By Michael J. Lancaster, Esq.
The California Association of Realtors' standard residential purchase agreement contains a provision, requiring that the parties first mediate any dispute arising out of the agreement before resorting to arbitration or court action. There is s severe consequence to the party who refuses. Mediation is a condition precedent to the right to recover attorney fees in litigation under the agreement. In Frei v. Davey (2004) 124 CA4th 1506, 1520, the Sellers prevailed in buyers' action for specific performance of purchase agreement. However, the court held the Sellers were not entitled to recover attorney fee award because they refused to mediate their dispute as required by the purchase agreement.
A party to the standard residential CAR Purchase Agreement who refuses to Mediate cannot recover their attorney fees. The are three other reported cases interpreting the effect of mediation provisions on recovery of attorney fees. In those cases, the court was considering a mediation provision that applied only to the party initiating the litigation, not the party defending against it. The contractual language being interpreted by those courts read, in relevant part: “If any party commences an action based on a dispute or claim to which this paragraph applies, without first attempting to resolve the matter through mediation, then that party shall not be entitled to recover attorney's fees, even if they would otherwise be available to that party in any such action. ” ( Blackburn v. Charnley, supra, 117 Cal.App.4th at p. 767, 11 Cal.Rptr.3d 885; Leamon v. Krajkiewcz, supra, 107 Cal.App.4th at p. 432, 132 Cal.Rptr.2d 362; Johnson v. Siegel (2000) 84 Cal.App.4th 1087, 1100, 101 Cal.Rptr.2d 412.)
In Blackburn v. Charnley, supra, 117 Cal.App.4th 758, 761-762, 11 Cal.Rptr.3d 885, two different sets of buyers signed separate purchase agreements with a real estate developerbuilder to purchase houses. The purchase agreements provided a party would not be entitled to recover attorney fees in litigation arising out of the agreement if that party did not first attempt to resolve the dispute through mediation. ( Id. at p. 767, 11 Cal.Rptr.3d 885.) After lengthy delays before construction began, and after the developer sought to renegotiate a higher price, the buyers sued for specific performance and recorded notices of a pending action. ( Id. at pp. 762-763, 11 Cal.Rptr.3d 885.) Specific performance was ordered in favor of the buyers, and they were later awarded attorney fees. ( Id. at p. 765, 11 Cal.Rptr.3d 885.) The Court of Appeal concluded the buyers did not violate the purchase agreements' mediation provisions by filing their lawsuits and recording notices of pending action without first mediating their claims. ( Blackburn v. Charnley, supra, 117 Cal.App.4th at p. 768, 11 Cal.Rptr.3d 885.) “Here, the parties filed a lawsuit and recorded a lis pendens on their lots in order to protect their homes from resale to a bona fide purchaser in a booming real estate market and to preserve their right to seek specific performance. Under the plain and unambiguous provisions of the purchase agreements, they were exempt from the mediation requirement.” ( Ibid.)
Thus, Blackburn v. Charnley stands for the proposition that a party initiating a legal proceeding to enable the recordation of a notice of pendency of an action may recover attorney fees despite a failure to request mediation, because the party is exempt from the requirement, not because the requirement has been removed from the agreement. It certainly did not address, much less resolve, the issue before us arising out of the Daveys' refusal to mediate under the Agreement. More important, to be covered by the limited exemption, a party should initiate Mediation before serving the complaint.
In Leamon v. Krajkiewcz, supra, 107 Cal.App.4th 424, 428-429, 132 Cal.Rptr.2d 362, the seller cancelled a residential purchase agreement, claiming she had only signed it as a result of the real estate agent's threats. The buyers filed a small claims action for breach of contract, and the seller filed a complaint in superior court to quiet title and for infliction of emotional distress. ( Id. at p. 429, 132 Cal.Rptr.2d 362.) A jury found there was no valid contract between the buyers and seller for the sale of the property, and judgment was entered in favor of the seller. ( Id. at p. 430, 132 Cal.Rptr.2d 362.) The seller sought recovery of attorney fees pursuant to the residential purchase agreement. ( Ibid.) The trial court granted the buyer’s motion to tax the attorney fees as an item of costs. ( Ibid.)
