Arbitration

At the beginning of a relationship, no one wants to think about the relationship ending. However, if you own a property with a resident manager, there stands at least an even chance that you, or your manager, will at some point end the employment relationship. And while this process often happens without any hitches, it sometimes does not – as evidenced by phone calls I regularly receive from property owners and management companies.

Being involved in a dispute with your employee or former employee is no fun, and the idea of placing the outcome of such a dispute into the hands of a “jury of your peers” is not very appealing. That is why the prevailing wisdom is – and long has been – that if an employee makes a legal claim against you, you are better served defending that claim in private arbitration than in court. The reason for this should be fairly obvious – juries are more likely to get confused or swayed by emotion and other irrelevant factors, and therefore more likely to side with – and issue large damages awards in favor of – the employee on-site manager. 
But having your resident manager disputes heard by an arbitrator, rather than in court, requires planning. Specifically, you need to include an arbitration provision in your resident manager agreement. So, before I get too far ahead of myself, let’s cover some basics – like what is “arbitration” and what is an “arbitration provision”? 

Arbitration

Arbitration is when two parties agree to settle their disputes outside a courtroom in a private forum, typically before a single arbitrator (but sometimes multiple). The arbitrator(s) conducts a “trial” as would a court, ultimately issuing a decision that, with rare exception, is considered final and binding. If necessary, the parties can turn the arbitrator’s decision into a court judgment. The arbitrator typically is a lawyer and often a retired judge (although he does not have to be). An “arbitration provision” is simply the language in a contract that requires the parties to arbitrate any disputes that arise. 

Parenthetically, arbitration should not be (but often is) confused with “mediation,” in which people involved in a dispute voluntarily go before a neutral third party – again, sometimes a retired judge – who tries to help them settle the claims. Unlike arbitration, a mediation has no winner and loser. In fact, unlike an arbitrator, a mediator has no authority. She cannot issue a decision or force a settlement upon the parties, and therefore usually is not much interested in who’s right and who’s wrong; mediators are there only to try to help the parties reach an agreement. Many claims settle through mediation, but those that do not simply continue until resolved through trial or arbitration.

More About Arbitration

The advantages of arbitration over being in court include, as noted above, avoiding the wild unpredictability, irrationality and biases of a jury. This can be especially beneficial for property-owner employers, who risk a double-whammy – they are both employers and rich – at least as compared to the “have-not” woebegone employee who seeks merely to protect his rights. It is true, of course, that arbitrators also have biases and can be irrational. The working assumption, however, is that someone trained in the law will better be able to put aside such biases and judge the facts,

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Arbitration also is supposed to be faster and more streamlined than the court process. If disputes arise during the process, it typically is easier to get an arbitrator’s attention than that of an overworked judge in an overtaxed court system. 

So, given the advantages of arbitration, you might assume I automatically put an arbitration provision in all resident manager contracts I draft — but you would be wrong. Why don’t I? One word – cost. Arbitration is expensive. Most arbitrators belong to a dispute resolution organization (there are several), and these organizations charge fees, including filing fees and case management fees. Then, of course, the arbitrator must be paid. By way of illustration, I recently received an invoice from an arbitrator who charges $880 per hour. He is not the cheapest arbitrator, but he also is by no means the most expensive, either.

And if you assume these costs will be split between you and the employee who is suing, you’d again be wrong. In California, the employer must bear nearly all the arbitration costs, including the arbitrator’s fees. You may or may not think of yourself as an “employer,” but if your property has a resident manager, you are one – which means you would be on the hook for paying the arbitrator. This fact, beyond the cost itself, has several ramifications.

  • First, it means you are susceptible to silly nuisance claims by savvy plaintiff lawyers who know that because you will have to bear the cost of arbitration you will be motivated to settle merely to avoid the cost. 
  • Second, some plaintiff lawyers are skilled at manipulating the system; they create disputes or take hard-line positions during the arbitration process for the sole purpose of forcing you to involve the arbitrator – knowing that your doing so costs you (but not his client) money. This, too, can be a tool to coerce a settlement.

I should also note that arbitration does not always turn out to be as speedy as advertised; good arbitrators often are very busy and sometimes are booked for months out.

Accordingly, there really is no “one size fit all” answer to whether to include an arbitration provision in your resident manager agreement (or any other employment agreement). You must weigh the benefits versus the cost for your specific circumstances. But if you decide to include an arbitration provision, I would encourage you to not craft the language yourself or pull language off the internet. The exact language used can have a significant impact on both the scope and enforceability of your provision.

There is one more complication hovering over this discussion – the proverbial elephant in the room. Effective January 1, 2020, a law went into effect prohibiting California employers from requiring employees, as a condition of employment, to sign an arbitration provision. For now, the courts have put on hold the enforcement of this law – meaning, as of when I am writing this, you still can require on-site managers to sign agreements with arbitration provisions. But this may change in the not-too-distant future, at which time a whole new strategy would be needed.

Takeaway

The takeaway is that if you use a resident manager, you should discuss with a lawyer whether you should – and lawfully can – include an arbitration provision to protect you in the event the employee makes a claim against you.

 

Gary Ganchrow chairs the Litigation Department at the 107-year-old downtown Los Angeles law firm of Parker Milliken Clark O’Hara and Samuelian, served as an Adjunct Professor at the USC School of Law, and is a frequent contributor to AOA Magazine. He regularly advises on, litigates and writes about a variety of employment, property management and business matters, and can be reached at 213-683-6535 and [email protected] This article is for informational purposes only and should not be considered legal advice or establishing an attorney-client relationship.