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Binding Arbitration Alternative

Over the last two articles, we have reviewed various alternatives for dispute resolution.  These alternatives included:  1) One on One Negotiations; 2) Mediation; 3) Non-Binding Arbitration; 4) Binding Arbitration; 5) Court or Bench Trial; and 6) Jury Trial.  Last, we focused on Mediation and now we will examine Binding Arbitration in more detail.

By way of review, arbitration is a process through which the disputants present their cases to a third party.  The third party is called an arbitrator.  The arbitrator can be an attorney, retired judge, or any other person who has some reasonable knowledge of the subject matter in dispute.  The process can be extremely formal, or entirely relaxed with no real ground-rules.

There are many creative types of arbitration.  Sometimes the parties agree to put a maximum and minimum on the amount the arbitrator can award.  This allows both sides an opportunity to limit their respective “worse case scenarios.”

Another creative process is “baseball arbitration,” so-called because it is used by baseball players and their teams when attempting to arrive at a salary.  In this type of arbitration, both sides present the amount they want awarded and the arbitrator is obligated to pick one or the other.  This forces the sides to be more realistic in hopes of having their position selected by the arbitrator.

A related form of arbitration is “night baseball arbitration.”  This is virtually identical to “baseball arbitration,” except that the arbitrator is not made aware of the positions of the respective parties -- hence use of the term “night” because the arbitrator is essentially left in the “dark.”  In this form of arbitration, the party whose proposal is closest to the amount awarded by the arbitrator receives the full award they requested.  This form of arbitration provides the primary benefits of “baseball arbitration,” while eliminating the risk that the arbitrator might be influenced by knowing the proposals of each of the parties.

Perhaps the most critical issue is whether the arbitration proceeding is binding or non-binding.  In Non-Binding Arbitration, the arbitrator gives an advisory ruling as to how he or she believes the dispute should be resolved.  The ruling is not binding on the parties.  Rather it is intended to provide the parties with an insight as to how a third party is likely to rule if the matter is submitted to a binding forum such as Binding Arbitration or Trial.

Binding Arbitration is the same technical process as Non-Binding Arbitration.  The critical distinction is that the ruling by the arbitrator is binding upon the parties.  It is this critical distinction which makes the rules for a Binding Arbitration extremely important.

Most often parties are obligated to participate in Binding Arbitration because they have entered into an agreement which included a provision that all disputes are to be resolved through this process.  This provision is commonly found in real estate agreements.  The arbitration provisions generally set forth the terms and conditions for the Binding Arbitration.

These terms will include: 1) what qualifications the arbitrators must have; 2) what forms of discovery (such as depositions, written discovery, site inspections, expert review, etc.), if any, are allowed; 3) how quickly the arbitration must take place; 4) what standards and laws an arbitrator must use in conducting the arbitration and evaluating the claims; 5) what rights, if any, the parties have to appeal the decision; and 6) whether the arbitration decision is to be confidential.

These terms are critical as they set forth the ground-rules for the arbitration process and dramatically impact the ultimate result.  It is for this reason that prior to agreeing to Binding Arbitration, whether as part of a contract or as the result of an actual dispute, you should always scrutinize these issues.

In reviewing these terms, the qualifications of the arbitrator are extremely important.  The arbitrator should have sufficient experience and knowledge to properly conduct the arbitration, as well as rule on the subject matter in dispute.  In real estate disputes, it is important that the arbitrator have a background in both the law and real estate.

One of the key objectives of Binding Arbitration is to promote efficient resolution.  Thus, the amount of time and cost for the process should be limited.  At the same time, it is critical that the parties have the right and time to conduct sufficient discovery to properly evaluate and present their respective cases.

Perhaps the most important issues involve the standards and rules to be followed by the arbitrator, along with the parties’ rights to appeal.  The standard and laws used by the arbitrator will have a significant impact on the ultimate rulings.  Thus, it is extremely important that the parties require standards and laws which are similar to those followed by the courts.  Similarly, to avoid the consequences of a terrible arbitrator or decision, the parties should be allowed to appeal a decision as to the question of whether the arbitrator followed the rules of law.  Without these protections in place, the participants in arbitration are taking significant risks that they will face an unjust result through arbitration.

In sum, Binding Arbitration, when properly structured, provides disputants with a dispute resolution forum which promotes, among other things: 1) creative means for resolution; 2) efficiency with respect to time and costs; and 3) the ability to control the confidentiality of the process and decision.  On the other hand, without proper scrutiny, the parties can find themselves stuck with a non-appealable decision which defies logic or justice.  Thus, it is critical that the parties give meaningful attention to all of the ground-rules for arbitration prior to allowing themselves to be bound to participate in Binding Arbitration.

As a last note, all real estate professionals must realize they should never advise their clients with respect to the arbitration provisions in any agreements.  When a party agrees to be bound by the Binding Arbitration provision, that party has waived a legal right.  Thus, if you -- as a real estate broker/agent -- advise that party to do so, you are essentially giving legal advice, which is prohibited.  You can contact the California Association of Realtors or your local boards for brochures which explain the benefits and risks of Binding Arbitration.  Then, when your clients ask, simply give them a copy of the brochure and have them review it to make their own decision regarding Binding Arbitration.

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