The C.A.R. Mediation and Arbitration Clauses: Skip Mediation and You Lose Your Attorney Fees

Nearly every residential deal in California is written on a California Association of Realtors form, and nearly every one of those forms contains two dispute resolution provisions that sit side by side on the page and look like a matched pair. They are not a pair. One binds you the moment you sign, whether you read it or not. The other binds you only if you and the other side separately initialed it. Confusing the two is expensive, and the most expensive mistake of all is ignoring the mediation clause, because a party who wins the case outright can still be sent home with a judgment and nothing toward the fees it took to get there.

The mediation clause binds everyone who signs

The mediation provision is part of the contract itself. There is no separate initial line, no opt in, and no place to decline. By signing the purchase agreement you agree to mediate any dispute arising between you and the other side out of the agreement before resorting to arbitration or court action.

That obligation is not a suggestion or a nicety. It is drafted as a condition precedent to the contract's attorney fee remedy, and California courts enforce it exactly as written.

Skip mediation and you forfeit your attorney fees, even if you win

This is the part of the form that surprises buyers, sellers, agents, and more than a few lawyers who do not practice in this area. The clause says that if a party commences an action without first attempting to resolve the matter through mediation, or refuses to mediate after a request has been made, that party is not entitled to recover attorney fees, even if fees would otherwise be available.

Read that again with the emphasis where it belongs. The bar applies to the winner. It applies whether you win in arbitration or in court. Prevailing on the merits does not cure it, and no amount of good work on the case earns the fees back.

There are two ways to walk into it:

1. You file first and think about mediation later. In Lange v. Schilling (2008) 163 Cal.App.4th 1412, the plaintiff filed his complaint before seeking mediation, then won at trial. The trial court awarded him his fees anyway. The Court of Appeal reversed, holding that the provision sets a clear and unambiguous condition precedent, that a request made after the lawsuit begins is not substantial compliance, and that the other side does not have to show it was prejudiced. The clause means what it says.
2. You turn down a request to mediate. In Frei v. Davey (2004) 124 Cal.App.4th 1506, the party that declined the other side's mediation demand went on to prevail on appeal and was awarded roughly $158,000 in trial and appellate fees. The Court of Appeal reversed the award in full. Refusing the request cost them more than the case was worth. In Cullen v. Corwin (2012) 206 Cal.App.4th 1074, defendants who beat the case on summary judgment had rejected two mediation requests, taking the position that they would mediate only if their motion was denied. They kept the judgment and lost the fees.

The pattern across all three is the same. The mediation clause is enforced mechanically, without a fairness inquiry into whether mediation would have accomplished anything. Judges do not ask whether the case was mediatable, whether the other side was reasonable, or whether the refusal was strategically sensible. They ask whether a request was made and honored before suit was filed.

One nuance worth keeping straight: what the clause bars is the contract's fee remedy. Ordinary recoverable costs are governed by the cost statute, and a fee entitlement arising from an independent statute rather than the contract stands on its own footing. That is cold comfort in most purchase and sale disputes, where the contract is the only fee source in the case. For the broader picture on fee recovery, see can you recover your attorney fees in litigation and our discussion of the Mountain Air rule.

What actually counts as attempting mediation

The safe practice is unglamorous and cheap:

• Send a written mediation request to every party you may sue, before you file anything.
• Send it early, not on the courthouse steps and not on the eve of trial.
• Do not condition your willingness to mediate on finishing discovery or on getting a ruling on a pending motion. That is what sank the defendants in Cullen.
• If you are on the receiving end of a request, answer it in writing and go. Refusing costs you the same fee remedy it costs the other side.
• Keep the correspondence. Whether you complied is a documentary question decided on the papers years later.

A mediation demand is a one page letter. Weighed against a six figure fee award, it is the highest return document in the file.

Arbitration is different: it binds you only if you initialed it

The arbitration provision is optional. It becomes part of the deal only if the parties separately initial it, and California law requires that the choice be presented conspicuously. Under Code of Civil Procedure section 1298, an arbitration provision in a contract to convey real property must be captioned "ARBITRATION OF DISPUTES," must be set out in at least 8 point bold type or in contrasting red, and must be immediately preceded by a statutory notice telling the parties, in bold capitals, that by initialing they are agreeing to neutral arbitration and giving up their rights to have the dispute decided in a court or by a jury, along with judicial rights to discovery and appeal. The C.A.R. form is drafted to track that statute.