The appellate court affirmed, based on the purchase agreement's language that a party otherwise entitled to recover attorney fees pursuant to the agreement may not recover those fees if that party commences an action “without first attempting to resolve the matter through mediation.’”( Id. at p. 432, 132 Cal.Rptr.2d 362.) “We conclude that the enforcement of the condition precedent to the recovery of attorney fees does not conflict with the concept of mutuality of remedy under the facts of this case. First, mutuality of remedy exists because the buyers could not have commenced their action in superior court and recovered attorney fees without first seeking mediation. In that sense, the imposition of a condition precedent on the recovery of attorney fees is mutual and reciprocal. To hold otherwise would violate the concept of mutuality of remedy by requiring the party who argues the contract is valid to comply with conditions not imposed on the party who asserts the contract is invalid. In addition, the public policy of promoting mediation as a preferable alternative to judicial proceedings is served by requiring the party commencing litigation to seek mediation as a condition precedent to the recovery of attorney fees.” ( Id. at p. 433, 132 Cal.Rptr.2d 362, fn. omitted.) The court noted, “Nor do we express any view on whether paragraph 21A permits attorney fees to be awarded to a prevailing defendant who refused a plaintiff's request to mediate because only the party commencing an action is required to seek mediation.” ( Id. at p. 432, fn. 6, 132 Cal.Rptr.2d 362.)
In Johnson v. Siegel, supra, 84 Cal.App.4th 1087, 1090-1091, 101 Cal.Rptr.2d 412, the buyer filed a lawsuit seeking rescission of the real estate purchase agreement and damages for fraud and negligent misrepresentation based on the sellers' failure to disclose flooding problems with the house. The trial court granted summary judgment because the buyer failed to arbitrate his claims, as required by the purchase agreement. ( Id. at pp. 1091-1092, 101 Cal.Rptr.2d 412.) The sellers then sought recovery of attorney fees pursuant to the terms of the real estate purchase agreement. ( Id. at pp. 1090, 1100, 101 Cal.Rptr.2d 412.) The buyer opposed the motion, claiming that because he lost his right to recover attorney fees by failing to mediate his claim before filing the lawsuit, principles of mutuality barred the sellers from recovering their attorney fees. ( Id. at p. 1100, 101 Cal.Rptr.2d 412.)
The Court of Appeal disagreed, and affirmed the order granting the sellers their attorney fees. “Mutuality of remedy is not at issue here, as the buyer contends. The parties' real estate purchase agreement provided that in any action between the buyer and seller, the prevailing party would be entitled to recover attorney fees, unless that party commenced an action without first attempting to resolve the matter through mediation. The provision is mutual and reciprocal because it would apply equally to either party. Had the sellers initiated an action without first attempting to resolve the matter through mediation, it would have applied to them. It was the buyer, however, who filed an action without first attempting to resolve the matter through mediation. By filing the action, the buyer forfeited his right to recover attorney fees. The buyer makes much of the fact that the sellers did not initiate mediation. However, their failure to do so is irrelevant to the attorney fee provisions of the parties' real estate purchase agreement. Seeking mediation is a condition precedent to the recovery of attorney fees by the party who initiates the action.” ( Johnson v. Siegel, supra, 84 Cal.App.4th at pp. 1100-1101, 101 Cal.Rptr.2d 412.)
Each of these cases holds that the language of the former version of the residential purchase agreement means what it says. The revised language in the Agreement also means what it says. A party refusing a request to mediate a dispute that ripens into litigation may not recover attorney fees at the conclusion of the litigation, even if that party is the prevailing party.
I always begin each real estate and contract action by reading the contract. If you are retained by either side in a residential or commercial transaction with similar contract language, your first step should be to tender mediation as required by the paragraph that requires it with a request for a response from the other side within a reasonable period of time, typically 10 days from the date of your letter. Make sure you properly serve your demand. Your circumstances may require a shorter response time. If you use language consistent with a demand for further assurances, the other side will be set up for anticipatory repudiation if they do not respond timely or otherwise refuse to mediate. Your follow up will then either be a demand for arbitration if the arbitration clause was initialed or litigation because your duty to mediate has been satisfied by your attempt and also excused by the material breach or refusal of the other side to mediate.
Michael J. Lancaster is AV RATED, a Certified NBTA Civil Trial Advocate with 27 years of real estate, business litigation and trial experience. He is also a Certified Mediator and Commercial Arbitrator on the panel of JDR, INC., where he brings his unique experience to effectively resolve the most complicated disputes. Please refer to his Professional CV for additional information.