REALTORS® Guide to Arbitration and Mediation

REALTORS® Guide to Arbitration and Mediation

NATIONAL ASSOCIATION OF REALTORS®

Introduction

Ever since like-minded real estate professionals gathered nearly a century ago to found the organization known today as the NATIONAL ASSOCIATION OF REALTORS®, the cooperative real estate transaction has been a hallmark of REALTORS®. The importance of cooperation in advancing the interests of sellers and buyers, landlords and tenants, and others who rely on REALTORS® and their services is underscored by the fact that the REALTORS® Code of Ethics has required cooperation as a condition of membership since the Code was created in 1913. The cooperative transaction has no parallel in other fields of professional endeavor. REALTORS® compete with each other, vigorously but fairly, to secure the right to represent clients. Once the initial competition to secure a listing or representation agreement is decided, the environment changes from one of competition to one of cooperation to achieve the desired objective - the successful real estate transaction. In many instances, particularly those involving residential real estate, compensation is offered by listing brokers to secure the cooperative services of other brokers. In the increasingly complex and dynamic environment in which REALTORS® function, it is inevitable that good faith disagreements will arise. To ensure that such disputes are resolved expeditiously, efficiently and economically, the Code has always maintained the corollary duty to arbitrate disputes with other REALTORS®. This duty - and privilege - of membership is sometimes misunderstood, and in some cases is wrongly viewed as an unwanted or unwarranted burden.

This Guide was developed at the direction of the National Association's Professional Standards Committee to provide REALTORS® and association executives with an understanding of the rationale for the obligation, an overview of the process, and guidance in conducting business so as to avoid disputes. It is with this in mind that this Guide is dedicated to the women and men who serve on Grievance and Professional Standards Committees at the local, state and national levels.

Table of Contents

Introduction............................................................................ Page 2

Arbitration -- A Duty and a Privilege..................................................... Page 4

Arbitrable Issues........................................................................................ Page 7

The Arbitration Hearing -- An Overview............................................... Page 11

National Association's Arbitration Guidelines...................................... Page 13

Mediation.....................................................................................................Page 30

Avoiding Disputes -- Some Suggestions..................................................Page 32

The REALTORS® Code of Ethics -- A Gift of Vision.................. Page 34

Arbitration -- A Duty and a Privilege

Although the duty to arbitrate is addressed in the new member orientation of many boards and associations, often the reality of that obligation does not become truly apparent until the first time a REALTOR® initiates the process, or the first time a REALTOR® is named as respondent in an request. To better understand the duty to arbitrate, it may help to understand who is required to arbitrate, and the circumstances under which it is mandatory, and the circumstances under which it is voluntary.

The duty of REALTORS® to arbitrate is based in the Code of Ethics, specifically Article 17 which provides:

In the event of contractual disputes or specific non-contractual disputes as defined in Standard of Practice 17-4 between REALTORS® associated with different firms, arising out of their relationship as REALTORS®, the REALTORS® shall submit the dispute to arbitration in accordance with the regulations of their Board or Boards rather than litigate the matter.

In the event clients of REALTORS® wish to arbitrate contractual disputes arising out of real estate transactions, REALTORS® shall arbitrate those disputes in accordance with the regulations of their Board, provided the clients agree to be bound by the decision. (Amended 1/97)

While many disputes that arise between REALTORS® will involve contractual questions, under certain circumstances there also may be related "non-contractual" issues or questions that arise. For that reason, the duty to arbitrate encompasses not only contractual issues, but also a number of specific non-contractual issues enumerated in Standard of Practice 17-4 which provides:

w Standard of Practice 17-4

Specific non-contractual disputes that are subject to arbitration pursuant to Article 17 are:

1. Where a listing broker has compensated a cooperating broker and another cooperating broker subsequently claims to be the procuring cause of the sale or lease. In such cases the complainant may name the first cooperating broker as respondent and may proceed without the listing broker being named as a respondent. Alternatively, if the complaint is brought against the listing broker, the listing broker may name the first cooperating broker as a third-party respondent. In either instance the decision of the hearing panel as to procuring cause shall be conclusive with respect to all current or subsequent claims of the parties for compensation arising out of the underlying cooperative transaction. (Adopted 1/97)

2. Where a buyer or tenant representative is compensated by the seller or landlord, and not by the listing broker, and the listing broker, as a result, reduces the commission owed by the seller or landlord and, subsequent to such actions, another cooperating broker claims to be the procuring cause of sale or lease. In such cases the complainant may name the first cooperating broker as respondent and may proceed without the listing broker being named as a respondent. Alternatively, if the complaint is brought against the listing broker, the listing broker may name the first cooperating broker as a third-party respondent. In either instance the decision of the hearing panel as to procuring cause shall be conclusive with respect to all current or subsequent claims of the parties for compensation arising out of the underlying cooperative transaction. (Adopted 1/97)

