Hello everybody.  With the recent soaring cost of litigation, including court fees, attorneys’ fees, court reporter fees, deposition transcript fees, etc., aggrieved parties, and particularly apartment and other small business owners, now wisely endeavor to avoid judicial litigation in favor of alternative dispute resolution proceedings.  Both plaintiffs and defendants frequently find that mediation and/or binding arbitration provide favorable alternatives to expensive and lengthy litigation. 

My column this month discusses the nature of these two alternative proceedings as well as the advantages and disadvantages of each. 

Mediation

Mediation may be thought of as a non-binding settlement conference which only becomes binding upon the execution of a mutual and voluntary agreement of both parties.

The person appointed to conduct the mediation is known as the mediator.  The mediator is usually a retired judge or a very experienced practicing attorney licensed by the California State Bar.  However, any person jointly approved by the parties may act as a mediator, including accountants, building contractors, interior decorators and real estate brokers.

While such non-judges and non-lawyers may serve as mediators, most parties still prefer that the mediator be a judge or seasoned attorney because contract disputes, which comprise the bulk of real estate mediations, involve legal principles.

As relevant to apartment buy/sell agreements, many contracts require the buyer and seller to participate in a mediation prior to filing litigation.  For example, see paragraph 31(A) of the California Association of Realtors 10-page “RIPA” agreement which is often used for the sale and purchase of apartment buildings.  That paragraph requires mediation prior to filing any lawsuit or arbitration proceeding, which is generally advantageous to the seller and buyer because it allows them the opportunity to control their own destiny through settlement with the minimum of legal expense.  Contrast that with a courtroom trial where one’s destiny is at the mercy of 12 unknown, and often indifferent, jurors.

The mediator’s function is to assist the parties in reaching a common resolution that will end the dispute.  Bear in mind, however, that the mediator has no power to compel either side to accept his recommendations for settlement or to accept a proposal of settlement offered by the other party.

By definition, mediation is a process by which settlement is voluntary and neither party can be compelled to settle.  If, however, the parties do agree on mutual terms of resolution, those terms will be documented in writing, typically at the conclusion of the mediation, and signed by each of the two or more adversarial parties before anyone goes home.  That settlement then becomes binding.

Mediations are customarily conducted in a spacious suite of a large office building.  The suite may have 20 or more conference rooms around the perimeter of the floor.  The parties and their respective attorneys are separated so that it is unlikely that any party on one side will come in personal contact with a party on the other side during the pendency of the mediation.  The mediator then walks back and forth between the separated conference rooms so as to confidentially discuss the strengths, weaknesses and opportunities for settlement with each set of parties and their counsel.  Based on those discussions, the mediator attempts to broker a settlement between the sides. 

Mediations typically consume four to six hours, although one mediation I handled in October for an owner who was sued by the two resident managers for $505,000 took 10 non-stop hours to settle.  (From my client’s perspective and the nature of the settlement, that 10 hours was time well spent.)

Thus, mediation is often a worthwhile and cost saving process by which the parties can voluntarily agree to a common resolution through the assistance of a neutral mediator.  Considering the fact that more than 70% of all California based mediations settle, it is a proceeding which both sides should at least consider, and possibly embrace, early on in their dispute.  My own experience has been that seasoned real estate attorneys handling real property controversies for their clients are typically able to settle 90% to 95% of all such mediated disputes. 

Arbitration

The decision whether to submit a contractual claim to arbitration rather than have the matter adjudicated in court is usually made at the time the contract is signed.  Of course, that is almost always well before the dispute arises.  If the parties knew at the time they executed the agreement what the future would hold, it would be an easier decision as to whether to provide for arbitration or litigation in the contract.

In the real world, parties do not know what the dispute might ultimately be.  At best, they can only anticipate.

Some decisions of whether or not to arbitrate are relatively easy to make, such as with a buyer who wants to proceed against a seller to compel a sale after the seller (allegedly) backs out of the deal.  Buyers generally prefer judicial action because litigation offers the opportunity to record a lis pendens (i.e., impose a cloud on the seller’s title).  Arbitration alone does not allow for that procedure (although some contracts empower the buyer to file suit so as to record a lis pendens, but then hold the action in abeyance while the matter is arbitrated).

Another benefit of litigation for buyers is that the duration of the litigation may be one to two years (and even longer given the current state of judicial budget cutbacks), as compared with just three to six months or so for arbitration, from beginning to end.  A lengthy duration affords the buyer the opportunity to evaluate market conditions over a longer period of time than does arbitration.  Thus, if property values increase, the buyer will pursue the purchase of the property.  In the other hand, if values decline, the buyer may dismiss the lawsuit and abandon the purchase.  Having such additional time is tantamount to giving the buyer a one or two year option to purchase the property while observing market conditions. 

On the other hand, a seller may prefer arbitration if he intends to quietly sell the property to someone else while the original buyer is pursuing arbitration without litigation.  Absent a lis pendens having been recorded, the seller can deliver clear title to a new buyer (provided that the new buyer is unaware of the pending claim by the original buyer).  Also, if the seller ends up losing, it is ordinarily best that the seller conveys title to the buyer sooner, rather than later, so that the seller can have early access to the proceeds of the sale for rapid reinvestment.

There are a number of other important factors to consider with arbitration.  For example, recent cases confirm what I have for many years advised AOA members:  A party has no right to appeal an adverse arbitration award even if it is erroneous.  Nor does a court have the power to overturn an arbitration decision even if the award is mistaken and contrary to California law.  Absent fraud or corruption by an arbitrator, or the arbitrator’s refusal to hear the evidence, a court does not have the power to reject an arbitration award even if it is erroneous or inconsistent with law.

