For many routine business disputes, arbitration can be a quicker and less expensive alternative to courtroom litigation. But what happens if, after you agree to have your dispute resolved by an arbitrator, your circumstances change and you can’t afford the arbitration fee?
That was the issue in a recent case before the California Court of Appeal, Weiler v. Marcus & Millichap Real Estate Investment Services.
There are many reasons why arbitration clauses are routinely included in everything from construction contracts and real estate purchase agreements to employment agreements.
If a dispute arises, it can often be resolved by an arbitrator in weeks or months, versus years to get on the crowded calendar of a state or federal court. Arbitration proceedings are generally not public, protecting the privacy of the participants. The parties can select arbitrators with special expertise, such as intellectual property, engineering, banking, film production or any other field.
Typically the parties agree that, if arbitration is necessary, they will jointly select the arbitrator or panel of arbitrators, and share the cost of arbitration fees and expenses.
When Rae Weiler and her husband engaged Marcus & Millichap Real Estate Investment Services, Inc., to conduct a so-called 1031 tax-deferred exchange of some real estate they owned, their contract with Marcus & Millichap included an arbitration clause.
In 2006, when they were in their 70s, the Weilers exchanged two Las Vegas properties for a building in Texas that was occupied by a Red Robin restaurant and supposedly worth $4.1 million. The Weilers were to receive rent payments from the tenant, who would also pay the property taxes.
Soon after escrow closed on the Texas property, the tenant became delinquent in making rent payments and failed to make property tax payments. This continued over the next seven years, costing the Weilers $600,000 in lost income. They finally sold the property for $2 million, or $2.1 million less than they had paid for it.
Before they sold the Texas property, Weiler sued Marcus & Millichap, alleging breach of fiduciary duty, negligence, misrepresentation and elder abuse, and seeking compensatory and punitive damages.
The complaint alleged that Weiler had told the real estate company that “she knew very little about commercial real estate investing, . . . and that she wanted a safe and secure investment with a decent return.” It also alleged the firm told her the Texas property was a “wonderful investment,” and that the restaurant “was busy and doing well financially.”
To arbitrate the dispute, Weiler told the court, her half of the costs would be over $100,000. After the losses caused by the Texas investment, and now in her 80s, she could not afford that, she said.
The trial court said the issue it had to decide was whether the arbitration clause was unconscionable at the time the agreement was signed, when the Weilers were wealthy, and that their financial situation years later, when they said they could not pay the arbitration costs, was irrelevant.
It ruled that the arbitration provisions were valid and enforceable. Weiler appealed the ruling.
The trial court’s decision was a mistake, the appellate court said.
“Though the law has great respect for the enforcement of valid arbitration provisions, in some situations those interests must cede to an even greater, unwavering interest on which our country was founded – justice for all,” the higher court’s judges said.
“A party’s fundamental right to a forum she or he can afford may outweigh another party’s contractual right to arbitrate.”
The appellate court acknowledged that it could not order the arbitrators to waive their fees, nor order one party to pay the other party’s share of the costs.
Instead, if one party cannot pay for arbitration, the other should be given the choice of either paying the entire costs and remain in arbitration, or waive its right to arbitrate the dispute.
“From a public policy standpoint, a defendant accused of wrongdoing should not be permitted to avoid potential liability by forcing the matter to arbitration and subsequently making it so expensive that the plaintiff eventually has no choice but to give up,” the appellate judges said. “To hold otherwise would be to turn ‘and justice for all’ into ‘and justice for those who can afford it.’
The trial court was ordered to reverse its decision, and Weiler was awarded her costs on appeal.
By Laurie Murphy