3. Where a buyer or tenant representative is compensated by the buyer or tenant and, as a result, the listing broker reduces the commission owed by the seller or landlord and, subsequent to such actions, another cooperating broker claims to be the procuring cause of sale or lease. In such cases the complainant may name the first cooperating broker as respondent and may proceed without the listing broker being named as a respondent. Alternatively, if the complaint is brought against the listing broker, the listing broker may name the first cooperating broker as a third-party respondent. In either instance the decision of the hearing panel as to procuring cause shall be conclusive with respect to all current or subsequent claims of the parties for compensation arising out of the underlying cooperative transaction. (Adopted 1/97)

4. Where two or more listing brokers claim entitlement to compensation pursuant to open listings with a seller or landlord who agrees to participate in (or who requests arbitration) and who agrees to be bound by the decision. In cases where one of the listing brokers has been compensated by the seller or landlord, the other listing broker, as complainant, may name the first listing broker as respondent and arbitration may proceed between the brokers. (Adopted 1/97)

It should be understood that "non-contractual" issues that can be arbitrated by hearing panels of board/association professional standards committees are limited to those referenced in Standard of Practice 17-4.

While the duty to arbitrate is shared by all REALTORS®, as a practical matter most arbitration hearings take place between REALTORS® who are principals in their firms or who "stand in the shoes" of principals (often branch office managers). An important point to remember is that REALTOR® membership and the duty to abide by the Code of Ethics is personal to each REALTOR®. The same is true for the duty to arbitrate which is a personal and not a corporate obligation. The National Association of REALTORS® Code of Ethics and Arbitration Manual includes all of the policies established by the NAR Board of Directors that relate to arbitration. These policies require that real estate-related disputes between REALTORS® (principals) in different firms, and disputes between REALTORS® (principals) and their clients must be arbitrated if arbitration is requested by any appropriate party and it is subsequently determined that an arbitrable dispute exists.

Arbitration is voluntary in instances where a dispute involves a REALTOR® (principal) and a REALTOR® (nonprincipal) who are or were members of the same firm at the time the dispute arose; between REALTORS® (principals) and nonmember brokers; and between REALTORS® (principals) and their customers. Definitions of key terms, including "principal," "client," and "customer" are found in the Manual. It is important to note that in those circumstances defined as "voluntary" in the Manual, arbitration can take place only if each party to the dispute voluntarily agrees to submit to arbitration and to be bound by the decision of the arbitration hearing panel.

A frequently asked question is whether all disagreements or disputes (particularly those between principal brokers in different firms) must be arbitrated? The simple answer is no. Arbitration of disputes, including those that fall under the "mandatory" category is required only when a party with standing invokes the arbitration process and it is determined by the Grievance Committee that an arbitrable dispute exists and that arbitration of the dispute is mandatory. For example, if two REALTORS® who are principal brokers in two different firms have a dispute, either may request arbitration. However if neither REALTOR® requests arbitration, a board/association cannot inject itself into their dispute and compel arbitration. If one of the REALTORS® pursues another remedy, e.g. litigation, and the other REALTOR® does not request arbitration, the REALTOR® who filed litigation is not in violation of the Code of Ethics. If, on the other hand, the second REALTOR® does request arbitration and the matter is found to be subject to mandatory arbitration by the Grievance Committee, the REALTOR® who brought the litigation must then terminate the lawsuit and submit to arbitration. This principle is established in Standard of Practice 17-1 which provides:

w Standard of Practice 17-1

The filing of litigation and refusal to withdraw from it by REALTORS® in an arbitrable matter constitutes a refusal to arbitrate. (Adopted 2/86)

Another frequently asked question is why require arbitration under any circumstances? Why shouldn't arbitration be entirely voluntary? The answer is simple and straightforward. The foundation for the Code of Ethics is the protection it affords the public - those who take advantage of and rely on the services REALTORS® provide to their clients and customers. The Code is premised on the principle that cooperation advances the best interests of those clients and customers. If cooperation is the norm which is not only expected but demanded of REALTORS®, if REALTORS® are going to work closely and cooperatively with others who are at the same time their competitors, then there must be an efficient, economical, and reliable method to resolve the disagreements that will inevitably arise. Litigation is cumbersome, adversarial, time-consuming, and expensive. In comparison, arbitration is less formal, faster, less expensive and, if conducted in an appropriate atmosphere, less contentious and confrontational. Put plainly, arbitration is the "grease" that makes the "wheels" of cooperation between REALTORS® turn smoothly.

Arbitrable Issues

The following discussion of what constitutes an arbitrable issue is taken from the NAR Code of Ethics and Arbitration Manual.

Appendix I to Part Ten

Arbitrable Issues

Article 17 of the Code of Ethics provides:

In the event of contractual disputes or specific non-contractual disputes as defined by Standard of Practice 17-4 between REALTORS® associated with different firms, arising out of their relationship as REALTORS®, the REALTORS® shall submit the dispute to arbitration in accordance with the regulations of their Board or Boards rather than litigate the matter.

Part Ten, Section 43, Arbitrable Issues, in this Manual provides in part:

As used in Article 17 of the Code of Ethics and in Part Ten of this Manual, the terms "dispute" and "arbitrable matter" refer to contractual issues and questions, and certain specific non-contractual issues and questions outlined in Standard of

Practice 17-4, including entitlement to commissions and compensation in cooperative transactions, that arise out of the business relationships between REALTORS®, and between REALTORS® and their clients and customers, as specified in Part Ten, Section 44, Duty and Privilege to Arbitrate. (Revised 11/96)

Part Nine, Section 42, Grievance Committee's Review and Analysis of a Request for Arbitration, provides, in part, in Subsection (b): "If the facts alleged in the request for arbitration were taken as true on their face, is the matter at issue related to a real estate transaction and is it properly arbitrable -- i.e., is there some basis on which an award could be based?"

