Understanding Arbitration and Liquidated Damages Clauses

Posted On: November 21, 2016
By: ffdadmin

Before we collectively dive into some turkey, cranberry and that extra slice of pumpkin pie, let’s work up that appetite by discussing two delicious decisions buyers and sellers face when making and accepting an offer: arbitration and liquidated damages.

As a reminder: It’s our philosophy and practice that only clients can make the final decision about what is right for them. We can explain how these decisions affect your offer’s desirability and likelihood of being accepted, but only clients make the final decision. Our job is to help our clients make an informed decision.

Example Arbitration, Liquidated Damages clauses real estate property purchase san francisco

Example Arbitration, Liquidated Damages clauses

Without further ado, and before this post lasts long enough to make you miss that glorious slice of turkey, let’s jump into it feet fi…let’s make it wing first.

A liquidated damages clause is found in the purchase contract for a home. Its purpose is to make the seller financially “whole” in case the buyer defaults on his or her obligation to purchase a home as per the purchase contract. Basically, if the terms of the contract are not fulfilled by reason of default from the buyer, the parties agree ahead of time what that compensation will be to make the seller whole again and compensate them for such default.

For a liquidated damages clause to be enforceable, two requirements must be met. The first is that the amount must represent a reasonable estimate of the harm that is suffered by the seller so that they are reasonably compensated. The Civil Code and subsequent Court cases have set forth that 3% is usually a reasonable amount. That 3% may sound familiar to you as it also happens to be the typical deposit amount. Secondly, there is a form requirement that the clause must be in bold 10-point font or in red bold 8-point font so as to be conspicuous.

The main purpose of all of this is certainty. If buyer and seller agree to the liquidated damages clause, they know at the outset what will be the consequences of breach and can plan accordingly. In our experience, most buyers and sellers agree to the liquidated damages provisions. Buyers appreciate knowing with certainty what their maximum risk is should they default, and sellers typically view it as a demonstration of good faith by the buyers.

Arbitration, on the other hand, is an extrajudicial form of dispute resolution. Often referred to as alternate dispute resolution (ADR), it is a system whereby a dispute is resolved outside of the court system. Usually, each side will appoint one arbitrator and the two arbitrators will subsequently decide on a third arbitrator and this panel of three arbitrators will hear from both sides in the dispute and render a verdict.

In agreeing to binding arbitration, the parties agree to follow the final decisions of an arbitration panel that are fully binding with almost no chance of appeal, except under very narrow circumstances. The benefits of an arbitration are usually that is saves time and money as they are much quicker and thus much less expensive from an attorney’s fee standpoint than going to trial. The concerns expressed around arbitration are that you agree to give up the right to an appeal.

We hope that you have learned something about these two important decisions you’ll make when buying or selling a home. These decisions often impact whether an offer is accepted and can dictate the recourse available to the parties in the case of a dispute or breach of the purchase agreement.

This article is not legal advice. Always contact an attorney for legal advice, we are real estate professionals who can bring a deal together. As always, the team is here to help answer your questions about buying or selling a home in San Francisco.

You smell that? This article lasted just long enough for that pie to start filling your home with delicious seasonal smell of cloves and pumpkin.