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Mediation Keeps Disputes Out of Courts--but for a Price

A growing number of real estate-related disputes are being settled out of the courts with the help of private mediation and arbitration. Cases that might have been tied up in litigation for years are being hashed out instead through several hundred companies or individuals in the area that specialize in alternative dispute resolution--or ADR.

The San Fernando Valley Assn. of Realtors strongly encourages its members to get buyers and sellers to agree to ADR in their contracts because they are convinced that private resolution saves money and time. The ADR companies are happy with the trend--and why shouldn’t they be? They charge rates of up to $700 an hour. But California trial lawyers are more circumspect about the new trend. They say they don’t oppose private dispute resolution, but they warn about the dangers of shifting too many disputes to a growing number of profit-making dispute resolution companies.

Real estate agents are required by the National Assn. of Realtors, and affiliates such as the Valley’s association, to arbitrate disputes. Starting last year, standard form contracts distributed by the California Assn. of Realtors have included provisions for mediation and/or binding arbitration.

“We encourage our members to include alternative dispute resolution in their contracts,” said James A. Link, executive vice president of the San Fernando Valley Assn. of Realtors. Most arguments related to property have to do with claims by a buyer that the seller failed to disclose some sort of defect to the buyer, Link said.

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“Often the problem isn’t really about non-disclosure though. It’s about lack of understanding or communication. Generally, these are issues resolved better out of court.” Cases are resolved through mediation more than 80% of the time, Link said. That’s better, he argued, than waiting for years to get a civil trial in the Los Angeles area.

Realtors in California are so pleased with ADR that they are pushing legislation in Sacramento that would require all parties involved in real estate disputes to use mediation before pursuing litigation. The state Assembly has approved the mediation bill and the Senate is expected to take up the issue in the near future.

But not everyone is convinced that mandatory mediation is as great as it sounds. “It’s not a black-and-white issue,” said Wayne McClean, a Woodland Hills attorney and president-elect of the California Trial Lawyers Assn. “It’s a very expensive system,” he said.

Many mediators and arbitrators are retired judges who charge between $300 to $700 an hour for their services, McClean said. He recalled one mediation where “the judge was very talkative and taking people’s time. He didn’t accomplish anything but to take up everybody’s time and to earn himself a lot of money.”

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A growing number of real estate agents, lawyers and other people are also presenting themselves as mediators. McClean worries about the qualifications and the neutrality of many private mediators and arbitrators. “Most mediators don’t know what they’re doing,” he said. And, “they may be biased in favor of certain parties that bring them ongoing business.”

And what a business. Hundreds of alternative dispute resolution companies have sprung up in the past few years, many of them in the San Fernando Valley and Ventura County. Judicial Arbitration and Mediation Services--the industry leader--has 12 offices and hears about 1,000 cases a month in California. A full day of mediation by JAMS costs about $1,750.

Because real estate cases make up a large share of JAMS’ caseload, the company has a special real estate division staffed with retired judges who almost exclusively hear real estate-related disputes, reported John J. Welsh, general counsel.

ADR isn’t always appropriate, Welsh acknowledged. Litigation may be better for a class action involving many plaintiffs, where one of the parties wants to set a legal precedent or where a plaintiff expects a jury to award punitive damages. Also, parties generally can’t appeal a judgment in a binding arbitration in the way that a trial judgment can be appealed to a higher court.

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Finding the money for a private mediation or arbitration is another problem. “Private dispute resolution costs money,” admitted retired Superior Court Judge Leon Savitch, a JAMS mediator, arbitrator, and so-called judge pro tem.

Different companies charge differently for their ADR services. Richard J. Rosenthal, who heads the Rosenthal Group, a real estate consulting, education and mediation firm, said his company charges about $100 for each of the parties and another $75 to $250 an hour for a mediator--depending on the experience and qualifications of the mediator.

But the more expensive mediators and arbitrators aren’t necessarily better at their work, said Rosenthal, who is a past president of the California Assn. of Realtors.

A mediator should be someone who is a good listener, Rosenthal said. Many mediated disputes have more to do with hurt feelings than money, he said. That’s why the mediator should also be empathetic and conciliatory. In contrast, the arbitrator should be a person with a sense of fairness and authority, Rosenthal said.

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In certain technical cases, he added, it also helps to have a mediator or arbitrator who is familiar with the issues at hand. That makes it possible to get the session over with more quickly. The best way to find an arbitrator or mediator is by personal recommendation, Rosenthal said. Information about arbitration and mediation is also available through the American Arbitration Assn. at (213) 383-6516.

“The great bulk of disputes arise between buyers and sellers after the close of escrow,” Rosenthal reported. One of his cases involves a buyer who withdrew from the purchase of a property when he paid for an inspection and found the property wasn’t hooked into the local sewer system. The would-be buyer now argues that he should have been informed of the sewer problem before paying for an inspection. He is seeking reimbursement for the cost of the inspection and other miscellaneous expenses.

The buyer threatened to sue the listing agent, who in turn threatened to sue the buyer’s agent. To avoid the hassle of litigation, the parties will first try to work out their disputes in a session conducted by a mediator associated with Rosenthal’s company.

While mediation and arbitration seems to be the growing trend, not all lawyers are comfortable with the cost of ADR and some of the rights given up by parties--such as the right to appeal a binding arbitration. Arbitration and mediation can be very effective ways of settling a legal dispute, said trial lawyer McClean. “But look before you leap.”

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