Despite the guidance provided in the above-referenced sections of the Code of Ethics and Arbitration Manual, questions continue to arise as to what constitutes an arbitrable issue, who are the appropriate parties to arbitration requests, etc. To provide guidance to board grievance committees in their review of arbitration requests, the Professional Standards Committee of the National Association provides the following information. Arbitration by boards of REALTORS® is a process authorized by law in virtually every state. Arbitration is an economical, efficient, and expeditious alternative to civil litigation. Jurists, including the former U. S. Supreme Court Chief Justice Warren Burger, have endorsed arbitration as a method of reducing the litigation backlog in the civil courts.

To conduct arbitration hearings, boards of REALTORS®, acting through their grievance committees and professional standards committees, must have a clear understanding of what constitutes an arbitrable issue. An arbitrable issue includes a contractual question arising out of a transaction between parties to a contract in addition to certain specified non-contractual issues set forth in Standard of Practice 17-4. Many arbitrations conducted by boards of REALTORS® involve entitlement to compensation offered by listing brokers through a multiple listing service or otherwise to cooperating brokers acting as subagents, as agents of purchasers, or in some other recognized agency or non-agency capacity. Frequently, at closing, the listing broker will be paid out of the proceeds of the sale and will direct that a disbursement be made to the cooperating broker who the listing broker believes was the procuring cause of the sale. Subsequently, another broker who may have been previously involved in the transaction will file an arbitration request claiming to have been the procuring cause of sale, and the question arises as to who is the proper respondent.

In our example, assume that the listing broker is Broker A, the cooperating broker who was paid is Broker B, and the cooperating broker who was not paid, but who claims to be the procuring cause of sale, is Broker C. It is not unusual for arbitration requests filed by one cooperating broker to name another cooperating broker as the respondent. This is based on the assumption that the monies the listing broker paid to Broker B are unique and that the listing broker's obligation to compensate any other broker is extinguished by the payment to Broker B, irrespective of whether Broker B was the procuring cause of sale or not. However, the mere fact that the listing broker paid Broker B in error does not diminish or extinguish the listing broker's obligation to compensate Broker C if a hearing panel determines that Broker C was, in fact, the procuring cause of sale.

Does this mean that a listing broker is always potentially obligated to pay multiple commissions if a property was shown by more than one cooperating broker? Not necessarily. When faced with Broker C's arbitration request, the listing broker could have initiated arbitration against Broker B, requesting that the hearing panel consider and resolve all of the competing claims arising from the transaction at the same time. Professional Standards Policy Statement 27, Consolidation of arbitration claims arising out of the same transaction, provides: "Upon review by the Grievance Committee, or upon motion by either the complainant or the respondent, an arbitration request may be amended to include any additional appropriate parties so that all related claims arising out of the same transaction can be resolved at the same time."

A listing broker may realize, prior to the closing of a transaction, that there may be more than one cooperating broker claiming compensation as the procuring cause of sale. In such instances, to avoid potential liability for multiple compensation claims, the listing broker, after the transaction has closed, can initiate an arbitration request naming all of the potential claimants (cooperating brokers) as respondents. In this way, all of the potential competing claims that might arise can be resolved through a single arbitration hearing.

There is also an alternative avenue of arbitration available to REALTORS® involved in disputes arising out of cooperative real estate transactions. Standard of Practice 17-4 recognizes that in some situations where a cooperating broker claims entitlement to compensation arising out of a cooperative transaction, a listing broker will already have compensated another cooperating
broker or may have reduced the commission payable under a listing contract because a cooperating broker has expressly sought and/or chosen to accept compensation from another source, e.g. the seller, the purchaser, etc. Under the circumstances specified in Standard of Practice 17-4, the cooperating brokers may arbitrate between themselves without naming the listing broker as a party. If this is done, all claims between the parties, and claims they might otherwise have against the listing broker, are extinguished by the award of the arbitrators.

In reviewing requests for arbitration, it is important that grievance committees not take actions that could be construed as rendering decisions on the merits. For example, a grievance committee should not dismiss an otherwise arbitrable claim simply because grievance committee members believe the respondent would undoubtedly prevail in a hearing. On the other hand, an arbitration request that cites no factual basis on which a hearing panel could conceivably base an award should not be referred for hearing. A party requesting arbitration must clearly articulate, in the request for arbitration, facts that demonstrate a contractual relationship between the complainant and the respondent, or a relationship described in Standard of Practice 17-4, and an issue that could be the basis on which an arbitration award could be founded.

