How to Achieve Win, Win

As an attorney, I learned to favor arbitration but I no longer do. My inaugural column is about why I made this turnaround.

To understand, one must first know what arbitration is. Basically, arbitration is a form of deciding issues between two or more adverse parties outside the normalcy of the judicial (or court) system. In the 1980s, when the courts first began to get backlogged in expensive, time-consuming delays, arbitration came into favor.

It was said that arbitration, where the parties choose their own master (known as an arbitrator), would be faster, cost less and streamline the dispute process. This would free courts to pursue more involved and complicated cases. (Forget, for the moment, your tax dollars were paying for this). The courts began to assign cases to arbitrators, often retired former judges. And while many parties balked at this, it did work – cases were resolved in the arbitration process fairly quickly and, at first, at lower cost.

Gaining in Popularity

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So arbitration became loved. In most cases, a retired judge would be paid (imagine that, paying a judge for his favor!) to render decisions outside the courtroom that would have the same validity as if they were still sitting on the bench. At first, these hearings went quickly and so, cost litigants much less. As their success rate grew, attorneys began incorporating mandatory arbitration provisions into their contracts. And the judges began to love it, first asking if the parties would volunteer to arbitrate and later forcing parties to arbitrate.

Woe be to the litigant who didn’t want to arbitrate: If it was in the contract, the court would enforce it even if the bargaining power wasn’t equal, even if you had no right to trial by jury (you give that up to arbitrate), no right to insist on the rules of evidence (also given up in most cases), and only limited or no right to appeal. (Sorry, the arbitrator’s word became final). The arbitrators did not require any training either. Arbitrators were whomever the parties could agree upon.

The Reverse Direction

And then arbitration began to slow down. Hordes of former judges began pandering their services to earn the huge fees (paid by each side, so double the fees). They formed private companies, and they asked larger corporate clients to place the names of their firms into the very contracts they were to later adjudicate. Their calendars began to get very busy. Arbitrators, whose awards could not be appealed, fell asleep while hearing evidence. They often continued cases from day to day, well into the future, because of calendar conflicts (one of the same issues of abuse that gave rise to arbitrators in the first case). Arbitration began to become arbitrary.

Over time the arbitrators began to charge a lot of money, often $500 per hour or more, for hearings that would take place in a law office, without a court reporter, clerk or bailiff. The arbitrators might have other matters, and so they could only hear so much testimony per day, often continuing matters from day to day until they could reschedule. They began to charge rescheduling fees. Hearings would be held in pieces. Arbitrators have been known to fall asleep during testimony, to comment on the quality or length of testimony to discourage lengthy proceedings and finally, the arbitrators starting making bad decisions.

New Conditions

Large corporations and insurance companies wrote into their agreements that disputes had to be arbitrated by firms chosen in the contract – firms where the insurance companies can afford to pay but perhaps the litigant can’t. Today, arbitration is more like its root word because the results can arbitrary. Worse, it can be a pay-for-play system where the delays and costs are only bearable by those with deep pockets.

Ultimately, these arbitration provisions became what we now find in the Residential Purchase Agreement, a form used by literally every real estate agent who takes listings or writes offers.

No Way Out

In the standard contract, clients are asked before they even know that they might be in a dispute, to determine in advance whether or not they will arbitrate the issues if any arise. And the arbitration is binding. That is to say, there is no right to appeal. In the usual contract, the types of decisions contemplated might involve the later discovery of matters not disclosed by the seller, or perhaps a dispute over whether the agreement was broken and to whom a deposit might go. But these matters, the ones arbitration was designed for, usually can be resolved without too much question.

But when matters become complicated, or worse turn on technical rules of law, then arbitration becomes less capable than a courtroom. Take my friend Jack, who is after all the source of this column.

What a Reversal

Jack sold a home, and the buyer claimed fraud. While the dispute was resolved through arbitration, everyone along the way informed Jack that he had a solid case and not to worry too much because he hadn’t done anything wrong. In fact, while Jack’s advisors were correct, the arbitrator found – in a hearing of less than two days and after complaining to those present that he didn’t have time to conclude the hearing on consecutive days, could they please hurry it up? – that Jack did commit fraud to the tune of $500,000! The arbitrator declined to even look at photographic evidence that was illustrative of Jack’s case. Worse, when the decision was handed down, names were misspelled, the rationale for the decision was not clear and the law the arbitrator followed was contradictory. To say that Jack was blindsided is an understatement. Jack was shellshocked. He had to pony up $500,000. It was bad law, and a bad decision.

Jack probably never intended to have such a weighty matter resolved without any right to have the matter reviewed. But stuck he is, and the courts have upheld it. So I no longer agree that a buyer or seller should automatically initial the paragraph compelling arbitration and blithely give up the substantial rights they have been guaranteed by the framers of our federal constitution.

A Time to be Wary

If you are in the market, watch out for giving up these rights simply because your agent asks you to do so. In fact, some agents even insist that these paragraphs be initialed or they won’t present your offer. Others threaten that if you don’t agree to the arbitration provisions, they will not recommend to their clients that a sale be concluded. I submit that these agents are not acting out of your best interests but in their own self interest. Agents are not parties to the agreement. So they are not required to arbitrate.

Don’t allow this situation to baffle or to intimidate you. Take the time to obtain the advice of an attorney before you give up valuable rights and agree to arbitration. Or, if you must agree to arbitrate, insist that minimal safeguards be added in. Negotiate to include due process features that favor you in the event the dispute reaches a minimum dollar value. You’ll be glad you did.