The practical consequence is simple. If the initial lines are blank, or only one side initialed, there is no agreement to arbitrate to enforce. The dispute belongs in court. Fights over exactly that question are common once the transaction file is reconstructed years later from a stack of counteroffers and addenda.

What you give up by initialing

Arbitration has real advantages in a real estate case. It is private, it is usually faster than a Los Angeles civil trial calendar, and the parties can choose a neutral who already understands escrow, disclosure, and brokerage practice.

The tradeoffs are just as real, and they are permanent:

• No jury. Your case is decided by one neutral.
• Almost no appeal. Under Moncharsh v. Heily and Blase (1992) 3 Cal.4th 1, an arbitrator's mistake of law or of fact is generally not reviewable. A wrong award is usually a final award.
• Compressed discovery. Real estate arbitration agreements carry statutory discovery rights, but the scope is narrower and more discretionary than in court. That matters most in fraud and concealment cases, where the proof sits in the other side's files. See our post on California disclosure requirements.
• You pay the decisionmaker. Arbitrator and administrative fees are a real cost in a case that does not settle early.

Whether that trade is worth making depends on which side of the transaction you are on and what kind of dispute is realistically ahead. It is a decision worth two minutes of thought at signing, not a box to initial because the agent flagged it with a sticky note.

What the clauses do not reach

Both provisions exclude matters that do not belong in a private process: judicial or nonjudicial foreclosure, unlawful detainer, the filing or enforcement of a mechanic's lien, and matters within the jurisdiction of the probate, small claims, or bankruptcy courts.

Just as important, going to court for a provisional remedy is neither a breach nor a waiver. Recording a notice of pending action, or seeking an attachment, a receiver, or an injunction, preserves the status quo while the mediation and arbitration machinery runs.

Brokers are usually not in the room

The form does not compel the brokers or their salespersons to mediate or arbitrate unless they agree in writing. That single sentence quietly reshapes many disputes. Your claim against the seller may be headed to arbitration while your claim against the agent stays in court, with two forums, two schedules, and two chances at inconsistent results. Claims against licensees, including dual agency and nondisclosure claims, need to be mapped out before the first demand goes out rather than after.

So are these provisions enforceable? Generally, yes

Arbitration provisions in California real estate contracts are enforced under both the California Arbitration Act and the Federal Arbitration Act. The party moving to compel bears the burden of proving that an agreement to arbitrate exists, and the party resisting bears the burden of proving a defense.

Unconscionability arguments borrowed from the employment world, where Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83 governs, rarely transplant well into a negotiated purchase between principals who each had an agent and a choice. The challenges that actually succeed are narrower and more concrete: nobody initialed, the initials do not appear on the operative document, the dispute falls outside the scope of the clause, or the party demanding arbitration litigated in court long enough to waive it.

One housekeeping point. The paragraph number of the dispute resolution provision has moved with almost every revision of the form, from paragraph 17 in the cases discussed above to 22, then 26, and to different numbering in the current version. Always work from the revision date printed on the agreement your client actually signed, not from the paragraph number in an older article or in a form you remember.

What to do

At signing. Decide about arbitration deliberately, and make sure the initial lines reflect that decision on the final, fully executed document. Understand that the mediation obligation applies no matter what you decide about arbitration.

When a dispute appears. Send the written mediation request before anything else, to everyone, and calendar the response. Then decide where the case belongs, remembering that the brokers may not be bound and that provisional remedies remain available in court. See also our post on the other initialed provision in the same form, the liquidated damages clause.

If you are already in litigation. Find out early whether a mediation request was made before filing. If it was not, that fact will surface at the fee motion, and by then it is too late to fix.

Talk to a Los Angeles real estate litigation attorney

The Darvish Firm's Los Angeles real estate litigation attorneys handle purchase and sale disputes for buyers, sellers, and licensees across Southern California, including motions to compel arbitration, mediation and fee forfeiture fights, and claims against brokers. Call (310) 677-3512 or request a consultation.

This article is general information about California law, not legal advice, and reading it does not create an attorney-client relationship. Every case depends on its facts. Consult an attorney about your specific situation.