ADR involving C.A.R. Purchase & Sale Agreements

In the legal world, the abbreviation “ADR” stands for Alternative Dispute Resolution, which means, in a general sense, any method of resolving legal disputes other than inside a courtroom.  Mediation and arbitration are common methods of ADR. Historically, the benefits of ADR, as opposed to litigating in court, were that it was more cost effective and disputes were resolved more quickly.  However, these days some forms of ADR can be just as, if not more, costly and time consuming as moving a dispute through the court system. Therefore, it is important to understand what you agreeing to if you are signing a contract that includes ADR requirements.     

In California, if you are the Buyer or Seller of residential real estate and you use the California Association of Realtors (C.A.R.) form Residential Purchase Agreement and Joint Escrow Instructions (the “RPA”) you are agreeing to participate in ADR in the event that you become involved in a dispute regarding the purchase and sale of the property. Section 26 of the RPA entitled “DISPUTE RESOLUTION” obligates the Buyer and Seller in most circumstances to participate in mediation and/or arbitration.  

In regard to mediation, Section 26.A. requires the parties to mediate any dispute between them under the RPA. For example, if the Buyer and Seller were involved in a dispute regarding the condition of the property or issues with the transfer disclosure statement then they would be obligated to participate in a mediation prior to commencing an arbitration or a court proceeding. The penalty or consequences for not complying with the mediation requirement is that a party subsequently prevailing in the dispute in court or arbitration will be barred from recovering their attorney’s fees.  

The mediation obligation applies to most types of disputes under the RPA but does not apply to (1) judicial or non-judicial foreclosure proceedings; (2) an unlawful detainer action (eviction); (3) the filing or enforcement of a mechanic’s lien; and (4) any matter that is within the jurisdiction of a probate, small claims or bankruptcy court.  

In the event that you do find yourself in mediation, it is important to note that a mediation is a voluntary non-binding process that involves the use of a neutral private mediator, generally an experienced attorney, to assist the parties in negotiating a settlement. The mediator will charge a fee for their services, which is typically billed as a flat rate for a half-day or full-day mediation. Under the RPA the parties agree to share the cost of the mediator equally. During the mediation, the parties will sit in separate rooms and the mediator will go back and forth throughout the day to try to resolve the dispute. The goal of the mediation is to find resolution, but in the event the parties are unable to come to an agreement then the mediation will conclude and the parties will remain free to bring their claims in an arbitration or court proceeding. Evidence of discussions and information shared in mediation is generally barred from being admitted in subsequent court proceedings.

In regard to arbitration, Section 26.B, which must be separately initialed by the parties to be enforceable, requires the parties, following an unsuccessful mediation, to resolve their dispute by binding arbitration. An arbitrator, unlike a mediator, plays the role of a judge and has the authority to make a decision on the parties’ dispute after holding a trial of the dispute.  The rules of arbitration are complex and the proceedings itself can take months or even years. The parties present their case to the arbitrator who ultimately issues an award. Since arbitrations take place outside of the court system, there are several rights that the parties waive when they agree to arbitration under the RPA, mainly the right to appeal any decision of the arbitrator and the right to a jury trial. These can be very important rights to any litigant, therefore, it is important to make an informed decision when initialing the arbitration provision in Section 26.B.  

ADR, when used properly, can be an effective method of resolving a dispute at an early stage before the parties have spent substantial time, money and effort in litigation. In the event that you are involved in ADR under the C.A.R. RPA please do not hesitate to contact the attorneys at Blake Law Firm to assist in the ADR process.