Daily Development for Friday, November 17, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

VENDOR/PURCHASER; BUYER'S REMEDIES; ARBITRATION: A clause in a real estate contract agreeing to binding arbitration is binding on the buyer when the buyer alleges fraud in the preparation of a disclosure form delivered after the execution of the contract.

Johnson v. Siegel, 00 C.D.O.S. 9204, No. H020624 (Cal. App. 11/15/00)

In the disclosure form, the seller had indicated that there were no drainage, grading or flooding problems. In fact, the buyer discovered significant problems in the first rain, serious enough to force him to abandon part of the house. The problems allegedly were caused by changes in grading in a nearby county road, and allegedly the seller had himself suffered significant problems, enough to require the use of sandbags and for the seller to ask his neighbors to participate in a lawsuit against the county. Allegedly, the seller made the same offer to buyer when the met to discuss the problem after the first few floods.

The buyer rejected the seller's offer to sue the County and instead brought suit to rescind the agreement. The seller responded that the buyer was required by the agreement to mediate and then to proceed to arbitrate any dispute arising under the contract, and that this dispute fell within that category.

The buyer nevertheless proceeded to court, where the court granted summary judgment to seller, agreeing that seller was entitled to arbitration. Then in a bizarre twist, when buyer thereafter requested arbitration, the seller responded that buyer now was barred from arbitration by principles of res judicata and that seller was without a remedy. By the way, said the seller, here's the bill for the attorney's fees to date.

The buyer responded by going back to court to reopen the judgment. The court concluded that the judgment should not be reopened, but stated that it was dubious that its ruling precluded the buyer from seeking arbitration.

On appeal, held: Affirmed. The original dispute must be arbitrated, notwithstanding the allegations of fraud, but the buyer is not bound from arbitrating when it first unsuccessfully seeks a judicial remedy.

The court first ruled that it was inescapable that the disagreement in question fell within the terms of the arbitration clause, even though the misrepresentation was contained in a separate document. The document in question was required by the terms of the agreement and was delivered in the course of carrying out the agreement. "The arbitration clause in the Real Estate Purchase Agreement is extremely broad. It provides that "any dispute or claim in Law or equity arising between [the buyer and seller] out of this Agreement or any resulting transaction" shall be arbitrated if the dispute has not been settled by mediation. Moreover, the arbitration clause is conspicuous. The clause is written in bold print, and the parties had to specifically initial provision. The clause is clearly broad enough to encompass disputes arising from the [disclosure statement], which is a required part of the overall real estate transaction."

The court then went on to address the argument that the seller's alleged fraud negated the entire contract, and therefore the arbitration clause along with everything else. The court cited California authority for the proposition that fraud in the inducement to enter into the contract itself, as opposed to fraud in the inducement to enter specifically into the arbitration clause contained in the agreement, is insufficient to justify seeking judicial remedies, even rescission. It commented: " This is because claims of fraud in the inducement are often intertwined with claims of contract breach. An arbitrator is competent and empowered to decide issues related to fraud in the inducement of the underlying contract."

As to seller's argument that the buyer's unsuccessful attempt to seek judicial remedy resulted in a res judicata that barred it from later seeking arbitration, the Court of Appeals could not agree. It distinguished California cases that seller argued led to that result, and concluded that to hold that a party agreeing to arbitrate would lose any remedy by contesting the arbitration agreement would be to deny that party any remedy, which is not consistent with the arbitration concept.

On the other hand, buyer's failure to proceed to mediation, under the terms of the agreement, deprived it of its claim for attorney's fees, but seller was still entitled to such fees. One assumes that such fees would be payable as to that aspect of the case dealing with the requirement for arbitration, even if the buyer ultimately prevailed at arbitration on the fraud allegations.

Comment 1: Coming so soon after a decision in which a California Court of Appeals endorsed a trial court finding that a binding arbitration clause in a sale agreement between a condo buyer and the developer is unconscionable, void, and even "un-American," this decision is remarkably pro-arbitration.

In light of the fact that the arbitration clause is contained in a form real estate contract to which consumer home purchasers are led like sheep by real estate professionals, the arbitration provision is at least as much a contract of adhesion as that contained in the condominium case. But here, the policy of the state appears to be in favor of arbitration. Nevertheless, it seems clear that it was the seller's alleged fraud that drove the buyer to enter into this contract in the first instance, and consequently to deny the buyer the right to escape the contract entirely by proving fraud strikes this arbitrator-suspicious commentator as an extreme approach. But, hey, this is California.

Comment 2: But isn't the court right on its second point - that an unsuccessful attempt to avoid arbitration ought not to eliminate all rights in the buyer? Although, it is true, the seller is denied the quick and efficacious alternative dispute resolution for which it allegedly bargained, to find otherwise would virtually remove the question of arbitrability from the courts altogether. We haven't come that far yet.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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