Standard real estate forms sometimes contain private dispute resolution clauses. Such clauses dictate the process to be used if there is a dispute over the transaction. Common forms of private dispute resolution are mediation and arbitration. Mediation is assisted negotiation with the mediator acting as a facilitator for the parties’ attempt to resolve their dispute by mutual agreement. In arbitration, the arbitrator is the decision maker and decides the resolution of the dispute after a hearing in which each party presents their evidence and arguments.
Dispute resolution clauses that dictate private arbitration limit the parties’ access to civil courts, including the ability to appeal adverse decisions. As a result, arbitration clauses in real estate contracts are somewhat controversial. In Oregon, the most commonly used real estate sale agreement form contains the following all-caps warning:
“BY CONSENTING TO THIS PROVISION SELLER AND BUYER ARE AGREEING THAT DISPUTES ARISING UNDER THIS AGREEMENT SHALL BE HEARD AND DECIDED BY ONE OR MORE NEUTRAL ARBITRATORS AND SELLER AND BUYER ARE GIVING UP THEIR RIGHT TO HAVE THE MATTER TRIED BY A JUDGE OR JURY. THE RIGHT TO APPEAL AN ARBITRATION DECISION IS LIMITED UNDER OREGON LAW.”
In actuality, there is no right to appeal an “arbitration decision” at all if what that is understood to mean is an appeal on the merits of the decision itself. An arbitrator’s decision, whether right or wrong, cannot be appealed. Instead, Oregon law allows challenges to enforcement of an arbitration decision only if the process used was patently unfair or the arbitrator clearly biased. Such a procedural challenge is not an “appeal” of the “decision” in the ordinary sense of these words.
Although Oregon law favors the use of private dispute resolution, courts do sometimes refuse to enforce arbitration clauses in form contracts. They do so when they believe the clause is “unconscionable” because of “substantial disparity in bargaining power, combined with terms that are unreasonably favorable to the party with the greater power.” Generally, arbitration clauses in standard real estate contracts survive judicial scrutiny. There are some caveats.
At least one Oregon court has struck the arbitration clause from a standard form contract where the form was used by a builder. Because the form was provided by the builder, not an agent in an existing home transaction, the disparity between the buyer and the builder was a major factor. Also taken into consideration was the fact that the consequences of the clause were not explained to the buyer. This case, however, was decided prior to the all-cap warning being included in the commonly used Oregon forms.
Whether the dispute resolution clauses found in common Oregon real estate forms are subject to challenge today is an open question. Certainly, the warnings now found in the form itself are helpful. Agents should, at a minimum, point out to clients the existence of the dispute resolution clauses in the contract. Although an agent cannot practice law by explaining the legal consequences of the clauses, they can point out to the client the functional provisions of the clause.
For instance, common Oregon forms require any dispute within the jurisdiction of small claims courts to be brought there exclusively. Small claims jurisdiction in Oregon is a dispute involving a claim for $7500 or less. Dispute resolution clauses in Oregon forms often require mediation between buyer and seller if there is a dispute that is not within small claims jurisdiction. Recently, the form most in use by REALTORS® has adopted separate provisions for disputes between buyer and seller and those involving real estate licensees or firms. These separate licensee or firm provisions, unlike the buyer/seller provisions, do not include mandatory mediation and do not allow the client attorney fees if they prevail in the dispute.
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