Arbitration

Arbitration is a method of alternative dispute resolution in which parties agree to resolve a dispute through a private hearing instead of a court trial. A neutral arbitrator hears evidence, evaluates legal arguments, and issues a decision called an arbitration award. In binding arbitration, that award is generally final and may be confirmed by a court.

What Is Arbitration?

Arbitration is a method of alternative dispute resolution (ADR) in which parties agree to resolve their dispute through a private hearing rather than in court. The matter is presented before a neutral arbitrator, often a retired judge or experienced attorney, who hears evidence, evaluates legal arguments, and issues a decision.

Arbitration is contractual in nature and generally cannot be forced on a party who has not agreed in a contract to resolve disputes by arbitration. In real estate and commercial disputes, that agreement often appears in an arbitration clause contained in a purchase agreement, lease, partnership agreement, construction contract, or settlement agreement.

Similar to a court trial, arbitration may involve:

• Witness testimony;
• Documentary evidence;
• Expert opinions; and
• Legal briefing.

However, arbitration proceedings are typically less formal, private, and conducted outside of the public court system. The tradeoff is that arbitration may also involve limited discovery, arbitrator fees, and much narrower appeal rights than ordinary litigation.

Legal Effect of Arbitration Under California Law

In California, arbitration is governed primarily by the California Arbitration Act, found in Code of Civil Procedure sections 1280–1294.4. The Federal Arbitration Act may also apply when the dispute involves interstate commerce.

When parties agree to binding arbitration:

• The arbitrator’s decision, called an award, is generally final and enforceable;
• Courts have limited authority to overturn the award;
• A party may petition the court to confirm the award; and
• Once confirmed, the award may be enforced like a court judgment.

Judicial review of arbitration awards is extremely narrow. Courts generally will not reweigh evidence or reconsider ordinary legal or factual errors unless a statutory ground exists, such as fraud, corruption, arbitrator misconduct, refusal to hear material evidence, or the arbitrator exceeding the scope of authority.

Because appellate rights are limited, agreeing to arbitration can significantly affect a party’s procedural rights. Parties should understand the arbitration provision before signing a contract that requires arbitration.

Mandatory vs. Voluntary Arbitration

Arbitration may arise in different contexts. The most common form in real estate and commercial disputes is contractual arbitration, where the parties agreed in advance that certain disputes must be arbitrated.

Contractual Arbitration

Contractual or private arbitration is common in real estate purchase agreements, partnership agreements, construction contracts, and commercial contracts. The parties can sometimes choose not to enforce the arbitration clause, but if either party timely seeks to enforce it, the dispute may be moved out of court and into arbitration.

A party seeking to enforce an arbitration clause may file a petition to compel arbitration. If the court finds a valid written arbitration agreement covering the dispute, the court will generally order arbitration unless a recognized exception applies.

Court-Ordered Arbitration

Some civil cases may be referred to non-binding judicial arbitration depending on the court rules and amount in controversy. Non-binding judicial arbitration is different from a private binding arbitration clause because a party may usually reject the result and proceed toward trial.

Binding vs. Non-Binding Arbitration

In California real estate transactions, arbitration clauses are common in residential purchase agreements. Schorr Law has discussed related contract considerations in its article on arbitration and mediation clauses in purchase agreements.

Arbitration in Real Estate Disputes

Arbitration frequently arises in:

• Breach of real estate purchase agreements;
• Seller non-disclosure disputes;
• Construction defect claims;
• Commercial lease disputes;
• Partnership or co-ownership conflicts; and
• Disputes involving settlement agreements or contract enforcement.

Because proceedings are private, arbitration is often preferred in high-value property disputes where confidentiality is important. At the same time, private arbitration can be costly because the parties usually pay for the arbitrator’s time and may also pay administrative fees.

Arbitration vs. Litigation

While arbitration resembles a trial, important differences exist. Arbitration is usually private, less formal, and controlled by the parties’ agreement and applicable arbitration rules. Court litigation is public, governed by formal procedural rules, and usually provides broader discovery and appellate rights.

For a broader comparison, see Schorr Law’s guide on the difference between mediation, arbitration, and litigation.

Common Legal Issues in Arbitration

Arbitration disputes often involve threshold questions about whether the parties must arbitrate and what claims are covered. Common legal issues include:

1. Enforceability of Arbitration Clauses

Parties may dispute whether a contract validly requires arbitration. Issues may include formation, consent, unconscionability, waiver, or whether the signed agreement covers the parties and dispute at issue.

2. Scope of Arbitration

Even when an arbitration agreement exists, the parties may disagree about whether the specific real estate, business, or contract claim falls within the scope of the arbitration clause.

3. Waiver of the Right to Arbitrate

Delay or substantial participation in litigation may create an argument that a party waived the right to arbitrate. Timing matters because a party seeking arbitration usually needs to assert that right early in the dispute.

4. Petition to Compel Arbitration

A party may ask the court to enforce the arbitration provision and stay litigation. If arbitration is ordered, the court case may be paused while the parties proceed before the arbitrator.

5. Confirming or Challenging an Arbitration Award

After an award is issued, a party may petition the court to confirm, correct, or vacate the award. Schorr Law has additional resources on confirming and enforcing an arbitration award and challenging an arbitration award.

California Statutes Governing Arbitration

Arbitration in California is governed by state and federal law, including:

• California Code of Civil Procedure sections 1280–1294.4 — the California Arbitration Act;
• Code of Civil Procedure section 1281.2 — petitions to compel arbitration;
• Code of Civil Procedure section 1285 — petitions to confirm, correct, or vacate an award;
• Code of Civil Procedure section 1286.2 — statutory grounds for vacating an arbitration award; and
• Federal Arbitration Act, 9 U.S.C. sections 1–16 — may apply when interstate commerce is involved.

These statutes establish procedures for compelling arbitration, confirming awards, correcting awards, and seeking to vacate awards on limited statutory grounds.

Real Estate and Financing Terms