Another question that frequently arises with respect to arbitration requests is whether the fact that the listing broker was paid out of the proceeds of the closing is determinative of whether a dispute will be considered by a hearing panel. Initially, it should be noted that the Arbitration Guidelines (Appendix II to Part Ten) provide that an arbitrable issue involving procuring cause requires that there have been a "successful transaction." A "successful transaction" is defined as "a sale that closes or a lease that is executed." Some argue that if the listing broker is not paid, or if the listing broker waives entitlement to the commission established in the listing contract, then there is nothing to pay to the cooperating broker and thus no issue that can be arbitrated. This is an improper analysis of the issue. While the listing broker needs the consent of the seller/client to appoint subagents and to compensate subagents, buyer agents, or brokers acting in some other recognized agency or non-agency capacity, the offer to compensate such individuals, whether made through the multiple listing service or otherwise, results in a separate contractual relationship accepted through performance by the cooperating broker. Thus, if the cooperating broker performs on the terms and conditions established by the listing broker, the fact that the listing broker finds it difficult to be paid or, alternatively, waives the right to be paid, has no bearing on whether the matter can be arbitrated but may have a direct impact on the outcome. Many cooperative relationships are established through MLS and the definition of the MLS provides, in part:

While offers of compensation made by listing brokers to cooperating brokers through MLS are unconditional,* a listing broker's obligation to compensate a cooperating broker who was the procuring cause of sale (or lease) may be excused if it is determined through arbitration that, through no fault of the listing broker and in the exercise of good faith and reasonable care, it was impossible or financially unfeasible for the listing broker to collect a commission pursuant to the listing agreement. In such instances, entitlement to cooperative compensation offered through MLS would be a question to be determined by an arbitration Hearing Panel based on all relevant facts and circumstances including, but not limited to, why it was impossible or financially unfeasible for the listing broker to collect some or all of the commission established in the listing agreement; at what point in the transaction did the listing broker know (or should have known) that some or all of the commission established in the listing agreement might not be paid; and how promptly had the listing broker communicated to cooperating brokers that the commission established in the listing agreement might not be paid.

* Compensation is unconditional except where local MLS rules permit listing brokers to reserve the right to reduce compensation offers to cooperating brokers in the event that the commission established in a listing contract is reduced by court action or by actions of a lender. Refer to Multiple Listing Policy Statement 7.23, "Information Specifying the Compensation on Each Listing Filed with a Multiple Listing Service of a Board of REALTORS®," Handbook on Multiple Listing Policy.

The foregoing are by no means all-inclusive of the consideration that must be taken into account by a grievance committee in determining whether a matter will be arbitrated. However, they are some of the common questions raised with respect to arbitrable issues, and this discussion is provided to assist grievance committees in their important role in evaluating arbitration requests.

The Arbitration Hearing -- An Overview

Participation in a professional standards hearing - arbitration or ethics - can be an intimidating experience for first time participants, witnesses and even new panel members. Knowing what will likely happen can make it a less stressful experience.

Although the arbitration hearing process is based on the judicial model of a civil trial, there are important differences between a trial and an arbitration hearing. While parties to any professional standards proceeding are entitled to fundamental due process, technical rules of evidence and procedure do not apply in an arbitration hearing. While the burden of proof rests with the parties, arbitration panel members can ask questions (directly or through the chair) to ensure that they have a clear understanding of relevant issues and facts. This is key to rendering a fair decision.

Parties are entitled to have legal counsel present but must respond to questions asked by panel members - or asked by other parties or their counsel when directed to respond by the chair.

Prior to the hearing, parties have the opportunity to challenge potential panel members for cause. While there are no preemptory or "automatic" challenges, boards/associations make all reasonable efforts to ensure that panel members will be impartial, unbiased, and fair.

At the beginning of an arbitration hearing the chair introduces herself and the other panel members and explains the procedures that will be followed. The chair also introduces the parties and their counsel, and others who may be present to assist the panel, which might be board legal counsel, a court reporter, or board/association staff.

Following the chair's introductory comments, the parties and their witnesses are sworn or affirmed. Witnesses are then excused from the hearing room until it is time for them to testify.

The complainant(s) testifies first. Complainants can introduce evidence and call witnesses to support their case. The respondent or the respondent's attorney can cross-examine the complainant and witnesses who testify for the complainant. After the complainant(s) finishes his presentation, respondents have the opportunity to present their evidence and testimony.

After the parties have had their chance to conduct cross-examination, panel members can ask questions of anyone who testifies. This differs from a trial in that while each party is primarily responsible for making their case, hearing panelists will want to clearly understand the events leading up to the dispute so that they can make an informed and fair decision. The fact that panel members can ask questions, is no substitute for thorough advance preparation by the parties.

Following the parties' presentations and any subsequent questions from panel members, each party or their counsel is entitled to make a closing statement, succinctly summarizing the salient points of their case.

After the closing statements, the chair adjourns the hearing and the hearing panel then (either immediately or at a future time) goes into executive session to determine the award. Awards may be for the amount requested or for a lesser amount. Hearing panels are not authorized to award more than was requested or to award punitive damages. Attorneys' fees and interest may be part of an award only if such amounts were part of the underlying contractual agreement that is the subject of the dispute.

