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The arbitration clause in real estate contracts

To understand the theory behind arbitration and how it potentially relates to your real estate transaction, you will need a little background on the subject.

Suing someone is expensive…and takes a lot of time…and is expensive..and takes a lot of time.  You get the point.  Entering our court system is a serious trip into the legal Twilight Zone, where no one is really sure what is going to happen.  Couple this uncertainty with the large cost and massive time to finally get before a judge (in Riverside, our courts are so crowded with criminal cases that a conservative estimate on how long it would take to get a routine real estate matter to court would be 3-5 years), and you have the atmosphere in which the arbitration process was born.

ARBITRATION is a lower cost and quicker alternative to the court system.  It was designed to reduce both the time and money required for a court trial.  You can still have an attorney, but the process was designed to give every person their “day in court” at a lower cost and quicker pace. Instead of a judge, you have an arbitrator decided upon by both parties (often a retired lawyer or judge), cases are presented, and a ruling is made.  Quick (by relative court standards), neat, and done.  However, be aware that this reduced cost and time period can come with a price…and that is what we will discuss today.

Your real estate transaction.

In the contract I mentioned above, the arbitration clause is found on Page 5, paragraph 17B…and you can immediately tell it is important because it requires additional signatures for both the buyer and seller in addition to the signatures at the bottom of the page.  A note:  anytime you are required to initial a specific paragraph in a contract in addition to the normal places to initial, someone is trying to tell you this is an important part of the contract…so pay attention and ask questions.  If only one party initials this paragraph, then it is not a part of the contractual agreement.   Both parties must initial for this to be valid.  The exception to this may be for the purchase of a foreclosure, as the lender/seller may have different language in their addendum’s…so if you are buying a repo, please be sure to check the addendum’s for something different.  However, in a normal sale with a normal buyer and seller, this paragraph must be initialed by both parties to be binding.

Now…for the guts of the arbitration clause.  Bottom line: there are two major differences between an arbitration and a lawsuit in court, and you need to understand what these differences are.

First, when you agree to arbitrate, you are waiving your right to a jury trial, and agreeing to have your case heard by an arbitrator…not a judge, not a jury, but an arbitrator.  In most cases, when both parties are ready for “battle”, each party is presented with a list of potential arbitrators, and each has the right to refuse a particular person.  In essence, you can decline who you don’t want, but cannot pick whom you do want.  Some cases vary, but usually this is how the arbitrator is decided.

Secondly, in picking arbitration, you are also waiving your right to some discovery issues, and you are also waiving YOUR RIGHT TO APPEAL THE ARBITRATORS DECISION.  This last one is a biggie (hence the caps) because it means that even if your arbitrator makes a mistake in the law, goofs up a ruling, etc, you have no appeal of the decision.  Once the decision is made, it is over (there are rare exceptions, but no too many) and you are left with the ruling…period. There is no going back.

Is this fair?  As many of my attorney friends will tell me off the record, the law is not necessarily about being fair!  Remember, the arbitration process is all about saving time and money…so the old saying “you get what you pay for” is apropos here.  Arbitration is definitely faster and less expensive than a court trial, but the courts take the position that if you want faster and “cheaper” then that comes with some side issues.  You picked your poison here.  Your choice was more time, more money, and potentially a more thorough examination of your case, or less time, less money, and perhaps a “slimmed down” version of your case that is over when the decision is made.

What is better?  That is not ours to say.  With reference to this paragraph in your purchase contract, all we as real estate professionals are trying to do is make sure that whatever decision you make is an informed one.  After that, it is up to you.  As a note, even if you choose to not initial this provision of the contract (thereby not making “arbitration” a part of your transaction), if the parties end-up wanting to sue one another later, trust me…you will be offered the chance arbitrate.  Most courts really push arbitration as a way to clear a really clogged system…so you can always potentially agree to do this later.

[one/three].The seat, or legal place, of arbitration shall be [City and/or Country].The language to be used in the arbitral proceedings shall be [    ].The governing law of the contract shall be the substantive law of [    ].” These pertains to international commercial agreement but can be made to suit the local circumstances and they have been done to such as seen in most Tanzania Real estate contracts.

The clause, as you can see above, is a contract in its own is a contract so to speak, for the parties to a contract agree to arbitrate. Even if the other parts of the contract may be in contention, this “arbitration” part of the contract will stand ground in court. It’s that “mighty”.

You need to be careful on choosing how you resolve your dispute, most people have a clause for arbitration and it only seems “fancy” that is there but do not know the implication of it. What people don’t know is that once the arbitrator(s) have been picked and the proceedings have been finalized, the award that is given is final. There is no appeal to the award that is given for the parties have agreed to subject themselves to the “finality playground” of arbitration. It is the law that, when the award if filled at the High Court for execution, it will be enforceable as if it was a decree of the Court. You can only appeal in relation to the proceedings for example as stipulated under the Arbitration Act, where an arbitrator or umpire has misconduct himself or an arbitration or award has been improperly procured and the award will be set aside by the High Court.

What you should know

 When opting for arbitration, even though it’s the best way to solve dispute, you should be keen to remember that one disadvantage of arbitration is the lack of any right to appeal. The arbitration process lacks a procedural safeguard against erroneous determinations. In court, if a judge makes a mistake, the parties can appeal the decision to the Court of Appeal for review. In arbitration, the arbitrator’s decision is final and cannot be appealed.

But (this is a big BUT) remember that finality is a great practical benefit. Remember also: most courtroom fact-finding errors rarely rise to the level of reversible unreasonableness; judicial errors are not reversed unless prejudicial; appeals are expensive; most appeals do not succeed; and, successful appeals too often result in the dubious “new trial” reward of having to repeat the same expensive process. Advocates who would sacrifice the benefits of arbitration on the holy grail of appellate review fail to acknowledge a more pragmatic explanation of an adverse award: if they could not persuade an astute arbitrator (or, in large cases, a panel of three able people), perhaps they did not deserve to win. In sum, the right to appeal is vastly overrated.

Hence, you need to consider what will be important to you if a dispute arises. For most of us,well, when we sing a contract ,we only look at the money we will earn or the house we will build (“happy mood”), you forget the  unknown “sad mood” side of the transaction. That it might go wrong somewhere before the “final destination”. The final decision on whether or not to initial an arbitration provision by having a clause in your real estate contract depends upon your view of the advantages and disadvantages of arbitration. There is no “right” answer.

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