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Should you initial the arbitration clause in a real estate contract?


Two provisions in real estate purchase contracts require the initials of both the buyer and the seller: the arbitration clause and the liquidated damages clause.  Even though buyers and sellers of real property often ask questions related to these two clauses, most real estate brokers refuse to give advice, because they are not allowed to give legal advice and/or they are unfamiliar with legal issues. 


Nevertheless, these two clauses contain significant legal consequences to the parties to the contract, and it is important that both buyers and sellers understand rights and remedies that result from initialing these two clauses.  In this article, we will discuss the advantages and disadvantages of initialing the arbitration clause.


What is Arbitration?


Arbitration is a process for resolving disputes which is an alternative to litigation in court.  Rather than filing a lawsuit and having the matter heard by a judge or jury in court, the buyer and the seller arrange for the services of a private arbitrator. 


The arbitrator is a retired judge or a real estate attorney with at least 5 years of legal experience.  Instead of a trial, arbitration provides an informal hearing which takes place in a conference room with the arbitrator, the buyer, the seller, and their attorneys.  Documents may be submitted and witnesses may testify.  Following a hearing, the arbitrator renders a decision.


Advantages of Arbitration


Generally, resolving a case through arbitration is less costly than proceeding through litigation because the arbitration process is quicker and less complicated than a court proceeding.  According to a recent study by the Federal Mediation and Conciliation Services, the average time from filing to decision was about 15 months in an arbitration case, while a similar case took from 18 months to 36 months in court.


Similar to litigation, however, arbitration still allows for discovery (taking depositions and providing documents), submission of evidence, hearings, and use of attorneys.


Another advantage of arbitration is flexibility and predictability of scheduling.  The arbitrator and parties agree on the schedule for hearings, and the hearings take place as scheduled.  In contrast, the dates of court proceedings are set by the court.  Court proceedings may involve a significant amount of waiting time due to overcrowded court calendars.


Disadvantages of Arbitration


One disadvantage of arbitration is that you waive your right to appeal the arbitrator’s decision.  In court, if a judge makes a mistake, the parties can appeal the decision for review.  In arbitration, the arbitrator’s decision is final and cannot be appealed.  Arbitrator’s decision may only be overturned when there is fraud or “manifest disregard of the law.”  This is a high hurdle because arbitrators need not issue written findings of fact or legal conclusions.


Another disadvantage is that arbitration procedures are more informal and less comprehensive than a trial.  One of the primary ways in which arbitration is less costly, both in terms of time and money, is that it normally has less extensive discovery than traditional litigation.  Discovery is the process by which parties obtain information and evidence in the possession of their opponent or third parties.


For sellers, the fact that arbitration process is less costly can also be a double-edged sword.  Because arbitration is less costly than litigation, initialing the arbitration clause may encourage buyers to initiate arbitration proceedings more often.


Should You Initial the Arbitration Clause?


The final decision on whether or not to initial the arbitration clause depends upon your view of the advantages and disadvantages of arbitration proceedings.  There is no right or wrong answer; you need to consider what will be important to you if a dispute arises and make an informed decision.

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