From Michael P. Carbone’s Mediation Strategies Blog
Abraham Lincoln understood the necessity of compromise in human affairs. “Persuade your neighbors to compromise whenever you can,” he said in a lecture for lawyers. “Point out to them how the nominal winner is often a real loser–in fees, and expenses, and waste of time.”
Two California appellate court cases, one of which has just been decided, illustrate dramatically the wisdom of settling real estate disputes. The amount of money spent on litigating these cases can be staggering and the results difficult to predict.
Raising the stakes, virtually every agreement for the purchase of real estate in California provides that the losing party in any litigation must reimburse the prevailing party for attorneys’ fees. In most cases, however, these agreements also have an interesting twist. If the prevailing party pursues litigation after failing or refusing to go to mediation, then that party will forfeit his or her right to recover for attorneys’ fees.
Frei v. Davey (2004) 124 Cal.App.4th 1506, was an action by the buyers of a home to enforce the contract to sell. The contract contained a provision for awarding attorneys fees to the prevailing party in any litigation. It also required that the parties would first mediate any disputes and that “If…any party commences an action without first attempting to resolve the matter through mediation, or refuses to mediate after a request has been made, then that party shall not be entitled to recover attorney’s fees, even if they would otherwise be available to that party in any such action.” (124 Cal.App.4th at 1511-1512.)
Before the buyers filed suit the sellers made an offer to settle by completing the sale of the property and having the real estate broker give them a credit on the sales commission of $18,540. The buyers countered by proposing that the commission be held in escrow and that the sellers reimburse the buyers for additional expenses of the transaction caused by the delay in closing. Negotiations broke down at that point.
The buyers had also made a demand to mediate, which the sellers unwisely refused. The sellers prevailed in the lawsuit and they were awarded attorneys’ fees of $119,935 for trial and $37,950 on appeal. But the Court of Appeal reversed the award of fees because the sellers had refused to mediate.
The court called the case “a textbook example of why agreements for attorney fees conditioned on participation in mediation should be enforced…and a graphic illustration of a case that should have been mediated at an early stage when the parties were only $18,540 plus expenses apart in their settlement positions. Hundreds of thousands of dollars in attorney fees have been spent and the parties have litigated through two trials and three appeals. The lesson? There is a good reason the mediation clause was in the Agreement and the legal consequences specified by the Agreement for refusing to mediate will be enforced.” (124 Cal.App.4th at 1512; emphasis added.)
Frei v. Davey is a striking example of how the winner, as Lincoln said, can end up being the loser. By the time the litigation was over, the sellers had spent more than $157,885 and the buyers had spent over $127,287 in attorneys’ fees. In addition the realtor had paid its counsel $89,075 to defend a cross-complaint brought by the sellers. After an expenditure of over $500,000 in attorneys’ fees by all of the parties, the sale of the house was not compelled, there was no recovery of damages, and the winners had forfeited their rights to recover attorneys’ fees. A disagreement over less than $20,000 turned into a lawsuit costing the parties approximately $500,000.
In the very recent case of Burlage v. Superior Court (2d Civil No. B211431, Aug. 31, 2009) the buyers purchased a home in a gated community next to a country club. After escrow closed, they learned that the swimming pool and a wrought iron fence on the property encroached on land owned by the country club. They claimed that the seller knew of the encroachment but had failed to disclose it. Two years after the purchase, and after the pool and fence had been moved, the title company paid the country club $10,950 in exchange for a lot-line adjustment that gave the buyers title to the land on which the pool and the fence were originally located.
The case went to arbitration before a retired judge with JAMS, who chose to follow a strict application of the law and refused (because of the buyers’ objection) to consider the lot-line adjustment since it had taken place after the sale closed. He awarded the buyers $552,750 in compensatory damages. Although the opinion does not explain how that sum was calculated, it probably included the amount by which the arbitrator found that the buyers had overpaid for the property, plus additional damages for moving the pool and the fence. The arbitrator also awarded the buyers $250,000 in punitive damages and the rather remarkable amount of $732,570 in attorneys’ fees and costs. The buyers were awarded $1,535,320 because of an encroachment that was remedied at a cost of $10,950–paid by the title company– plus the cost to the buyers of moving the pool and the fence.
Unfortunately for the buyers, however, the seller had the arbitrator’s award vacated by the Superior Court because of the arbitrator’s refusal to consider the lot-line adjustment, and the Superior Court was upheld in a 2-1 decision by the Court of Appeal. Although arbitrators in California generally do not have to follow the law, they cannot refuse to consider “evidence that is material to the controversy” if a party would be “substantially prejudiced” by such refusal. (Cal. Code Civ. Proc. Sec.1286.2 (A)(5).) Here, the majority felt that the lot-line adjustment was “material” evidence.
Ironically, the arbitrator could have chosen to take all of the facts into consideration, including the lot-line adjustment, and then to do whatever he thought was fair and just. Had he done so, the award would in all likelihood have been confirmed.
But the story is not over yet. The California Supreme Court could decide to hear this case and might uphold the arbitrator’s award. Or, if the Court of Appeal’s decision stands, the Superior Court may order a rehearing before a new arbitrator.
So what is the lesson of this case? It is easy to second-guess the arbitrator over the size of the award, and court will also be criticized for making an illogical decision so that it could overrule the arbitrator. (“Hard facts make bad law,” the critics will say.) But it was not the arbitrator’s or the court’s decision to escalate the dispute into a full-blown legal battle, rather than to settle it.
Looking at the costs of the arbitration, if the buyers spent $732,570 in legal fees and costs (and that does not include the proceedings in the Superior Court and the Court of Appeal) one wonders how much the seller has spent. As the case now stands, the two sides have surely spent well over $1,000,000, the dispute is still unresolved, and the expenses are ongoing.
The opinion does not say whether the parties first went to mediation. My guess is that they did, but obviously they failed to settle.
Author's Acknowledgement  “We [mediators] are victims of unintended consequences - a ‘revenge effect’ – a result unanticipated that is almost the exact opposite of the one we designed.” -...By Peter Adler