Parties to arbitration are entitled to due process. For that reason, parties may request procedural review of the arbitration hearing process if they believe they did not get a fair hearing. A review of the hearing process must be distinguished from review of the award itself. Disagreement with the decision of the hearing panel is not a basis to institute a procedural review. For an arbitration award to be overturned, it is necessary for a party to demonstrate that he or she was denied a fundamentally fair hearing.

It is the arbitration statutes of the respective states that permit bodies such as boards/associations of REALTORS® to conduct arbitration, and it is the courts of each state, and not boards/associations of REALTORS® that have legal authority to compel payment of arbitration awards. It is, however, anticipated that REALTORS®, as professional business people, will meet their obligations, including payment of arbitration awards, promptly. In the event a REALTOR® does not pay an arbitration award, the board may assist the prevailing party in seeking judicial enforcement in the courts. Some boards/associations have adopted rules that require payment of awards within a specified period or payment of an equivalent amount to be held in escrow by the board/association pending the outcome of procedural review or legal challenge to the arbitration process. In those boards/associations, if the award is not paid, or an equivalent amount is not deposited with the board/association, the member may be subject to disciplinary action, including suspension or termination of membership, at the discretion of the Board of Directors.

Detailed information about the specific arbitration procedures can be obtained from the local board/association of REALTORS®.

National Association's Arbitration Guidelines

REALTORS® participating in arbitration hearings will want to familiarize themselves with the factors which will be considered by an arbitration hearing panel in adjudicating a dispute. The following is reprinted from the Code of Ethics and Arbitration Manual. Although intended primarily to guide hearing panels, REALTORS® preparing for arbitration may also benefit from careful study.

Appendix II to Part Ten

Arbitration Guidelines

(Suggested Factors for Consideration by a Hearing Panel in Arbitration)

A key element in the practice of real estate is the contract. Experienced practitioners quickly become conversant with the elements of contract formation. Inquiry, invitation, offer, counteroffer, contingency, waiver, acceptance, rejection, execution, breach, rescission, reformation, and other words of art become integral parts of the broker's vocabulary. Given the significant degree to which Article 3's mandate for cooperation - coupled with everyday practicality, feasibility, and expediency - make cooperative transactions facts of life, it quickly becomes apparent that in virtually every real estate transaction there are actually several contracts which come into play. Setting aside ancillary but still important contracts for things such as mortgages, appraisals, inspections, title insurance, etc., in a typical residential transaction (and the same will be true in many commercial transactions as well) there are at least three (and often four) contracts involved, and each, while established independently of the others, soon appears to be inextricably intertwined with the others.

First, there is the listing contract between the seller and the listing broker. This contract creates the relationship between these parties, establishes the duties of each and the terms under which the listing broker will be deemed to have earned a commission, and frequently will authorize the listing broker to cooperate with or compensate (or both) cooperating brokers who may be subagents, buyer agents, or acting in some other capacity.

Second, there is the contract between the listing broker and cooperating brokers. While this may be created through an offer published through a multiple listing service or through some other method of formalized cooperative effort, it need not be. Unlike the bilateral listing contract (where generally the seller agrees to pay a commission in return for the listing broker's production of a ready, willing, and able purchaser), the contract between the listing broker and the cooperating broker is unilateral in nature. This simply means that the listing broker determines the terms and conditions of the offer to potential cooperating brokers (and this offer may vary as to different potential cooperating brokers or as to cooperating brokers in different categories). This type of contract differs from a bilateral contract also in that there is no contract formed between the listing broker and the potential cooperating brokers upon receipt of the listing broker's offer. The contract is formed only when accepted by the cooperating broker, and acceptance occurs only through performance as the procuring cause of the successful transaction.

Third, there is the purchase contract - sometimes referred to as the purchase and sale agreement. This bilateral contract between the seller and the buyer establishes their respective promises and obligations to each other, which may also impact on third parties. The fact that someone other than the seller or buyer is referenced in the purchase contract does not make him/her a party to that contract, though it may create rights or entitlements which may be enforceable against a party (the buyer or seller).

Fourth, there may be a buyer-broker agreement in effect between the purchaser and a broker. Similar in many ways to the listing contract, this bilateral contract establishes the duties of the purchaser and the broker as well as the terms and conditions of the broker's compensation.

These contracts are similar in that they are created through offer and acceptance. They vary in that acceptance of a bilateral contract is through a reciprocal promise (e.g., the purchaser's promise to pay the agreed price in return for the seller's promise to convey good title), while acceptance of a unilateral contract is through performance (e.g., in producing or procuring a ready, willing, and able purchaser). Each of these contracts is subject to similar hazards in formation and afterward. The maker's (offeror's) offer in any of these scenarios may be accepted or rejected. The intended recipient of the offer (or offeree) may counteroffer. There may be questions as to whether a contract was formed - e.g., was there an offer, was it accepted, was the acceptance on the terms and conditions specified by the maker of the offer - or was the "acceptance" actually a counteroffer (which, by definition, rejects the first offer). A contract, once formed, may be breached. These and other questions of contract formation arise on a daily basis. There are several methods by which contractual questions (or "issues" or "disputes") are resolved. These include civil lawsuits, arbitration, and mediation.

