Real Estate agents have the unfortunate (and hopefully infrequent!) experience of dealing with broken sales contracts and considering the rights and remedies of buyers and sellers when a contract is breached. Less frequently, agents have to deal with a listing agreement being breached by a seller, and their remedies under that agreement.
The form of listing agreements used by agents is not as uniform as the standardized FAR/BAR contracts. But the Florida Association of Realtors© Exclusive Right of Sale form seems to be used more than any other, and we’ll use that as a base for analysis. That document, in Section 12 gives two options for resolving disputes – the relevant language is copied below:
If litigation arises out of this Agreement, the prevailing party will be entitled to recover reasonable attorney’s fees and costs, unless the parties agree that disputes will be settled by arbitration as follows: Arbitration: By initialing in the space provided, Seller (____) (____), Sales Associate (____), and Broker (____) agree that disputes not resolved by mediation will be settled by neutral binding arbitration … Each party to any arbitration (or litigation to enforce the arbitration provision of this Agreement or an arbitration award) will pay its own fees, costs, and expenses, including attorney’s fees, and will equally split the arbitrator’s fees and administrative fees of arbitration.
So, there are two methods of dispute resolution that the parties can select: they can litigate disputes (meaning: they can file a lawsuit in the courthouse, and let a judge or a jury decide their fate), or they can arbitrate disputes (meaning: they can hire a professional arbitrator to act as a private “judge” who will listen to their positions and decide their dispute). Whether litigation or arbitration is a superior forum is a topic for another day. Putting that aside, the selection matters for a very practical reason: if the parties choose to resolve their disputes in litigation, the losing party will pay the winning party’s attorney fees and costs. However, if they choose to arbitrate their claim, each party will pay their own attorney fees and costs (while splitting the cost for the arbitrator), regardless of whether they win or they lose. This distinction makes a huge practical difference for how disputes are handled.
A scenario: you’ve listed a property for $500,000.00, got a contract in (both sides!) at full asking price, and your listing agreement entitles you to a 6% commission at close. That’s a $30,000.00 check headed your way. You’ve known that your seller was shady and difficult, and that proves to be true the day before closing: they make a totally unfounded claim that you are not entitled to your commission. Drat. How this scenario plays out from here differs wildly depending on how you agreed to resolve disputes in your listing agreement.
If you’ve selected arbitration to resolve disputes, every dollar you spend on legal fees to pursue a claim will ultimately diminish your net recovery. If you spend $20,000.00 in fees to arbitrate the matter, your ultimate recovery will be $10,000.00 (less arbitrator costs), even if you win. That’s not a great outcome. Conversely, if you select the litigation option, and you prevail, you gain a judgment for the full $30,000.00 plus the attorney fees and costs that you spent to get to that point – you are made whole.
Sounds like the clear option here is choosing litigation, right? Not necessarily. Along with the fact that you can recover more fully in litigation comes the fact that you undertake the risk of paying the other side’s fees if you lose the case (so you write a check to the other side instead of being paid your commission…that hurts). That risk doesn’t exist in the arbitration context. There is no possibility that you will be forced to pay the other side anything, no matter how badly the arbitration outcome is for you.
This is the part of the blog where you are supposed to be told the right thing to do. But there really isn’t a right answer. There are benefits to both arbitration and litigation when it comes to analyzing the recovery of fees. If you prefer an option that gives you a greater ability to make a full recovery, and are willing to undertake some risk to get there, litigation is a better option. If you are risk-averse, and prefer an option that forces each side to be more reasonable in resolving disputes (because the legal fees are on their dime, no matter the outcome), then arbitration is more attractive. In either case, though, you should be making a conscious decision as to which option is preferable for you (or your broker). If you simply ignore the dispute resolution section of the listing agreement, it will default to the litigation option.
As always, should you have any questions please feel free to reach out to your local real estate attorney.
