Real Estate Law: The Difference Between Arbitration and Court Litigation

James wrote in last week. He and his wife are buying a construction home in South Lyon, MI. They are having a major disagreement with the builder about the integrity of the foundation. They don’t want to move forward and they want their $55,000 earnest money deposit back.

According to James, the builder says that the contract requires the parties to arbitrate their dispute. He wants to know if he can just go to court instead, and what the difference is between arbitration and going to court.

Sorry for your circumstance James. Building a home is never easy.

Sales Contract Clauses

First, many real estate and sales contracts contain arbitration clauses whereby the parties to a contract agree not to litigate, but go through a less formal decision-making process. If a contract however, calls for arbitration, then the case cannot be litigated in court unless the parties agree to do so later.

Litigation

Regarding resolving a dispute, litigation is based upon a legal process deeply rooted in centuries of English and American history and jurisprudence. It involves determining issues through the court system with a judge or jury. Which court a case is brought before will depend upon the type of dispute , where the matter arose, and by how much is in dispute. For instance, circuit courts handle cases that involve over $25,000, or they are assigned specific types of cases. In real estate cases, circuit courts hear such matters as quiet title actions or specific performance matters; District courts handle matters that involve $25,000 or less. How long a matter takes to resolve also depends upon the complexity of the matter.

Avoid Court With Arbitration

In arbitration, parties avoid the court system altogether. The parties will hire a disinterested third party in an attempt to resolve the dispute. In arbitration, there may be one or more arbitrators who hear both sides of the issue and who decide.

Unlike litigation, which makes a case open to the public, the court sets the case schedule for hearings and discovery; the parties in arbitration can make the process less formal. Absent any contract terms to the contrary, the parties can pick who will arbitrate the case and decide among themselves the timeline for scheduling their case. They can also decide if they want the arbitrator’s decision to be binding or non-binding. Binding Arbitration decisions cannot be appealed unless there is fraudulent behavior by the arbitrators (a very difficult threshold).

Arbitration Faster and More Private

Arbitration is usually a faster and more private way to resolve a dispute than litigation. My experience is that it can take anywhere from 90 days to about 18 months to litigate a matter.

However, arbitration can be just as costly as going to court as the parties will have to pay for an arbitrator, which can be very expensive.

Litigation Paid by Taxpayers

In litigation, the judge is a public servant and the system is paid by the taxpayers. Litigants are paying their attorneys over a much longer period.

So the appeal of using arbitration is that it is usually quicker to resolve a matter, less costly, and less formal.

So, before signing any contract, a party should determine if there is an arbitration clause in the event of a dispute. The courts will not entertain any case where the parties have agreed to arbitration.

I hope you found my answer helpful James.