Another key contract is the one entered into when a real estate professional joins a local board of REALTORS® and becomes a REALTOR®. In return for the many benefits of membership, a REALTOR® promises to abide by the duties of membership including strict adherence to the Code of Ethics. Among the Code's duties is the obligation to arbitrate, established in Article 17. Article 17 is interpreted through four Standards of Practice among which is Standard of Practice 17-4 which enumerates four situations under which REALTORS® agree to arbitrate specified non-contractual disputes.

Boards and Associations of REALTORS® provide arbitration to resolve contractual issues and questions and specific non-contractual issues and questions that arise between members, between members and their clients, and, in some cases, between parties to a transaction brought about through the efforts of REALTORS®. Disputes arising out of any of the four above-referenced contractual relationships may be arbitrated, and the rules and procedures of boards and associations of REALTORS® require that certain types of disputes must be arbitrated if either party so requests. (Information on "mandatory" and "voluntary" arbitration is found elsewhere in the Code of Ethics and Arbitration Manual.)

While issues between REALTORS® and their clients - e.g., listing broker/seller (or landlord) or buyer broker/buyer (or tenant) - are subject to mandatory arbitration (subject to the client's agreement to arbitrate), and issues between sellers and buyers may be arbitrated at their mutual agreement, in many cases such issues are resolved in the courts or in other alternative dispute resolution forums (which may also be administered by boards or associations of REALTORS®). The majority of arbitration hearings conducted by boards and associations involve questions of contracts between REALTORS®, most frequently between listing and cooperating brokers, or between two or more cooperating brokers. These generally involve questions of procuring cause, where the panel is called on to determine which of the contesting parties is entitled to the funds in dispute. While awards are generally for the full amount in question (which may be required by state law), in exceptional cases, awards may be split between the parties (again, except where prohibited by state law). Split awards are the exception rather than the rule and should be utilized only when hearing panels determine that the transaction would have resulted only through the combined efforts of both parties. It should also be considered that questions of representation and entitlement to compensation are separate issues.

In the mid-1970s, the NATIONAL ASSOCIATION OF REALTORS® established the Arbitration Guidelines to assist boards and associations in reaching fair and equitable decisions in arbitration; to prevent the establishment of any one, single rule or standard by which arbitrable issues would be decided; and to ensure that arbitrable questions would be decided by knowledgeable panels taking into careful consideration all relevant facts and circumstances.

The Arbitration Guidelines have served the industry well for nearly two decades. But, as broker-to-broker cooperation has increasingly involved contracts between listing brokers and buyer brokers and between listing brokers and brokers acting in nonagency capacities, the time came to update the Guidelines so they remained relevant and useful. It is to this end that the following is intended.

Procuring Cause

As discussed earlier, one type of contract frequently entered into by REALTORS® is the listing contract between sellers and listing brokers. Procuring cause disputes between sellers and listing brokers are often decided in court. The reasoning relied on by the courts in resolving such claims is articulated in Black's Law Dictionary, Fifth Edition, definition of procuring cause:

The proximate cause; the cause originating a series of events which, without break in their continuity, result in the accomplishment of the prime object. The inducing cause; the direct or proximate cause. Substantially synonymous with "efficient cause."

A broker will be regarded as the "procuring cause" of a sale, so as to be entitled to commission, if his efforts are the foundation on which the negotiations resulting in a sale are begun. A cause originating a series of events which, without break in their continuity, result in accomplishment of prime objective of the employment of the broker who is producing a purchaser ready, willing, and able to buy real estate on the owner's terms. Mohamed v. Robbins, 23 Ariz. App. 195, 531 p.2d 928, 930.

Also see Producing cause; Proximate cause.

Disputes concerning the contracts between listing brokers and cooperating brokers, however, are addressed by the National Association's Arbitration Guidelines promulgated pursuant to Article 17 of the Code of Ethics. While guidance can be taken from judicial determination of disputes between sellers and listing brokers, procuring cause disputes between listing and cooperating brokers, or between two cooperating brokers, can be resolved based on similar though not identical principles. While a number of definitions of procuring cause exist, and a myriad of factors may ultimately enter into any determination of procuring cause, for purposes of arbitration conducted by boards and associations of REALTORS®, procuring cause in broker to broker disputes can be readily understood as the uninterrupted series of causal events which results in the successful transaction. Or, in other words, what "caused" the successful transaction to come about. "Successful transactions," as used in these Arbitration Guidelines, is defined as "a sale that closes or a lease that is executed." Many REALTORS®, executive officers, lawyers and others have tried, albeit unsuccessfully, to develop a single, comprehensive template that could be used in all procuring cause disputes to determine entitlement to the sought-after award without the need for a comprehensive analysis of all relevant details of the underlying transaction. Such efforts, while well-intentioned, were doomed to failure in view of the fact that there is no "typical" real estate transaction any more than there is "typical" real estate or a "typical" REALTOR®. In light of the unique nature of real property and real estate transactions, and acknowledging that fair and equitable decisions could be reached only with a comprehensive understanding of the events that led to the transaction, the National Association's Board of Directors, in 1973, adopted Official Interpretation 31 of Article I, Section 2 of the Bylaws. Subsequently amended in 1977, Interpretation 31 establishes that:

A Board rule or a rule of a Multiple Listing Service owned by, operated by, or affiliated with a Board, which establishes, limits or restricts the REALTOR® in his relations with a potential purchaser, affecting recognition periods or purporting to predetermine entitlement to any award in arbitration, is an inequitable limitation on its membership.

