Seller and Buyer Should Never Arbitrate If Mediation Is Unsuccessful

Question: We deposited $50,000 earnest money with the escrow company to buy a Cave Creek home. During the 10-day inspection period we met our home inspector at the home early in the morning. The morning traffic noise was horrific! We told our Realtor to get our $50,000 earnest money back and find us another home. The seller has refused to give us our $50,000 earnest money back. Our Realtor told us that under our AAR Purchase Contract we have to go to mediation. The mediator was very nice, but recommended a 50/50 split of the $50,000 earnest money. We refused. Our Realtor says that under the AAR Purchase Contract we now have to go to American Arbitration Association (“AAA”) arbitration. What is AAA arbitration? Do we have to go to AAA arbitration?

Answer: The AAR Purchase Contract, lines 327-331, provides that, if mediation between the seller and the buyer is unsuccessful, the parties shall go to AAA arbitration. If a seller and buyer can’t settle an earnest money dispute at mediation, however, they should never go to AAA arbitration. The cost of paying AAA fees, and paying the fees of an arbitrator, for a $50,000 earnest money dispute can be as expensive as litigation. For example, in litigation the Judge is free, but an arbitrator is not free, and can charge more than $500/hour. In addition, there are two inherent problems with arbitration. One, arbitrators tend to “split the baby” because they want future business, and they don’t want to make anybody really mad! Two, and a much more important reason not to go to arbitration, there is no appeal! In other words, if you hire a lawyer and spend the time and money to prove at an AAA arbitration hearing that “grass is green,” but the AAA arbitrator rules that “grass is blue,’’ you lose! No appeal.

Note: The Arizona Association of Realtors reviews their forms such as the AAR Purchase Contract every two years or so and should definitely consider removing lines 327-331 of the AAR Purchase Contract because the language is confusing, e.g., the parties shall go to arbitration, but the parties can “opt out” of arbitration, and go to litigation.

Comment: I have done more than 30 jury trials. Although I have lost some jury trials, I have never had an angry client. Why? An eight-person jury generally does the right thing, and the client gets an immediate ruling after seeing all the witnesses testify and the evidence presented.

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