March 27, 2008

ARBITRATION AVOIDANCE -- The Unconscionable Arbitration Provision

There are plenty of reasons to prefer a court trial to an arbitration. In California, arbitrators are not required to follow the law and arbitration awards are final. That means that if the arbitrator fails to follow the law or makes another mistake, the parties do not have right to appeal. Also, arbitration can be surprisingly expensive. Arbitrators charge hundreds of dollars an hour for their time and the arbitration tribunal may charge thousands of dollars for their administrative fee depending on the amount at issue. In addition, since arbitrators are not required to follow the rules of evidence, the hearing may go on longer than anticipated.

In California, real estate agents customarily use the California Association of Realtors (C.A.R.) form of Deposit Receipt and Purchase Agreement for the sale of single family residences. This contract contains a conspicuous arbitration provision in bold type. For the arbitration provision to be effective, it must be initialed by the buyer and seller. But for the reasons discussed above, the parties should think twice before initialing the arbitration provision. If the provision is initialed by both parties, it is likely the parties will be required to arbitrate any dispute between them.

Arbitration provisions are also common in contracts to purchase new tract homes. For example, the developer may include an arbitration provision in a limited warranty that curtails the liability of the developer for construction defects. In the recent opinion in Bruni v. Didion, filed March 12, 2008, the California Court of Appeal held that an arbitration provision "buried" in voluminous, preprinted documents was unenforceable. It was difficult to find the arbitration provision and the parties did not sign or initial it. Moreover, the buyers were not permitted to negotiate any of the documents and understood that the documents were presented on a "take it or leave it" basis. The Court of Appeal held that the arbitration provision was unconscionable because it was part of a contract of adhesion and it violated the buyers' reasonable expectations. To read the Bruni v. Didion opinion, click here.

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