The explanation of Interpretation 31 goes on to provide, in part:

[T]he Board or its MLS may not establish a rule or regulation which purports to predetermine entitlement to any awards in a real estate transaction. If controversy arises as to entitlement to any awards, it shall be determined by a hearing in arbitration on the merits of all ascertainable facts in the context of the specific case of controversy.

It is not uncommon for procuring cause disputes to arise out of offers by listing brokers to compensate cooperating brokers made through a multiple listing service. A multiple listing service is defined as a facility for the orderly correlation and dissemination of listing information among participants so that they may better serve their clients and customers and the public; is a means by which authorized participants make blanket unilateral offers of compensation to other participants (acting as subagents, buyer agents, or in other agency or nonagency capacities defined by law); is a means by which information is accumulated and disseminated to enable authorized participants to prepare appraisals and other valuations of real property; and is a means by which participants engaging in real estate appraisal contribute to common databases. Entitlement to compensation is determined by the cooperating broker's performance as procuring cause of the sale (or lease). While offers of compensation made by listing brokers to cooperating brokers through MLS are unconditional*, the definition of MLS and the offers of compensation made through the MLS provide that a listing broker's obligation to compensate a cooperating broker who was the procuring cause of sale (or lease) may be excused if it is determined through arbitration that, through no fault of the listing broker and in the exercise of good faith and reasonable care, it was impossible or financially unfeasible for the listing broker to collect a commission pursuant to the listing agreement. In such instances, entitlement to cooperative compensation offered through MLS would be a question to be determined by an arbitration hearing panel based on all relevant facts and circumstances including, but not limited to, why it was impossible or financially unfeasible for the listing broker to collect some or all of the commission established in the listing agreement; at what point in the transaction did the listing broker know (or should have known) that some or all of the commission established in the listing agreement might not be paid; and how promptly had the listing broker communicated to cooperating brokers that the commission established in the listing agreement might not be paid.

Factors for Consideration by Arbitration Hearing Panels

The following factors are recommended for consideration by hearing panels convened to arbitrate disputes between brokers, or between brokers and their clients or their customers. This list is not all-inclusive nor can it be. Not every factor will be applicable in every instance. The purpose is to guide panels as to facts, issues, and relevant questions that may aid them in reaching fair, equitable, and reasoned decisions.

Factor #1. No predetermined rule of entitlement

Every arbitration hearing is considered in light of all of the relevant facts and circumstances as presented by the parties and their witnesses. "Rules of thumb," prior decisions by other panels in other matters, and other predeterminants are to be disregarded.

Procuring cause shall be the primary determining factor in entitlement to compensation. Agency relationships, in and of themselves, do not determine entitlement to compensation. The agency relationship with the client and entitlement to compensation are separate issues. A relationship with the client, or lack of one, should only be considered in accordance with the guidelines established to assist panel members in determining procuring cause. (Adopted 4/95)

Factor #2. Arbitrability and appropriate parties

While primarily the responsibility of the grievance committee, arbitration hearing panels may consider questions of whether an arbitrable issue actually exists and whether the parties named are appropriate to arbitration. A detailed discussion of these questions can be found in Appendix I to Part Ten, Arbitrable Issues.

Factor #3. Relevance and admissibility

Frequently, hearing panels are asked to rule on questions of admissibility and relevancy. While state law, if applicable, controls, the general rule is that anything the hearing panel believes may assist it in reaching a fair, equitable, and knowledgeable decision is admissible.

Arbitration hearing panels are called on to resolve contractual questions, not to determine whether the law or the Code of Ethics has been violated. An otherwise substantiated award cannot be withheld solely on the basis that the hearing panel looks with disfavor on the potential recipient's manner of doing business or even that the panel believes that unethical conduct may have occurred. To prevent any appearance of bias, arbitration hearing panels and procedural review panels shall make no referrals of ethical concerns to the grievance committee. This is based on the premise that the fundamental right and primary responsibility to bring potentially unethical conduct to the attention of the grievance committee rests with the parties and others with firsthand knowledge. At the same time, evidence or testimony is not inadmissible simply because it relates to potentially unethical conduct. While an award (or failure to make a deserved award) cannot be used to "punish" a perceived "wrongdoer", it is equally true that hearing panels are entitled to (and fairness requires that they) consider all relevant evidence and testimony so that they will have a clear understanding of what transpired before determining entitlement to any award.

