Contractual Arbitration Provisions Under California Law

If you have ever purchased or sold a home, or seen a medical doctor, no doubt you were presented with a proposed written agreement, possibly on a preprinted form, that contained an arbitration provision. The typical arbitration provision requires any dispute arising under the subject agreement to be arbitrated, as opposed to having it decided by a jury. Some of these agreements also contain provisions that require the parties to mediate their disputes (essentially have a settlement conference) prior to arbitrating it. The rationale behind arbitration provisions is that it’s quicker, and in many cases, more cost effective than going to court.

Although one of the rationales for an arbitration provision is to keep costs down, arbitrators can be very expensive and generally charge by the hour for ALL work performed. In addition to presiding over the hearing, arbitrators will often charge for reviewing materials and for the time it takes them to draft their ruling. In some cases, the out of pocket costs can be thousands to tens of thousands of dollars. Whereas, in civil court, for the one time cost of a filing fee or answer fee, the parties have an arbitrator (the judge) for the duration of the dispute. Accordingly, when dealing with a lawyer or a medical office in the context of an arbitration provision on one of their forms, ask who pays the initial costs of the arbitration and whether or not the prevailing party can be reimbursed by the losing side.

In the context of real estate transactions in California, there are several kinds of form contracts that I have come across in my practice. The difference between one of these contracts and the ones you might get if you transact with a law firm is that the person on the other side may be just as uninformed about the arbitration provision as you are. Although you stand little chance of convincing a law firm or a medical office into scratching out the arbitration provision in their contracts, when you deal with another lay person in a real estate transaction, undertake to determine whether or not arbitration makes sense in the context of the transaction and consider the possibility with the other side of the transaction of crossing out the provision. Depending on the specifics of the transaction, a court of law might actually be cheaper than an arbitration and you will preserve your right to have your matter decided by a jury.