Often the terms “mediation” and “arbitration” are used indiscriminately, but they mean entirely different things for the parties to an agreement containing these provisions.
1. What is Mediation?
Mediation is a way to resolve a dispute by mutual agreement. A successful result at mediation would be a voluntary settlement of the dispute by the parties. Usually both parties are compromising to arrive at the settlement. That means the claimant is receiving less than they want, and the respondent is giving up more than they want, but ultimately both parties decide it is better to compromise that to engage in further litigation.
In the context of real estate litigation, buyers may have a claim against the seller for failure to disclose a property condition or sellers may be claiming entitlement to the buyer’s deposit on a failed purchase.
Conducting a mediation often means hiring a “neutral” party as the mediator to facilitate getting the parties to a settlement. According to the terms of the contract the mediator can be a retired judge or a seasoned practitioner. The mediator attempts to help each side see the strengths and weaknesses of their position and the other parties’ position, and arrive at a compromise between the extremes.
The settlement is a voluntary, mutual decision that the parties decide they can all live with.
2. What is Arbitration?
In contrast, arbitration does not involve a voluntary, mutual decision by the parties. Instead, the parties agree to designate an arbitrator (again, a retired judge or experienced attorney) who will make a unilateral decision after hearing evidence.
The parties will give testimony, present evidence, and at the conclusion of the presentations the arbitrator will render his or her “award.” In short, it is a private trial taking place in a conference room instead of a courtroom, the parties are paying the arbitrator by the hour and there will be a winner and a loser.
3. How do mediation and arbitration provisions work in real estate contracts?
Most of the real estate contracts here in California come from a few specific publishers. For example, the Peninsula Regional Data Service (PRDS) forms are frequently used in Santa Clara and San Mateo Counties but many other counties utilize the California Association of Realtors (CAR) forms.
Both the CAR and PRDS purchase agreements have a mandatory mediation[i] provision and an optional (elective) arbitration provision. In fact, the parties initial the arbitration provision in order to invoke it, because it is not required. If the parties initial the arbitration provision, they are agreeing to keep their dispute in a private setting rather than using the court system. By leaving it blank, the parties default to using the state’s judicial system in the event of a dispute.
Mediation is a pre-litigation requirement under these contracts. That means that before the parties can take their dispute to court, they MUST first attempt mediation. It is obviously intended to keep litigation costs down and give the parties an opportunity to reach a negotiated compromise in an expedited proceeding.
If you have any questions regarding mediation and arbitration provisions in a real estate contract in California, please do not hesitate to contact Brewer Offord & Pedersen LLP at (650) 327-2900 or on the web at www.BrewerFirm.com.
[i] There are a few exceptions, such as claims within the small claims dollar amount (below $10k).