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What Do You Need to Understand about Mandatory Arbitration Clause in a Real Estate Contract?

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With the boom in real estate, mandatory arbitration to resolve the disputes has become very common in real estate transactions. Arbitration is a widely used method to settle the dispute out of the court. There are certain advantages in this method of conflict resolution that the court does not offer, such as, it is private and resolve the dispute efficiently and timely. Arbitrations are a cheaper alternative to dispute resolution as opposed to the full court trial.

While opting for arbitration to resolve the dispute, the parties must give due attention to the language of the clauses. If the language is vague, many unfavorable consequences can arise.

Legal Disputes in Real Estate Transactions

While signing a real estate contract, there may arise disputes for many reasons. The buyer may think that the seller has kept a few aspects of the sale hidden, and did not provide complete information about the property and its condition. Thus, the buyer may have stepped back after signing the contract.

The Lawsuit in Real Estate Disputes

In a legal dispute, the parties may consider filing a lawsuit. The process of lawsuit involves hiring a real estate lawyer, who seeks the solution that the party wants. When a lawsuit is filed, the party has to pay to serve the other party. After that, discovery is conducted which involves the parties send questions or put forward their demands.

Litigation is very expensive. The parties involved in the disputes have to pay attorney fees. When an expert witness is necessary, the party presenting the expert must pay him or her.  Moreover, because of a number of pending cases, it can take a lot of time until the judge will hear the case. When the hearing of the case is completed, the verdict is made. But, either of the party can appeal the decision which makes the procedure more expensive as well as longer.

Arbitration is an Alternative to Dispute Resolution

Because of a number of disadvantages of litigation, arbitration is considered as an effective alternative to resolving the dispute. This is less expensive and quicker in finding the solution than litigation. In this process, an arbitrator is appointed instead of a judge to make a decision. Another reason why arbitration is preferable is that the parties can choose the arbitrator who has the background and knowledge of real estate transaction. An arbitrator is not a random decision-maker.

Moreover, in the case of binding arbitration, appeals are not made generally and the finality of the decision is greater than litigation.


Apart from the advantages, arbitration has some disadvantages too. In arbitration, the parties have to agree to the decision and hence, they waive their right to a jury trial.

Since the arbitration is supposed to be cheaper and faster, there are certain shortcuts during the process. Such as, discovery can be limited, meaning that the parties will not have a bigger opportunity to gain information and evidence from another party as it would be in litigation.

Apart from it, the right to appeal may also be limited to only a few situations when fraud is involved. In the results of arbitration that you don’t like, you may end up with very limited resources. You can have arguments to appeal a decision in litigation, for instance, you can argue against an improper ruling on an evidentiary issue. On the other hand, in arbitration, these mistakes will not be sufficient to permit a party file an appeal.

Mandatory Arbitration as Part of the Agreement:

Mandatory arbitration becomes a part of the agreement when a party signs it. In case a party refuses to sign the arbitration agreement, despite that the transaction is completed, and a dispute arises, arbitration can be suggested by one of the parties. The court prefers this method because this way, they remove one case on their side.

In this situation, a real estate attorney can guide well about whether signing the arbitration agreement is in your favor or not.

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