Mediation and Arbitration in Real Estate and Construction Defect Litigation

Many real estate purchase and sale agreements contain mediation and arbitration provisions. How these provisions work in real estate and construction defect litigation is an important facet of the litigation process, one that is important to understand and use to you benefit. 

Mediation in Real Estate and Construction Defect Litigation

Most if not all mediation provisions that are set out in real estate purchase agreements require mediation as a mandatory prerequisite before filing suit. These provisions often contain a penalty against the party who files suit before attempting mediation in the form of a forfeiture of attorney fees at the end of the case, should the matter go to arbitration or trial. Therefore, it is vital to comply with the mandatory mediation provisions before one files suit or commences arbitration in order to avoid this penalty. Notably, many mediation provisions provide exceptions where the party filing the lawsuit is required to file a lawsuit in order to avoid a pending statute of limitations deadline. One must review the terms of the mediation provision carefully, be aware of any upcoming statute of limitations issues and, of course, comply with the mediation provisions as stated. Note also that most mediation provisions require that the party pursuing the mediation before filing an action “attempt” to mediate. This means that the party must attempt to mediate by notifying the other party of the dispute and the parties’ demand that they mediate. In determining whether the party acted in good faith in attempting mediation, and thus in making a determination as to whether that party is entitled to attorney fees, courts will most likely look at the manner of notification, the number of times the notice was given, the response and the relative reasonableness, good faith and persistence in pursuing mediation, even where the other party seems reluctant. Carefully documenting all efforts to get the other side to mediate is important. 

In many disputes, mediating at the outset, before an action is filed, poses considerable challenges. Namely, that the parties may not be entirely familiar with the nature of the dispute, sufficient to enable a productive mediation. In complex real estate matters, it is still vital to share information and utilize the mediation to the best extent possible. The matter may not be resolved at the first pre-filing mediation, but once the case is filed, the groundwork can certainly be laid for a final and conclusive mediation somewhere down the road. 

construction defect and real estate litigation mediation

In construction defect litigation, it is almost impossible to reach a settlement in an early mediation. Typically, all of the contractors, subcontractors, owner, developers and other actors are not present at an early mediation, many may not even be known, or their roles. Also, at an early date, the defects and damages are usually not fully known and the owner/claimant may not even have a settlement demand or completed, comprehensive cost of repair. In these cases, it is prudent to request that the seller/other party to the purchase agreement agree to waive or postpone the mediation until such time as the parties are joined, available and ready to participate, with their insurance carriers and policies in play, and the owner/claimant has a completed and comprehensive cost of repair, knowledge of the defects and a ready settlement demand. Otherwise, the mediation will just be a rather expensive and unproductive exercise to fulfill the mediation requirement. 

Arbitration in Real Estate and Construction Defect Litigation

Arbitration provisions in real estate purchase agreements as they apply to real estate litigation involving the purchase are relatively straightforward. When initialed and agreed to by the parties, they’re then bound to submit a dispute to arbitration, and if one or the other files suit, the parties can be compelled to arbitrate by filing a petition to compel arbitration in the court where the lawsuit was filed, or by simply filing a petition to compel arbitration against a party who refuses to comply.

The same arbitration provisions in real estate purchase agreements are not so straightforward when involving construction defects to the property that is the subject of a real estate purchase agreement which contains an arbitration provision that the parties have initialed and agreed to. This is because construction defect litigation matters almost always will involve persons and entities who are not parties to the real estate purchase agreement, such as contractors, subcontractors, developers and others, and who have not agreed to arbitration and who are not bound to arbitrate. Further, in these situations there are typically cross-claims for indemnity by these persons and entities which, again, are not subject to arbitration. This is all further complicated by the fact that the purchaser/owner bringing the construction defect claim has a constitutional (US and California) right to a jury trial against all persons and entities, except the entities who have signed the purchase agreement and have signed and initialed the arbitration provision.

construction defect and real estate litigation arbitration

In these construction defect and multi-party situations, arbitration is simply not suitable, nor will a court be likely to order it, because a court is not inclined to order parties into arbitration who have not agreed, nor compel them to pay, nor is a court inclined to force cross-claims for indemnity into arbitration, and courts are also not likely to split the action, with the parties who agreed to arbitration proceeding with their arbitration, and staying the matter until the conclusion, then proceeding with the action in court because this is highly inefficient, would potentially require the duplication of matters and testimony in arbitration and at trial, would be unnecessarily expensive and ultimately could result in inconsistent results. Therefore, in multi-party actions, including construction defect and complex multi-party real estate litigation, the matter best proceeds in court and not arbitration. 

Undoubtedly, every situation is unique, but while mediation provisions need to be complied with, or waived by agreement, arbitration provisions in multi-party and complex construction defect cases are not necessarily binding and there are distinct advantages to proceeding in court. 
For a case evaluation and consultation call Timothy Norton today at 310.706.4134, or write to: timothy@constructiondefect.com to set up an appointment. Norton & Associates is your Los Angeles construction defect and real estate litigation solution with 34 years experience, $190m in jury verdicts and $70m in punitive damages awards. Protect your investment.

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