Like many contracts, the standard California real estate purchase agreement, produced by the California Association of Realtors® (CAR), contains an arbitration clause. If initialed by both buyer and seller -- it is completely voluntary -- the parties agree that any irresolvable dispute between them will be settled by arbitration rather than in the courts.

Many find arbitration to be an attractive alternative to legal proceedings. It is generally faster and less expensive; it is private and confidential; and the participants have the ability to choose someone who may have special expertise in the field. But, as arbitration has come to be used more frequently, some of its downsides have become apparent as well. One of these is that there are only very narrow grounds for appealing an arbitration decision. This was vividly illustrated by a recent U.S. Supreme Court case (Hall Street Associates, LLC v. Mattel, Inc.) which upheld a ruling that an arbitrator's decision was not subject to review even though it was based on a legal error.

The case arose out of a lease of Oregon property between Hall Street Associates, as landlord, and Mattel, Inc., as tenant. The lease provided that the tenant would indemnify the landlord for any costs resulting from the failure of the tenant or its predecessor lessees to follow environmental laws while using the premises.

In 1998 and subsequently tests showed high levels of pollutants in the groundwater, apparently the result of discharges by an earlier lessee. Mattel and one of the predecessor lessees signed a consent order with the Oregon Department of Environmental Quality providing for a cleanup of the site. After Mattel gave notice to terminate the lease, Hall Street, the Landlord, filed a suit which, among other things, claimed that Mattel was obliged to indemnify it for the costs of the cleanup.

The District Court that tried the case approved an agreement by Mattel and Hall Street to arbitrate the issue of indemnification. The Court approved an arbitration agreement between those parties that contained the following provision: "The Court shall vacate, modify or correct any award: (i) where the arbitrator's findings of fact are not supported by substantial evidence, or (ii) where the arbitrator's conclusions of law are erroneous."

The arbitrator found in favor of the tenant, Mattel. He held that the lease provision to follow all applicable environmental laws did not require compliance with the testing requirements of the Oregon Drinking Water Quality Act. That Act, the arbitrator maintained, dealt with human health as distinct from environmental contamination.

Not surprisingly, the landlord, Hall Street, asked the District Court to vacate the arbitration award because of a legal error. The Court agreed, and the arbitrator then modified the award in favor of the landlord. So the tenant appealed.

The Ninth Circuit Court of Appeal reversed the District Court and found in favor of the tenant, Mattel! It is reasonable to ask, "why?" And the answer is to be found in the point mentioned earlier, that there are very few grounds on which an arbitration award can be appealed. As a CAR legal memorandum puts it, "The law does provide for very limited review of arbitration decisions where the arbitrator is biased, commits fraud, or violates other basic principles of fairness, but such a review rarely deals with the merits (substance) of the case." The relevant law, the Federal Arbitration Act (FAA) does not provide for review on the basis that a legal error has been made.

On to the U.S. Supreme Court the case went; and there the Supreme Court agreed with the Ninth Circuit decision. It upheld the view that the FAA sets forth the only grounds for vacating or modifying an arbitration award. It invalidated any attempt to expand the bases for review, as did the arbitration agreement between Hill Street and Mattel.

So there you have it. Arbitration is typically quicker, cheaper, and easier than going through the court. But it also can result in a non-reviewable decision that could be based on a mistake about the law. If that is a chance you want to take, go for it.

Published: October 2, 2008

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Bob Hunt is a director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .