Arbitration Process

A key element in the practice of real estate is the contract. Experienced practitioners quickly become conversant with the elements of contract formation. Inquiry, invitation, offer, counter-offer, contingency, waiver, acceptance, rejection, execution, breach, rescission, reformation, and other words of art become integral parts of the broker's vocabulary.

Given the significant degree to which Article 3's mandate for cooperation, coupled with everyday practicality, feasibility and expediency, make cooperative transactions fact of life, it quickly becomes apparent that in virtually every real estate transaction there are actually several contracts which come into play. Setting aside ancillary but still important contracts for things such as mortgages, appraisals, inspections, title insurance, etc., in a typical residential transaction (and the same will be true in many commercial transactions as well) there are at least three (and often four) contracts involved and each, while established independently of the others, soon appears to be inextricably intertwined with the others.

First, there is the listing contract between the seller and the listing broker. This contract creates the relationship between these parties, establishes the duties of each and the terms under which the listing broker will be deemed to have earned a commission, and frequently will authorize the listing broker to cooperate with or compensate (or both) cooperating brokers who may be subagents, buyer agents, or who may be acting in some other capacity.

Second, there is the contract between the listing broker and cooperating brokers. While this may be created through an offer published through a multiple listing service or through some other method of formalized cooperative effort, it need not be. Unlike the bilateral listing contract (where generally the seller agrees to pay a commission in return for the listing broker's production of a ready, willing and able purchaser) the contract between the listing broker and the cooperating broker is unilateral in nature. This simply means that the listing broker determines the terms and conditions of the offer to potential cooperating brokers (and this offer may vary as to different potential cooperating brokers or as to cooperating brokers in different categories). This type of contract differs from a bilateral contract also in that there is no contract formed between the listing broker and the potential cooperating brokers upon receipt of the listing broker's offer. The contract is formed only when accepted by the cooperating broker, and acceptance only occurs through performance, that is, through production of a purchaser pursuant to the terms and conditions previously established by the listing broker.

Third, there is the purchase contract sometimes referred to as the purchase and sale agreement. This bilateral contract between the seller and the buyer establishes their respective promises and obligations to each other, which may also impact on third parties. The fact that someone other than the seller or buyer is referenced in the purchase contract does not make them a party to that contract though it may create rights or entitlements which may be enforceable against a party (the buyer or seller).

Fourth, there may be a buyer broker agreement in effect between the purchaser and a broker. Similar in many ways to the listing contract, this bilateral contract establishes the duties of the purchaser and the broker as well as the terms and conditions of the broker's compensation.

These contracts are similar in that they are created through offer and acceptance. They vary in that acceptance of a bilateral contract is through a reciprocal promise, e.g., the purchaser's promise to pay the agreed price in return for the seller's promise to convey good title; while acceptance of a unilateral contract is through performance, e.g., in producing (or procuring) a ready, willing and able purchaser.

Each of these contracts is subject to similar hazards in formation and afterward. The maker's (offer's) offer in any of these scenarios may be accepted or rejected. The intended recipient of the offer (or offer) may counter-offer. There may be questions as to whether a contract was formed, e.g., was there an offer, was it accepted, was the acceptance on the terms and conditions specified by the maker of the offer or was the "acceptance" actually a counter-offer (which, by definition, rejects the first offer). A contract, once formed, may be breached. These and other questions of contract formation arise on a daily basis. There are several methods by which contractual questions (or "issues" or "disputes") are resolved. These include civil lawsuits, arbitration, and mediation.

Boards and Associations of REALTORS® provide arbitration to resolve contractual issues and questions that arise between members, between members and their clients and, in some cases, between parties to a transaction brought about through the efforts of REALTORS®. Disputes arising out of any of the above-referenced contractual relationships may be arbitrated and the rules and procedures of Boards and Associations of REALTORS® require that certain types of disputes must be arbitrated if either party so requests (information on "mandatory" and "voluntary" arbitration is found elsewhere in this Manual.)

While issues between REALTORS® and their clients, e.g. listing broker/seller (or landlord) or buyer broker/buyer (or tenant), are subject to mandatory arbitration (at the client's request), and issues between sellers and buyers may be arbitrated at their mutual agreement, in many cases such issues are resolved in the courts or in other alternative dispute resolution forums (which may also be administered by Boards or Associations of REALTORS®). The majority of arbitration hearings conducted by Boards and Associations involve questions of contracts between REALTORS®, most frequently between listing and cooperating brokers. These generally involve questions of procuring cause where the panel is called on to determine which of the contesting parties is entitled to the funds in dispute. While awards are generally for the full amount in question (which may be required by state law), in exceptional cases, awards may be split between the parties (again, except where prohibited by state law). Split awards are the exception rather than the rule and should be utilized only when hearing panels determine that the transaction would have resulted only through the combined efforts of both parties. It should also be considered that questions of representation and entitlement to compensation are separate issues.

In the mid-1970's, the NATIONAL ASSOCIATION OF REALTORS® established the ARBITRATION GUIDELINES to assist Boards and Associations in reaching fair and equitable decisions in arbitration; to prevent the establishment of any one, single rule or standard by which arbitrable issues would be decided; and to ensure that arbitrable questions would be decided by knowledgeable panels taking into careful consideration all relevant facts and circumstances.

The ARBITRATION GUIDELINES have served the industry well for nearly two decades. But, as broker-to-broker cooperation has increasingly involved contracts between listing brokers and buyer brokers and between listing brokers and brokers acting in non-agency capacities, the time came to update the GUIDELINES so they remained relevant and useful. It is to this end that the following is intended.