The Purchase Agreement Arbitration Provision Does Not Limit the Court’s Authority

The standard form residential purchase agreement published by the California Association of Realtors ("CAR"), was updated in October 2002. The Purchase Agreement adopted The Federal Arbitration Act ("FAA") procedural provisions. Until recently, parties have interpreted this provision to mean that the trial court has no authority to stay or deny arbitration under the California Arbitration Act because the Agreement adopted the Federal rules.

On the contrary, on June 1, 2010, the California Supreme Court held that ("FAA"), incorporated into the newer CAR Forms, does not limit the trial Court's authority to deny arbitration, arising out of a dispute between a "Buyer and Seller" involved in a Residential Purchase Agreement. In the case of Valencia v. Smyth, 2010 DJDAR 8103, the owner of a residential property compelled the Buyers to arbitration after they filed a lawsuit. The Seller argued that pursuant to the California Association of Realtors Residential Purchase Agreement, by initialing under the FAA arbitration provision, the buyers were giving up their right to trial, and limited their rights to an arbitration proceeding, only.

Arbitration proceedings are generally informal and, under California law, the arbitrator may base the decision on business custom and practice, technical insight, and/or broad principles of equity and justice, rather than the strict letter of the law. There are many benefits and disadvantages to arbitration. The Buyers in Valencia v. Smyth did not want to proceed with arbitration and opposed the Seller's petition to arbitrate. The Buyers argued that the Seller waived his right to arbitration by delaying the motion to compel and engaging in discovery.

The California Supreme Court disagreed with the Seller, and upheld the trial court's decision to deny the arbitration petition, in favor of the Buyers. The Supreme Court held that, "there is no federal policy favoring arbitration under a certain set of procedural rules; the federal policy is simply to ensure the enforceability of private agreements to arbitrate." (Volt Info. Sciences v. Leland Stanford Jr. U. (1989) 489 U.S. 468). Essentially, determination of whether a dispute arising out of Residential Purchase Agreement must be arbitrated is a decision left for the reviewing Judge.

Under California law, a contractual arbitration provision does not make arbitration a mandatory alternative to trial. In order for a party to enforce a contractual arbitration provision, it must first file a petition to compel arbitration with the proper Court. A Judge may make factual findings based on affidavits, oral testimony, and declarations submitted by the parties. However, evidentiary support is required before the Court can grant a petition to compel arbitration, or deny the petition, based upon a defense such as fraud. The party seeking arbitration has the burden of proving the existence of an enforceable arbitration agreement, and the party opposing the motion has the burden of proving any defense by a preponderance of the evidence. If the court finds there is a valid contract binding the parties to arbitrate, it cannot refuse to compel arbitration unless there is a valid defense under Code Civ. Proc. § 1281.2.

Some of the attorneys at Kring & Chung, LLP are also on the Orange County Panel of Arbitrators, and are available to answer any questions you may have. Our litigation attorneys are experienced and ready to assist both the Seller and the Buyer in either petitioning the proper Court to enforce contractual arbitration provisions, and/or oppose petitions to arbitrate. Please contact Anna Greenstin directly if you have any question regarding alternative dispute resolution, including arbitration proceedings and/or mediation.

Anna Greenstin is an Associate at Kring & Chung, LLP's Irvine, CA office. She can be contacted at (949) 261-7700 or agreenstin@kringandchung.com .