One thing to be cautious about when refusing mediation is that, if the contract requires mediation and one party fails to mediate, a waiver of an attorney fee provision in the mediation clause is enforceable against the party who fails to mediate. Johnson v. Siegel (2000) 84 CA4th 1087. The inability to recover attorney fees by failing or refusing to mediate could lead to significant financial loss even if the party prevails.
 
What is Arbitration?

Arbitration is another alternative to a court trial. Unlike the built-in mediation clause, the arbitration provision must be initialed by both sides in the purchase contract to be effective. Arbitration usually takes place after the parties have failed to reach a settlement through voluntary mediation. Arbitrated disputes are heard by an independent arbitrator selected by the parties. Once the arbitrator reaches a decision, with very limited exceptions, that decision is final. The main exception that allows parties to seek revocation of the arbitrator’s decision is that the arbitrator has violated the Arbitrator Code. With most arbitrators being seasoned law practitioners, the chance of invoking the exception is fairly low. Therefore, clients should be informed that it is almost certain that they are giving up the right to trial by initialing the arbitration clause in the purchase contract.
 
Role of Real Estate Professionals

It is important for a client to understand the mediation and arbitration clauses in the purchase agreement. However, real estate professionals cannot advise their clients on mediation and arbitration when disputes arise. Only an attorney can give legal advice, and the clients should be recommended to seek legal representation. The real estate professionals, however, should coordinate the transaction and advise accordingly so that the clients may make a sound decision.