Attorneys’ Fees, Mediation, and Arbitration: How These Concepts Relate to Claims Involving Real Estate Licensees

By David Hamerslough

My recent articles on lawsuits being brought in today’s market and claims and releases prompted a number of inquiries regarding who has the right to recover attorneys’ fees when such claims are made and whether those claims are bound by the mediation and arbitration clauses in the purchase contract. This article will briefly discuss those issues.

Both the PRDS and C.A.R. purchase contracts contain attorneys’ fees clauses similar in nature. The language in these clauses is broad enough to cover claims for breach of contract as well as for misrepresentation, nondisclosure, breach of fiduciary duty, negligence, etc. or any other claim “arising out of” the contract. Both clauses provide that the “prevailing party” is entitled to recover attorneys’ fees and costs. The prevailing party is determined by the judge or arbitrator. Generally, the definition turns on the results that a party has achieved, not the manner in which those are resolved. Both clauses limit the recovery of attorneys’ fees to “reasonable” fees, which is determined by the judge or arbitrator. There is no guarantee under either of these clauses that all of the attorneys’ fees incurred can be recovered by a successful buyer or seller. A buyer/seller’s ability to recover fees under either clause is also subject to the contractual obligation that the buyer and seller mediate any dispute before initiating an arbitration or court action unless one of the exceptions in the contract applies. The attorneys’ fees clauses apply to litigation pursued in court or through binding arbitration, if that clause has been initialed by the buyer and seller. Both of these clauses also provide for the recovery of costs, and the PRDS contract specifies that this includes the cost of any arbitration. The definition of “costs” is limited by law and normally does not include the costs of expert witnesses. Costs do not usually include attorneys’ fees.

What buyers, sellers, and real estate licensees need to understand is that both of these clauses apply only to claims between the buyer and seller and do not apply to any claims brought by or against a licensee. The upshot is that only the buyer and seller have the potential exposure for direct liability for attorneys’ fees based on these contractual provisions. If a licensee is sued and successfully defends that claim, he/she will not be able to recover attorneys’ fees based on these contractual provisions. Similarly, if a licensee sues a buyer or seller, he/she will not be able to recover attorneys’ fees under these clauses, even if successful in the claim. Conversely, even if the claims are unsuccessful, attorneys’ fees will not be owed to the other party.

The PRDS and C.A.R. listing contracts differ in their treatment of attorneys’ fees and the mediation and arbitration clauses. My article in May of this year discussed these distinctions; please refer to it for details.

Insofar as the purchase contracts are concerned, both PRDS and C.A.R. require that only the buyers and sellers participate in mediation. This obligation exists without any initialing of the mediation clause. The purchase contracts also require that the buyer and seller participate in binding arbitration if that clause is initialed by both parties. Even if the clause is initialed, arbitration may be stayed if there is another action pending against third parties and the outcome of that action may result in inconsistent findings of fact or law. This often occurs when a buyer and seller initiate arbitration but one of the parties brings a claim against a real estate licensee or an inspector. The real estate licensees are not obligated to mediate or arbitrate, though they may agree to do so. Participating in mediation and/or arbitration does not make a licensee a party to the purchase agreement and does not make him/her directly liable for attorneys’ fees. A real estate licensee’s voluntary participation in mediation also does not mean that the licensee is then required to participate in any binding arbitration. Participating in either a mediation or binding arbitration is a decision that, at a minimum, should be discussed with your manager or broker and/or a qualified real estate attorney.

In conclusion, the right to recover attorneys’ fees requires either a written agreement containing an attorneys’ fees clause applicable to the dispute. Recovery of attorneys’ fees may also be based upon a statute or upon some other legal or equitable theory. The exposure to attorneys’ fees and/or the ability to recover them are important considerations that should be evaluated at the outset of any dispute to properly assess your upside and downside.