|
|
Publications
Arbitration in Real Property Transactions: Efficient, Cost Effective, Fair or None of the Above?
Real Estate Newsletter
Contracts involving real estate often provide for arbitration of disputes that may arise between the parties. But, does arbitration truly provide a speedier and less expensive alternative than judicial resolution of disputes, and do the time and cost savings outweigh the risk of an erroneous arbitration decision? The jury is still out on whether arbitration fulfills its promise as a preferable alternative to litigation, particularly in resolving complex real estate disputes. This is the first of two articles that considers the benefits and detriments of arbitration in the real estate context.
In Moncharsh v. Heily & Blaise, 3 Cal.4th 1 (1992), the California Supreme Court stamped its imprimatur on the use of arbitration as a favored alternative to litigation. There, the California Supreme Court ruled that “the existence of an error of law apparent on the face of the award that causes substantial injustice does not provide grounds for judicial review.” Stating that the “[l]egislature has expressed a ‘strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution,’” the court observed that “the … risk to the parties of an arbitrator's erroneous decision represents an acceptable cost” to obtain “the expedience and financial savings that the arbitration process provides – as compared to the judicial process.”
The California courts have largely accepted the benefits of arbitration expressed in Moncharsh without question. As the Supreme Court noted a number of years after Moncharsh, the “[p]urpose of arbitration is to voluntarily resolve private disputes in an expeditious and efficient manner.” (Broughton v. Cigna Health Plans of California, 21 Cal. 4th 1066, 1080 (1999).) The courts of appeal have ruled without further inquiry that “[p]ublic policy favors arbitration as a speedy and inexpensive method of resolving disputes.” (See Alan v. Superior Court, 111 Cal. App. 4th 217, 229 (2003) (citing Victoria v. Superior Court, 40 Cal. 3d 734, 750 (1985)); see also Wools v. Superior Court, 127 Cal. App. 4th 197, 204 (2005)(citing Moncharsh, 3 Cal. 4th at 9 (1992).) In practice, however, arbitration can fall short of this widespread expectation.
Contrary to assertions made in numerous appellate decisions, arbitration is not always faster than litigation in court. According to the Judicial Council of California, in fiscal 2004 – 2005, California courts disposed of general civil cases with amounts in controversy greater than $25,000 with relative efficiency: 64 percent of such cases were disposed of in less than 12 months from filing to disposition; 84 percent were finished in less than 18 months and 92 percent were completed in less than 24 months. The Administrative Office of the U.S. Courts states that in the federal court in 2005, the median time for a civil case to proceed from filing to disposition was 9.5 months. That same year, the median time from filing to trial was 22.5 months. Comparatively, commentator Henry S. Noyes has put “the average time to resolve an arbitration – the time from the date of filing the demand to the date of the award – [at] 16.5 months.”
Arbitration’s promise of economy is also subject to question. To begin with, the initial filing fees tend to be far more modest in courts than with arbitration administrators. In San Francisco Superior Court, for example, the filing fee for an unlimited civil complaint is $335. The additional fee for a case designated as complex is $550. A summary judgment motion fee is $200 and other motions are $40. By contrast, the American Arbitration Association’s initial filing fee for commercial disputes of more than $500,000 starts at $6,000, with an additional case service fee of $2,500. Arbitration fees with the AAA increase as the amount in controversy increases. If the disputed amount exceeds $10 million, the AAA requires a “base fee of $ 12,500 plus .01 percent of the amount of claim above $10 million.”
Administrative fees in arbitration do not typically include the cost of renting a hearing room for the proceedings, the cost of the arbitrator’s travel expenses should he or she be required to attend proceedings in another city or, typically most significant, the cost of the arbitrator’s time, usually paid at a daily or half-daily rate. Such fees can be considerable.
Meanwhile, unless arbitration proceedings resolve more quickly than litigation, attorney’s fees incurred by the parties in an arbitration are likely to be similar to fees for litigation. For companies involved in potentially high-exposure arbitration matters, “[y]ou still have to hire outside counsel so you're not saving a lot of money.” (Leslie A. Gordon, Clause for Alarm, 92 A.B.A.J. 19 (November 2006) ( quoting Paul Adams, associate general counsel at the Gap in San Francisco.) Indeed, if discovery is not available and the matter is substantial, an attorney could spend more time investigating the facts than would be required in a judicial proceeding because the means are unavailable to compel those with relevant information to cooperate in providing it.
Contrary to the Supreme Court’s vision in Moncharsh, arbitration might not always be quick, it might not save money, and it might not be fair, either. Indeed, arbitration has the potential to be downright arbitrary. An arbitrator need not, but may, allow discovery. There are no rules of evidence for the arbitrator to apply, and, as we have already observed, an award need not follow the law or even the parties’ agreement. There is, of course, no right to appeal as such. As a result, arbitration arguably involves a greater degree of unpredictability than is present in judicial resolution of disputes.
It is questionable whether arbitration provides a more efficient and cost effective forum than litigation for resolving disputes generally. In the next segment of this article, we consider arbitration of complex real estate disputes.
This article was first published in The California Real Property Journal, Winter 2008, and is presented here in condensed form.
|
Related People
Related Offices
Related Practices
|