Various types of contracts, including real estate-related contracts, often include an arbitration provision. Even so, many people don’t know what arbitration means or how it works. In this article, you’ll learn more about arbitration generally, as well as some common types of arbitration seen in the real estate world.

What is Arbitration?

Arbitration is a way of resolving disputes outside of court. Instead of the case being heard by a judge, it’s heard by a neutral third party, called an arbitrator. The arbitrator listens to the facts of the case (as presented by both sides) and considers any relevant laws, rules, contracts, etc. to make a decision. Arbitration can be either non-binding or binding. With non-binding arbitration, the parties can continue to negotiate and/or take another step, such as a lawsuit, to resolve the issue even after arbitration is complete. With binding arbitration, the arbitrator’s decision is final, and the parties have no option to continue negotiating or escalate the case after the arbitration.

How Do I Know If Arbitration Is Required?

If arbitration is required by a contract, the contract will say so. For example, AAR’s Listing Agreements, Buyer Agency Agreement, and Transaction Facilitator Agreements all require binding arbitration between the consumer and licensee. AAR’s Purchase Agreements have an optional binding arbitration agreement between the buyer and seller, but it only applies if both parties agree to it. If you use a Local REALTOR® Association’s forms, or if your company has its own forms, AAR encourages you to read the forms to determine whether they require arbitration and if so, whether it is binding or non-binding arbitration. As you’ll see below, some types of disputes, including some disputes between REALTORS® and some between consumer and REALTOR®, require arbitration through the REALTOR® Association.

REALTOR® Association Arbitration

If a dispute arises between two licensees, depending on the nature of the dispute, the relationship between the licensees, and their membership status with the National Association of REALTORS® (“NAR”), they may be required by the REALTOR® Code of Ethics to participate in arbitration through the Association. For example, a dispute between two REALTOR® principals from different companies that arises out of a real estate-related matter would be subject to mandatory arbitration through the Association. Additionally, a client or customer can choose to invoke REALTOR® Association arbitration against the licensee they’re working with, if that licensee is a REALTOR® member. If this happens, the REALTOR® is required by the Code of Ethics to submit to such arbitration.

If the situation doesn’t require mandatory arbitration, the parties may still be eligible to voluntarily submit to arbitration through the REALTOR® Association. For example, a dispute between two REALTORS® from the same company is not subject to mandatory arbitration through the REALTOR® Association, but the parties may nonetheless consent to this type of arbitration. (For other situations eligible for voluntary REALTOR® Association arbitration, please see NAR’s Code of Ethics and Arbitration Manual.) A major benefit of arbitration through the Association is that the arbitration panel will be knowledgeable about real estate-related issues, since the panel is comprised of REALTORS®.

Private Arbitration

Arbitration can also take place outside of the REALTOR® Association in several different forums. There are many other arbitration forums across the country. If you review your contracts with various services, like streaming platforms, cell phone providers, ride share apps, etc., you will notice that most of these contracts not only require arbitration, but also require it to take place in a certain location and/or using a certain arbitrator.

In the context of the AAR Forms, if arbitration using the REALTOR® Association isn’t utilized, the AAR Forms provide a procedure for arbitration. Specifically, they require that an attorney who is licensed in Alabama be the arbitrator and explain how that person is to be selected. Again, arbitration under the AAR Forms is binding, meaning it is the final decision in the matter. The Alabama Center for Dispute Resolution is a good place to begin the search for an arbitrator. AAR recommends ensuring that the arbitrator you choose is knowledgeable about real estate transactions. You can do this by reviewing their background and experience.

The American Arbitration Association also offers nationwide arbitration services. The benefit of this is a standardized procedure across the country, but it can come at a higher cost than some other arbitration services. Finally, in some areas, the local Bar Association (or a similar entity) may offer arbitration services at a discounted rate for those who are eligible.

Note: This article is for information only and is not intended as legal advice. If you need legal advice, please contact a qualified attorney.