A Note From The Legal Helpdesk: Arbitration for the REALTOR®
February 6, 2018
For the past three weeks the Alabama REALTORS® have explored alternate methods of dispute resolution. Past articles on interpleader and mediation are on the website. Last week in our fact pattern, we sat down, discussed our issues in good faith at mediation but simply could not reach an agreement. This week, we agree to select an arbitrator and be bound by his or her judgment. Arbitration is pervasive in business and commerce throughout the United States. Sales contracts, lease agreements, and even receipts commonly contain arbitration provisions. This article delves into the world of arbitration, including its presence in the REALTOR® Code of Ethics.
Arbitration, much like mediation, is a dispute resolution option in lieu of litigation in court. Similar to mediation, parties agree, whether before or after the dispute arises, to select an arbitrator, or arbitration panel, to hear the dispute so that the parties can reach a resolution without involving the court system. Like in mediation, the discussions and material provided in arbitration is confidential and further stipulations can be agreed upon to protect proprietary and other sensitive information.
Large differences between arbitration and mediation do exist. First, the arbitrator or arbitration panel hears the differing sides and decides the outcome, rather than the disputants reaching an agreement. Second, and most importantly, arbitration is binding on the disputing parties. In agreeing to arbitrate, the parties agree to be bound by the arbitrator’s decision. However, this brings us to the third difference. Since it is binding, arbitration is governed, and sometimes limited, by both federal and state laws, especially those agreed upon before a dispute arises (pre-dispute arbitration agreements).
Arbitration has many benefits over litigation and some over mediation as well. These benefits include:
- Tends to be less costly and less time-consuming than litigation
- Less formal and technical than a courtroom
- Confidential proceedings instead of trial in open court
- Binding nature prevents parties from backing out
- Parties select the arbitrator instead of being assigned to a judge, ensuring the arbitrator has some experience in the field
Arbitration in the Code of Ethics
The NAR Code of Ethics, Article 17 governs arbitration for REALTORS®. Below are some highlights on arbitration under the Code of Ethics. For additional information, go to the NAR website here. Keep in mind that pre-dispute arbitration agreements, like those in the REALTOR® Code of Ethics, are governed, and sometimes limited, by federal and state law, discussed in the Federal and State Laws section below.
- Mandatory arbitration is required between certain parties, including:
- Between REALTOR® principals in different firms
- Between REALTOR® principals and a nonmember broker who is a participant in the Board’s MLS and who wants to arbitrate
- Between REALTORS® and REALTOR-ASSOCIATE®s in different firms
- Business disputes between REALTOR® principals with a client who wants to arbitrate
- Voluntary arbitration is available as well (both parties agree in writing to the arbitration)
- REALTORS® and REALTOR-ASSOCIATE®s who are or were with the same firm
- REALTOR® principals may use a Board’s arbitration facilities in a real estate dispute with a nonmember broker
- Process – Mandatory arbitration may occur after a Grievance Committee meeting on a complaint or upon submission of an arbitration request by appropriate parties. Voluntary arbitration may occur under similar situations and simply requires the parties to agree in writing to arbitration.
- Refusal to Arbitrate – If a REALTOR® refuses to arbitrate a dispute that must be arbitrated, the Board may sanction the REALTOR®. It should be noted that one of the seminal cases on arbitration in Alabama struck down a sanction of expulsion by a local board of REALTORS® where the member refused to comply with the mandatory arbitration. See Wells v. Mobile County Bd. of Realtors, Inc., 387 So. 2d 140 (Ala. 1980). Whether this case applies today is up for debate, but more recent Alabama Supreme Court and U.S. Supreme Court decisions suggest that it would not apply. Whether it applies or not, other sanctions are available to a Board.
- Failure to Abide - If a REALTOR® refuses to abide by an arbitration award, judicial enforcement rather than Board enforcement may be pursued by the aggrieved party.
- State Arbitration – A Local Board can request that the State Association hear an arbitration if the Local Board cannot impanel an impartial panel.
- Burden and Standard of Proof – For an arbitration panel to issue an award, the complainant bears the burden of proving his or her case by a preponderance of the evidence.
Federal and State Laws
Federal law encourages arbitration, including arbitration provisions in a pre-dispute agreement, and has done so since at least 1925 when Congress passed the Federal Arbitration Act (FAA). The FAA applies in all transactions involved in interstate commerce and maritime law. Since the U.S. Supreme Court interprets interstate commerce quite broadly, the FAA applies to most contracts or agreements. Thus, even where state law discourages pre-dispute arbitration agreements, federal law may apply, preempting the state law and allowing these agreements.
Pre-Dispute Arbitration Agreements in Alabama
AAR’s Bylaws concur with the arbitration provisions in NAR’s Code of Ethics but also state that “[a]rbitration . . .shall be conducted in a manner consistent with the laws of the State of Alabama.” AAR Bylaws, Art. XII. In Alabama, the laws generally support arbitration, with one exception. Alabama law holds void any pre-dispute arbitration agreements, unless the agreement was entered into voluntarily and the transaction involves interstate commerce. See Old Republic Ins. v. Lanier, 644 So. 2d 1258 (Ala. 1994); Ala. Code § 8-1-41(3). As mentioned above, interstate commerce is interpreted broadly, so many, if not most, pre-dispute arbitration agreements are valid in Alabama.
This leaves unanswered whether a pre-dispute arbitration provision agreed to by members of a trade association, like that in NAR’s Code of Ethics, is considered interstate commerce or void under Alabama law. Neither Alabama nor Federal courts have addressed the issue. However, the broad interpretation of interstate commerce heavily suggests that an arbitration provision like that in the REALTOR® Code of Ethics would be enforced under the FAA. See Allied-Bruce Terminix Cos. v. Dobson, 115 S. Ct. 834 (1995).
Post-Dispute Arbitration in Alabama
For your information, Alabama expressly encourages arbitration where a pre-dispute agreement is not present. This usually occurs when parties voluntarily agree to submit an existing dispute to arbitration. Recently, courts are even referring parties already in litigation to arbitration in an attempt to clear back-logged court dockets.
Alabama has two avenues to pursue arbitration – by statute or by common law (laws established through the courts). The main difference between the two is that the statutory route has some additional, written obligations with which the parties must comply. Basically, the statutory route is more formal. You can view the code sections applicable to arbitration here - § 6-6-1 through § 6-6-16.
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