As costs and delays skyrocket in litigation, would-be plaintiffs are being urged by judges and an array of social commentators to find some way to settle disputes out of court. This is particularly true in real estate where, says New York lawyer Flora Schnall, "contracts, commitments, leases and construction agreements are oftentimes not conduits for clarity, undebatable interpretation, and quick comprehension. They generate controversy."
But how receptive lawyers are to these demands for arbitration instead of litigation depends a lot on whom they represent.
"Lawyers who represent lenders adamantly refuse to include arbitration clauses in loan commitments, loan agreements or any other related loan transaction documents," Michael Brooks Carroll of San Francisco reported last month to an American Bar Association program chaired by Schnall. "Lawyers have expressed their reason for this dogmatic aversion to arbitration quite simply: Why should their clients, when they usually have leverage at the stage of the drafting of the commitment or loan agreement, agree to a forum in which the borrower will be more likely to get the lender's money and more likely to get it quicker."
Similarly, lawyers representing owners of a building under construction are likely to want to avoid arbitration, because most disputes are bids to get money out of the owners.
The obverse of the coin is also true, however: borrowers and those involved in putting up a building--architects, engineers, and contractors--are going to want to take disputes to arbitration, because, if they are in the right, they will get their money a lot sooner. And they have other reasons for preferring arbitration. The dispute is settled by a panel of experts that is likely to include other architects, engineers, or contractors, who, the building professionals feel, are better able to understand the technical issues involved than would a judge or jury.
Another aspect of arbitration--secrecy--makes it appealing to lawyers who represent promoters of limited partnership arrangements put together to finance real estate projects. If a disgruntled investor goes into court with a suit alleging fraud or a break of the general partner's fiduciary relationship, that action is going to be on the public record, generate some publicity, and sour the promoter's relations with other investors in that project and with potential money sources for other ventures.
But it is not always possible to predict in advance just what a dispute will be about, so those trying to decide whether or not to write into a contract a clause requiring disputes to be arbitrated have to take a gamble. That is the situation in office or other commercial property leases, identified by Carroll as "the area of real estate disputes for which the most valid case for arbitration may be made."
Take this relatively common situation: a tenant has the option of renewing a lease by given written notice of his intention 60 days before the lease expires. He talks with the building owner a number of times as the deadline arrives, assuring him of his intention to renew. But the actual written notice does not arrive until a week after the deadline. If rental space is tight and rents are rising, chances are good that the landlord would like to hold the tenant to the letter of the agreement and consider that the option has not been taken up. He could get more money from another tenant.
That argument would have a much better chance in court--where strict adherance to written contracts is one of the underpinnings--than in arbitration, where the arbitrator is a lot more likely to weigh the conversations and the relatively short time the written document was late and let the tenant renew the option. In other words, arbitration favors the tenant. But turn the story around. If there were a glut of commercial space on the market, the landlord had passed up a chance to rent to a new tenant based on the talks with the option holder, and the written renewal never arrived, then the more flexible, look-at-all-the-facts approach of arbitration might well help the landlord.
New York lawyer Bernard H. Goldstein, a prolific author on issues of real estate law and arbitration, has worked out a way of dividing disputes into those that lend themselves better to arbitration and those that should properly land in court. The approach, which will be outlined soon in the St. John's University Law Review, argues that arbitration is best when the core question is interpretation of contract language. Arbitrators can look behind the actual wording of a provision providing for rents to rise automatically in certain circumstances, for instance, to see what each party really meant when the agreement was signed. But Goldstein argues that litigation is appropriate when the issue is one of performance--what each party actually did--because then there are legal rules and precedents that each side can call on to bolster its position.
The pressure in the real estate industry to arbitrate has led the American Arbitration Association to create two special sets of rules, one strictly for cases involving the proper valuation of land and buildings and the other covering controversies that arise during construction. The association keeps lists of experts in the field who are willing to serve as arbitrators.
But in fact, just as a primary goal of an arbitration clause in a contract is to keep a dispute out of court, another aim can be to keep it out of arbitration, to work out an agreement between themselves. "When a dispute arises, the parties have two choices: settle or arbitrate," notes Robert Coulson, president of the AAA. "Most parties settle because the arbitration clause creates a sense of immediacy. Arbitration clauses encourage settlements."
In other recent cases, courts ruled that:
* Only lawyers can collect lawyers fees from the government. The U.S. Court of Appeals in Cincinnati ruled that the law allowing plaintiffs who win a case against the government to be reimbursed for their litigation costs does not apply to laymen who represent themselves in such cases. The decision is in line with the holdings of most other circuit courts, but the Court of Appeals in Washington has taken the opposite approach: nonlawyers here--but, it begins to seem, nowhere else--CAN get paid for prosecuting their suits against Uncle Sam.
(Wolfel v. U.S., July 11)
* Management has to give up some perks before it can cut the pay of rank-and-file workers in a faltering company. Judges hearing reorganization cases are often willing to let the company out of an expensive labor contract. But the U.S. Bankruptcy Court in Rhode Island told the company that its problems stemmed from excessive costs all through the corporate hierarchy. The firm can reject the union contract, the decision says, only if it reduces managerial salaries, gets rid of most of its company cars and cancels all of its gasoline credit cards.
(In re Blue Ribbon Transportation, June 24)
* Congress erred last year in telling judges to order those convicted of federal crimes to pay restitution to their victims. The Victim & Witness Protection Act says that if a judge does not tell thieves and conmen to pay back the victims, they must write an opinion explaining why they did not. But not Judge William M. Acker Jr. in Birmingham, Alabama, had declared that section of the statute unconstitutional. Ordering restitution as part of a felon's punishment, he explained, would lead to unfair court-to-court variations and would impose a civil penalty on a person without a civil trial to assess damages and with no set standards for deciding who could lodge what claims or what kind of evidence could be considered. (U.S. v. Welden, July 29)