Peter Miller on Real Estate: Settling Disputes Without Courts

Arbitration may be the tonic for the litigious leery.

July 1, 1999

There's a terrible new threat to our friends and neighbors in the legal profession: More and more of us are using quick and low-cost arbitration to resolve disputes.

Stockbrokers have long required binding arbitration when creating accounts, and now, says The Washington Post, credit card companies, banks, computer makers, insurance companies, and car dealers "are rewriting the fine print of their contracts and sales agreements to require that consumers agree, in advance, to give up their right to sue and submit any disagreements to arbitrators. Such clauses also bar consumers from participating in class action lawsuits." (See "Hidden in Fine Print: 'You Can't Sue Us,'" The Washington Post, May 22, 1999.)

The right to sue sure sounds like a grand and glorious opportunity, but only if the civil judicial system is fair, efficient, fast, and economical. Except for Judge Judy or a small claims court, our judicial system is none of those things. Instead, the odds favor settling cases--even if one party is in the right--rather than exposing yourself to the litigation lottery. The system is tilted in favor of settlement because even small claims can mushroom into large awards. For example (true stories about actual litigants):

You're driving along with a cup of hot coffee in your lap, it spills, and you're burned. Collect several hundred thousand dollars.

You buy a new car and learn that the automaker repainted it because if was scratched, but you were never told. Collect $4 million.

You and a neighbor order cable service, you're overcharged, the cable company agrees to all your demands, and you sue anyway. Collect $975,000 for mental anguish, and $581 million in punitive damages.

When I first obtained a broker's license in 1978, my listing agreements contained a binding arbitration clause. Consumers never moaned or mooed about losing the right to sue. Instead, they were elated to see that a dispute resolution system was in place, which assured that if wronged, they could quickly and cheaply resolve the matter.

Arbitration isn't a device to avoid liability but rather an effort to remove the profit motive from the dispute resolution process and to make whole those who've been damaged. And although arbitration isn't perfect, wonderful, or in all cases fair, it's a step up from the civil litigation system, which is none of those things and expensive to boot.

I'm a believer in binding arbitration clauses for listing agreements, broker-salesperson contracts, and buyer representation agreements. I first had a binding arbitration clause in a buyer representation contract in 1984.

To create a valid arbitration agreement, you'll want an attorney for the proper wording. Hiring an attorney is both necessary and worthwhile because an arbitration agreement must be consistent with applicable rules (for instance, in Delaware a bank can amend a credit card agreement to require binding arbitration by mail notification after a consumer signs up) and the latest court decisions. No less important, your arbitration agreement should answer a variety of questions before they arise. For example:

Is each party responsible for its own legal fees? If litigants had to pay their own attorney fees, the volume of lawsuits would probably decline.

Which state rules govern the arbitration? This is especially important for companies that come under several jurisdictions.

Are damages capped?

Can the arbitrator's decision be appealed to a court?

Where will the arbitration be conducted?

Who pays for the arbitration? An agreement might say that the arbitrator decides or that the losing side pays all arbitration costs. But determine this when drawing up the arbitration agreement.

Must an arbitration clause be written on a separate paper, or can it be included within the body of an agreement?Must all parties initial or sign an arbitration clause in addition to signing the overall agreement? The issue here is whether the parties receive adequate notice. If an arbitration agreement is buried in a huge contract, is it something to which all parties agreed? In either case, an arbitration requirement must be reviewed by an attorney.

Putting a binding arbitration agreement in place at the start of a business relationship sets out the steps that must be taken in the event of a dispute. Trying to create an arbitration agreement once combat begins may not be possible, in some measure because such an arrangement dooms the profit-making potential that fuels our legal system.

What do you think of this column?

Peter G. Miller, OurBroker®, also writes a column that appears in Realty Times each Tuesday, and is the author of The Common Sense Mortgage, the best-selling guide to real estate finance. He's the original creator and host of the Real Estate Center with America Online and maintains a consumer information site at OurBroker.com.

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