ARBITRATION AND THE PROBLEM OF DUAL FORUMS

Due to several recent inquiries on this topic, we are reprinting this article which was published earlier.
As all licensees know, by virtue of arbitration clauses appearing in many listing agreements, many real estate disputes are required to be resolved by binding arbitration rather than in superior court.

We have previously written about the advantages of arbitration for disputes between real estate agents, their clients, and other parties. One key disadvantage, however, that can arise under Arizona law is that sometimes it is impossible to join in the arbitration proceedings parties who did not sign the contract and who would otherwise be declared “indispensable” to the action. This creates the possibility of inconsistent results from the pursuit of these parties in separate legal proceedings and can require the litigation of the same issues twice in two separate forums.

For example, we have a situation in which our client is a party to a listing agreement which requires the parties to arbitrate their disputes. A separate “Commission Agreement” relating to the same property was executed by a third party purchaser and in that agreement, which has no arbitration clause, the broker was also promised a commission for the same transaction. The seller of the property takes the position that the third party purchasers are responsible for payment of the commission and the third party purchasers are taking the position that the signatory to the listing agreement is solely responsible to pay the commission. Unfortunately, there is no way to force the parties to litigate this issue simultaneously in the same forum, since one is required to arbitrate the dispute and the other is not. While it is clear that at least one of the parties owes a commission, it is possible that an arbitrator will make a decision which is inconsistent with that of the superior court judge and as a result, nobody will have to pay.

In another case, a real estate broker is being sued by a seller for professional negligence and that issue is being arbitrated pursuant to the arbitration provision in the listing agreement. Simultaneously, in superior court, the seller is suing his former law firm for negligence in the same transaction and that claim is not subject to arbitration. Once again, under Arizona law, as it currently stands, there is no mechanism to force the two parties to join in a single litigation.

In both of the circumstances outlined above, it is quite possible that a completely inconsistent result will be reached in the two different forums in which these issues are being litigated. It is also possible that parties to the arbitration may also be drawn into the superior court litigation. For instance, they may be named as third-party defendants. Thus, the licensee could end up litigating the same issues twice.

This problem has been addressed in some other jurisdictions. For example, California does have specific statutory provisions for handling the situation outlined above, which Arizona might consider adopting. CCP §1281.2 grants the superior court authority to decide these issues and provides various options to remedy this situation, stating:

If the court determines that a party to the arbitration is also a party to litigation in a pending court action or special proceeding with a Third-Party as set forth under subdivision (c) herein, the court (1) may refuse to enforce the arbitration agreement and may order intervention or joinder of all parties in a single action nor special proceeding; (2) may order intervention or joinder as to all or only certain issues; (3) may order arbitration among the parties who have agreed to arbitration and stay the pending court action or special proceeding pending the outcome of the arbitration proceeding; or (4) may stay arbitration pending the outcome of the court action or special proceeding.

In drafting arbitration provisions, Arizona practitioners may chose to adopt a California choice of laws provision governing arbitration to take advantage of this flexible rule, or, a drafter may set forth such provisions in detail when writing the arbitration provision. A better solution would be for the Arizona Legislature to address this problem by granting the courts discretion to deal with this issue.

Conclusion: While arbitration provisions can provide a comparatively quick method to handle disputes arising from contracts, they can also result in multiple lawsuits dealing with the same issues which, in turn, can lead to inconsistent results. Given the growing importance of arbitration proceedings in resolving legal disputes, it seems this issue deserves the attention of our legislature.