Thus, absent extraneous circumstances or the arbitrator’s exclusion of proper evidence, and so long as an arbitrator’s award is within the scope of the matters presented to him, the court has no power to modify, overturn or reverse the arbitrator’s award.

In two recent California Supreme Court cases, for example, the arbitrators failed to award attorney’s fees to the prevailing party even though the contracts provided that the winning party would recover his fees at the conclusion of the arbitration.  In both cases, the high court determined that as long as the arbitrator’s decision was within the scope of the issues presented to him, that decision would not be disturbed by the judiciary.

Those two cases follow a long line of other cases in which our appellate courts and the California Supreme Court have acknowledged that the arbitrator’s decision will be upheld even if the decision is contrary to law.  Consider, for instance, the substantive rule prescribed by the American Arbitration Association says nothing about the arbitrator having to decide the dispute according to law:

“The arbitrator may grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties.” 

  1. Nothing within that rule requires that the arbitrator abide by the law of California, or for that matter, the law of any other forum.  Instead, the arbitrator can make any award which the arbitrator personally feels is just and equitable under the circumstances, so long as it is within the scope of the parties’ contract.  This leads to three amazing revelations:
  2. Just by rendering an award which the arbitrator believes is just and equitable, the award is correct within the context of the arbitration rules.
  3. So long as the arbitrator is acting in good faith (and he does not improperly refuse to hear evidence), his decision can never be wrong insofar as the law is concerned. 

Neither party has the right to appeal an arbitrator’s award even if the award is contrary to law because it is still a correct decision under the arbitration rules.

All of this raises the question of why would anybody want to arbitrate a case if (1) the arbitrator may decide the issues based on his own personal whims, (2) there is no right to appeal the arbitrator’s award, and (3) the arbitrator’s decision may be contrary to law?  The answer to that question is a balancing of the benefits of arbitration, which include the following: 

  1. Most arbitrators nevertheless try to follow the law and base their decisions on their understanding of the law, rather than reach a decision on purely gut level feelings about the equity of the matter.
  2. Usually the arbitration result is fair, or at least no more unfair, than what a judgment at trial might bring.
  3. The amount of attorney’s fees incurred by each party in an arbitration proceeding are typically significantly less than the fees which would be incurred if the case was litigated judicially.  The primary reasons for lower fees is that discovery (e.g., depositions and interrogatories) is often limited, and the case may come before the arbitrator two or three years before it would take to come to trial.  Substantially reduced attorney’s fees are a powerful inducement to the parties to use arbitration.
  4. The amount of punitive damages is likely to be less than what a jury might award.  Bear in mind, however, punitive damages are not allowed if the claim is for breach of a contract, unless the breach is by an insurance company.
  5. Arbitration proceedings are generally kept confidential whereas most aspects of litigation are available to members of the public and the press.
  6. The parties have control over the selection of an arbitrator but almost no control over the selection of a judge and limited control over the selection of a jury. Concluding Comments

    Mediation:  What is important to remember with mediation is that it is an informal process by which settlement cannot be compelled unless both sides agree to the resolution.  The mediator’s function is to assist the parties in reaching a settlement regardless of whether the mediator feels that the resolution is fair.  Because the majority of disputes submitted to mediation settle, both sides should give it serious consideration before filing an expensive and time consuming lawsuit.  Finally, even if litigation is filed, the parties should consider putting the case on hold so that the controversies can be quickly mediated.

    Arbitration:  With arbitration, what is important to remember is that the arbitrator is not required to follow the law and he may make an award within the scope of the parties’ agreement which the arbitrator himself personally feels is just and equitable, even if that result is contrary to established law.  Generally arbitrators examine the law and attempt to apply it in reaching their decisions.  But unlike judges, they are not required to do so.  Hence, an arbitrator may be perceived as having more power than a sitting Superior Court judge.  Judges can be reversed on appeal whereas arbitrators cannot.  No appeal is allowed from an arbitration award absent the arbitrator’s impropriety (such as fraud or bribery) or his exclusion of relevant evidence at the hearing.

    Whether or not the parties to a contract should jointly initial an arbitration clause included in the contract is a question which must be decided on a case-to-case basis.  There may be no right or wrong answer, although often, after the dispute has arisen, a party may wish that he/she had selected a different tribunal to resolve the dispute.  On the other hand, it is almost always wise to include a contractual provision in buy/sell agreements which mandate mediation prior to filing formal litigation.

    NEXT MONTH:  My column in the January 2016 issue of AOA Magazine will discuss and update all the important laws pertaining to resident managers, including the new laws which become effective on January 1.  If you employ an on-site manager, please watch for the article.  

    Dale Alberstone is a prominent litigation and transactional real estate attorney who has specialized in real property law for the past 39 years.  He has been appointed to periodically serve as a judge pro tem of the Los Angeles Superior Court and is a former arbitrator for the American Arbitration Association.  He also testifies as an expert witness for and against other attorneys who have been accused of legal malpractice.

    Mr. Alberstone has been awarded an AV rating from Martindale-Hubbell.  An AV rating reflects an attorney who has reached the heights of professional excellence and is recognized for the highest levels of skill and integrity. You may Google “Dale S. Alberstone” for further background.          

    The foregoing article was authored in November 2015.  It is intended as a general overview of the law and may not apply to the reader’s particular case.  Readers are cautioned to consult an advisor of their own selection with respect to any particular situation.

    Questions of a general nature are warmly invited.  Address correspondence to Dale S. Alberstone, Esq., ALBERSTONE & ALBERSTONE, 1900 Avenue of the Stars, Suite 650, Los Angeles, California 90067.  Phone:  (310) 277-7300.