Arbitration Clause Removed From California Listing Agreement

Arbitration Clause Removed From California Listing Agreement

[This article was written and published by Bob Hunt on May 22, 2017, and he authorized me to use and share it].

A few weeks from now the California Association of REALTORS® (CAR) will release the semi-annual update to its library of Standard Forms. CAR currently publishes more than 200 standard forms (e.g. purchase contracts, listing agreements, and disclosures). Not only is it virtually inevitable that changes and modifications will continually be needed, but also new laws and court decisions provide the need for yet more new forms.

Among those to be released this spring are nine different listing agreements (e.g. residential, commercial, vacant land) all of which have been changed in the same way. In each, an optional arbitration agreement between the seller and listing office has been removed and replaced by “language advising of the need to use separate arbitration agreement if both parties consent.”

Why would CAR remove the optional arbitration agreement? The official explanation is this: “The arbitration clause was removed from the listing agreements because some attorneys for sellers were using it to draw listing agents into contract disputes between buyers and sellers.”

To understand this explanation fully, we need to realize an important difference between the optional arbitration agreements in the CAR listing agreements and the ones in the CAR purchase contracts. The difference is this: the arbitration agreements in the purchase contracts are between the principals — buyer(s) and seller(s) — whereas the agreement in the listing agreement is between the agent and the principal — the listing office and the seller.

If both principals (buyer and seller) have signed the optional arbitration agreement in the purchase contract, then, if a dispute arises between them and should mediation fail, they will be required to submit to arbitration. Going to court is not an option. Not being a party to the contract, neither broker would be required to join that arbitration proceeding; though either could if they so choose.

One can see, then, why an attorney might want to use the listing arbitration agreement “to draw listing agents into contract disputes between buyers and sellers.”

There is, however, another reason that many listing brokers will be pleased to see the optional arbitration agreement removed from the listing agreement.

When arbitration agreements were first introduced into the various CAR contracts, many — probably most — California brokers welcomed that as one of the greatest cultural improvements since the catcher’s mitt, or sliced bread. They welcomed the notion of having disputes settled outside of the judicial process with all of its time-consuming frustrations and expenses.

But, over the years, brokers came to discover how badly they can fare in arbitration which can often be, well, arbitrary. Arbitrators do not have to follow the law. They can choose an outcome that they may perceive to be fair, even if it is not the one the law would provide. Many brokers have reached the conclusion that they are more likely to obtain a just decision in a court of law rather than in an arbitration. Moreover, an arbitrator’s decision is not subject to appeal, except in extreme cases of bias.

In short, over the years, many brokers have come to the conclusion that, should they become involved in a dispute with a principal, they are far more likely to get a fair shake in court than at the hands of an arbitrator.

But, some might ask, why remove the arbitration clause from the listing agreement? After all, it’s optional. Yes, it is optional; but, remember, the overwhelming majority of listing agreements are negotiated between sellers and individual agents who are representatives of the broker. Few agents have the faintest idea where their broker stands on arbitration (and shame on the broker for that). Fewer still, even if they did know the broker doesn’t want to commit to arbitration, would be comfortable telling their client that the broker doesn’t want to sign the arbitration clause. Better to take it out, and leave that conversation for another day. Or no day at all.

[Bob Hunt is a smart guy, good writer and a friend.  He’s a real estate broker and Realtor® who serves as a director of the California Association of Realtors®. Bob is also the author of his valuable book “Real Estate the Ethical Way”.] 

About Harrison K. Long

Real estate and business attorney. CA State Bar Association attorney member #69137. Professional real estate representative, REALTOR®, GRI, Real estate broker, CALBRE #01410855. Broker associate, HomeSmart Evergreen Realty, Irvine, CA. Providing real estate legal information and services for property owners, estate trustees, executors and administrators, fiduciaries, bankers, investor group managers, with their best decisions about homes and real estate. Orange County REALTORs® (member and prior service on its board of directors). "Realtor of the Year 2016" award by the Orange County REALTORs®. California Association of REALTORs® (now serving on its board of directors). National Association of REALTORs® member. Contact by cell or or text at 949-701-2515.
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