Before You Sign: Understanding Subtleties in Your Arbitration Provision

By Jeffrey Brown, Pircher Nichols & Meeks

Though real estate executives focus significant time and resources negotiating financial and other substantive terms of their agreements, boilerplate provisions are often given too little attention. One such provision relates to the method for resolving disputes between the parties. Far from simply cutting and pasting a provision from your last deal, serious consideration should be given to this important part of your agreement.

Though real estate executives focus significant time and resources negotiating financial and other substantive terms of their agreements, boilerplate provisions are often given too little attention. One such provision relates to the method for resolving disputes between the parties. Far from simply cutting and pasting a provision from your last deal, serious consideration should be given to this important part of your agreement.

One common alternative dispute resolution mechanism that might lead to handling disputes more efficiently than ordinary litigation (if that is a goal) is arbitration. In addition to potentially bringing the dispute to resolution faster and with less cost than litigation, arbitration provides additional potential benefits. In California, for example, the highest court has held that parties cannot waive trial by jury. Nonetheless, arbitration allows the parties to do just that; a mandatory arbitration provision indirectly waives trial by jury because the parties agree that an arbitrator or panel of arbitrators, as opposed to a jury, decides all of the issues.

Further, if your potential dispute is best reviewed by industry experts rather than judges, a well crafted arbitration provision can help. For example, you can describe the minimum requirements for your arbitrator and the selection process that the parties must utilize. Of course, deciding where the arbitration will occur is something that you do not want to overlook if for no reason other than convenience, if not to avoid being on someone else’s hometown turf.

Arbitration is also helpful for parties who want to try to keep their disputes out of the public eye. It is much easier to arrange for a confidential arbitration proceeding than it is to do the same for litigation in a public court in which the burden is on the parties to convince a judge why their dispute should be kept secret.

Probably the most expensive and time-consuming aspect of litigation is discovery, whether through depositions or written discovery, such as interrogatories or document requests . Arbitration provisions can be used to limit discovery as long as a reviewing court agrees that the process is fair. We ask our clients to take the time to consider whether they would like to limit discovery to a set number of depositions, each limited to a maximum amount of time (e.g., no more than 6 hours per deposition) and a set number of document requests, with additional discovery allowed only if the arbitrator finds that there is good cause.

While it may seem that the interests of the parties in finalizing these aspects should be aligned, in fact, the parties’ different interests are why we do not treat these provisions as boilerplate If a jury may be more beneficial to a potential claim or defense that you would likely raise in a dispute, you may want to avoid arbitration and choose litigation. Likewise, if the other party to the deal is the one who will have more information, responsibility and activity in respect of the subject deal, limiting discovery may not be the right choice for you.

We try to think these provisions through while the parties are still negotiating the deal, as it can be difficult to convince the other party about the dispute procedures which should be followed once you are locked into combat.