The Castleman Law Firm
A Professional Corporation
Real Estate Contract Arbitration Clauses
© 1999 by Lorin Castleman
California law (Code of Civil Procedure § 1298) requires that all contracts to convey real property, or contemplated to convey real property in the future, including marketing contracts, deposit receipts, real property sales contracts, leases together with options to purchase, and ground leases coupled with improvements, which contain a provision for binding arbitration must clearly label that provision as "ARBITRATION OF DISPUTES."
If a provision for binding arbitration is included in a printed contract, it must be set out in at least 8-point bold type or in contrasting red in at least 8-point type, and if the provision is included in a typed contract, it shall be set out in capital letters.
Immediately before the line or space provided for the parties to indicate their assent or nonassent to the arbitration provision, and immediately following that arbitration provision, the law requires the following language to appear:
"NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES' PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE "ARBITRATION OF DISPUTES' PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY." "WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES' PROVISION TO NEUTRAL ARBITRATION."
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A recent California Court of Appeals case (Marcus & Millichap Real Estate Inv. Brokerage Co. v Hock Inv. Co. (1998) 68 CA4th 83, 80 CR2d 147)) has determined that all parties to the contract must initial the arbitration provision. If the arbitration provision is initialed by only some, but not all, of the parties, the arbitration cannot be enforced, even if the contract itself is signed by all.
If you want to ensure binding arbitration in real estate contracts, then all parties must initial the specific arbitration provision, in addition to signing the contract. But before you agree to arbitration, you need to carefully consider the consequences. Although arbitration can lead to a quicker result, it is not necessarily cheaper than a court trial. For example, arbitrator's and arbitration "administration" fees paid to the American Arbitration Association can be very high. It is also very important to remember that an arbitration result can be very arbitrary, and that because binding arbitration cannot be appealed, the arbitrator has little accountability. You should always discuss the pros and cons of binding arbitration with your legal counsel before signing the agreement.