Factor #4. Communication and contact - abandonment and estrangement

Many arbitrable disputes will turn on the relationship (or lack thereof) between a broker (often a cooperating broker) and a prospective purchaser. Panels will consider whether, under the circumstances and in accord with local custom and practice, the broker made reasonable efforts to develop and maintain an ongoing relationship with the purchaser. Panels will want to determine, in cases where two cooperating brokers have competing claims against a listing broker, whether the first cooperating broker actively maintained ongoing contact with the purchaser or, alternatively, whether the broker's inactivity, or perceived inactivity, may have caused the purchaser to reasonably conclude that the broker had lost interest or disengaged from the transaction (abandonment). In other instances, a purchaser, despite reasonable efforts by the broker to maintain ongoing contact, may seek assistance from another broker. The panel will want to consider why the purchaser was estranged from the first broker. In still other instances, there may be no question that there was an ongoing relationship between the broker and purchaser; the issue then becomes whether the broker engaged in conduct which caused the purchaser to terminate the relationship (estrangement). This can be caused, among other things, by words or actions. Panels will want to consider whether such conduct caused a break in the series of events leading to the transaction and whether the successful transaction was actually brought about through the initiation of a separate, subsequent series of events by the second cooperating broker.

Factor #5. Conformity with state law

The procedures by which arbitration requests are received, hearings are conducted, and awards are made must be in strict conformity with the law. In such matters, the advice of board legal counsel should be followed.

Factor #6. Consideration of the entire course of events

The standard of proof in board-conducted arbitration is a preponderance of the evidence, and the initial burden of proof rests with the party requesting arbitration (see Professional Standards Policy Statement 26). This does not, however, preclude panel members from asking questions of the parties or witnesses to confirm their understanding of testimony presented or to ensure that panel members have a clear understanding of the events that led to the transaction and to the request for arbitration. Since each transaction is unique, it is impossible to develop a comprehensive list of all issues or questions that panel members may want to consider in a particular hearing. Panel members are advised to consider the following, which are representative of the issues and questions frequently involved in arbitration hearings.

The nature and status of the transaction

1. What was the nature of the transaction? Was there a residential or commercial sale/lease?

2. Is or was the matter the subject of litigation involving the same parties and issues as the arbitration?

The nature, status, and terms of the listing agreement

1. What was the nature of the listing or other agreement: exclusive right to sell, exclusive agency, open or some other form of agreement?

2. Was the listing agreement in writing? If not, is the listing agreement enforceable?

3. Was the listing agreement in effect at the time the sales contract was executed?

4. Was the property listed subject to a management agreement?

5. Were the broker's actions in accordance with the terms and conditions of the listing agreement?

a. Were all conditions of the listing agreement met?

b. Did the final terms of the sale meet those specified in the listing agreement?

c. Did the transaction close? (Refer to Appendix I to Part Ten, Arbitrable Issues)

d. Did the listing broker receive a commission? If not, why not? (Refer to Appendix I to Part Ten, Arbitrable Issues)

The nature, status and terms of the offer to compensate

1. Was an offer of cooperation and compensation made in writing? If not, how was it communicated?

2. Is the claimant a party to whom the listing broker's offer of compensation was extended?

3. Were the broker's actions in accordance with the terms and conditions of the offer of cooperation and compensation (if any)?

a. Were all conditions of the agreement met?

Roles and relationships of the parties

1. Who was the listing broker?

2. Who was the cooperating broker or brokers?

3. Were any of the parties acting as subagents? As buyer brokers? In some other capacity?

4. Did any of the cooperating brokers have an agreement, written or otherwise, to act as agent or in some other capacity on behalf of any of the parties?

5. Were any of the brokers (including the listing broker) acting as a principal in the transaction?

6. What were the brokers' relationships with respect to the seller, the purchaser, the listing broker, and any other cooperating brokers involved in the transaction?

a. Was the party to whom the property was sold represented by a party with whom the broker had previously dealt?

b. Is the primary shareholder of the buyer-corporation a party with whom the broker had previously dealt?

c. Was a prior prospect a vital link to the buyer?

7. Are all appropriate parties to the matter joined?

Initial contact with the purchaser

1. Who first introduced the purchaser or tenant to the property?

2. When was the first introduction made?

a. Was the introduction made when the buyer had a specific need for that type of property?

b. Was the introduction instrumental in creating the desire to purchase?

c. Did the buyer know about the property before the broker contacted him? Did he know it was for sale?

d. Were there previous dealings between the buyer and the seller?

e. Did the buyer find the property on his own?

3. How was the first introduction made?

a. Was the property introduced as an open house?

b. What subsequent efforts were made by the broker after the open house? (Refer to Factor #1)

c. Was the introduction made to a different representative of the buyer?

d. Was the "introduction" merely a mention that the property was listed?

e. What property was first introduced?

Conduct of the brokers

1. Were all required disclosures complied with?

2. Was there a faithful exercise of the duties a broker owes to his client/principal?

3. If more than one cooperating broker was involved, was either (or both) aware of the other's role in the transaction?

4. Did the broker who made the initial introduction to the property engage in conduct (or fail to take some action) which caused the purchaser or tenant to utilize the services of another broker? (Refer to Factor #4)

5. Did the cooperating broker (or second cooperating broker) initiate a separate series of events, unrelated to and not dependent on any other broker's efforts, which led to the successful transaction - that is, did the broker perform services which assisted the buyer in making his decision to purchase? (Refer to Factor #4)

a. Did the broker make preparations to show the property to the buyer?

b. Did the broker make continued efforts after showing the property?

c. Did the broker remove an impediment to the sale?

d. Did the broker make a proposal upon which the final transaction was based?