Procuring Cause & Arbitration

A. General Law in Ohio
Ohio courts have long favored arbitration as a means of resolving disputes between private citizens.1 The Ohio Supreme Court has stated:

A number of our cases decided over the course of many years reflect this Court’s dedication to the strong public policy favoring arbitration. Arbitration is favored because it provides the parties with a relatively expeditious and economical means of resolving a dispute.2

In an earlier case, the Court recognized that arbitration provides the parties with a relatively speedy and inexpensive method of conflict resolution and has the additional advantage of unburdening crowded court dockets.3 Therefore, Ohio courts are anxious to defer to the arbitration process, not only because it provides an economical and efficient means of dispute resolution, but also because the parties themselves have chosen to submit their dispute to private dispute resolution, and therefore, they are bound to accept the results of that process even though they may disagree with the decision of the arbitrator. It is an extremely rare case in Ohio where a court has substituted its opinion of the proper outcome of a private dispute for the decision of an arbitrator or an Arbitration Panel which has resolved the dispute in accordance with procedures agreed to by the parties.

Arbitration is nothing more than an alternative dispute resolution system which allows parties to present their cases to an independent, neutral party who is charged with resolving the dispute based upon the evidence that is presented. Black’s Law Dictionary (6th Ed. 1990) defines arbitration as:

A process of dispute resolution in which a neutral third party (arbitrator) renders a decision after a hearing at which both parties have had an opportunity to be heard. Where arbitration is voluntary, the disputing parties select the arbitrator who has the power to render a binding decision.

An arrangement for taking and abiding by the judgment of selected persons in some disputed matter, instead of carrying it to established tribunals of justice, and is intended to avoid the formalities, the delay, the expense, and vexation of ordinary litigation.

Statutory provisions governing arbitration in Ohio are found in Chapter 2711 of the Ohio Revised Code. This Chapter begins by recognizing that an agreement to arbitrate is valid, irrevocable and enforceable in Ohio even if it is agreed to by the parties prior to the existence of the dispute.4 This differs from some states which will enforce arbitration agreements only if they are entered after the dispute arises. In other words, parties can agree to arbitrate in the future a dispute which does not yet exist. This is what REALTORS in Ohio do. The arbitration agreement is created by the application for membership in the REALTOR Association and the subsequent acceptance of the member into the Association. By joining the REALTOR Association the member agrees to abide by the Code of Ethics of the National Association of REALTORS and to submit qualified commission disputes to arbitration rather than to litigate in a court of law. The consideration for this agreement is the payment of dues by the member and the provision of services and the right to use the term REALTOR and REALTOR( logo by the national, state and local associations.

Chapter 2711 of the Ohio Revised Code goes on to recognize that the decisions of an Arbitration Panel can be made the equivalent of a court order. If the Respondent in an arbitration proceeding fails or refuses to pay the award, then the prevailing party is authorized to file an application to confirm the award in the court of common pleas of the county in which the arbitration took place.5 The Respondent has one year from the date of the entry of the award to file the application for confirmation.6 If the court issues an order confirming the award, then that order makes the arbitration award enforceable just as if it had been issued by a court of law in an original proceeding. Collection proceedings may be instituted against the Respondent in the same manner in which the prevailing party in judicial litigation would be permitted to collect a judgment issued by a court of law.

Moreover, the common pleas court has no choice but to issue the order of confirmation unless the non-prevailing party has filed a motion to vacate the award. If the Respondent decides to file a motion to vacate, modify or correct the award, such a motion must be filed within three months after the award is delivered to the parties.7 If the motion is not filed within three months, then a subsequently filed motion is untimely, and the court must ignore it.

Consistent with the long-standing policy of favoring the resolution of disputes by arbitration, a court has a very limited right to reverse the decision of an Arbitration Panel if a motion to vacate is filed. Ohio courts have repeatedly held that a court may not substitute its decision for the decision of the arbitrator even if it believes that the decision of the arbitrator is factually or legally incorrect.8 In fact, the only bases for setting aside the decision of an arbitrator are found in Revised Code §2711.10 which includes the following:

1. That the award was procured by corruption, fraud, or undue means.

2. There was evidence of partiality or corruption on the part of the arbitrators, or any of them.

3. The arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent or material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced.

4. The arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made.

In the absence of proof of any of these grounds, the award of the arbitrators must be affirmed. One court has stated:

The only way to give effect to the purposes of the arbitration system of conflict resolution is to give lasting effect to the decisions rendered by an arbitrator whenever possible. Therefore, a reviewing court is precluded from reviewing the merits of the arbitrator award since doing so would interfere with and/or undermine the positive attributes of the arbitration system.9

Assuming that the local Board follows the provisions specified in the NAR Code of Ethics and Arbitration Manual, it is extremely unlikely that a common pleas court will ever set aside an arbitration award by a REALTOR panel. The arbitration procedures in the Manual are designed to provide the parties with an opportunity to challenge the independence of the arbitrators on grounds of partiality or corruption, and further provide for a limited right of appeal to the Board of Directors of the local Board in the event that there is any evidence of a denial of due process.

B. REALTOR Arbitration System

1. The Duty to Arbitrate.
As stated above, REALTORS are required to arbitrate real estate commission disputes as a condition of membership in the REALTOR Association, rather than pursuing litigation in a court of law. Article 17 of the Code of Ethics describes those kinds of disputes that must be arbitrated. Article 17 provides:

1. 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 in accordance with the regulations of their Board, provided the clients agree to be bound by the decision.

Standard of Practice 17-4 was added to the Code of Ethics in January 1997. Before this addition, there always had to be a contractual relationship between the REALTORS before there was a duty to arbitrate or before a local Board could require arbitration. Now, Standard of Practice 17-4 adds four specific situations in which REALTORS are obligated to submit matters to arbitration even though there is technically not a contractual relationship between the parties. The first scenario is a situation in which a listing broker compensates a cooperating broker (CB-1), believing him to be the procuring cause of the sale; and another cooperating broker (CB-2) subsequently claims to be the procuring cause of the sale. Before SOP 17-4, the cooperating broker claiming that he should have been paid (CB-2) was required to institute an arbitration proceeding against the listing broker to recover the selling share of the commission. The listing broker could then bring CB-1 into the arbitration and there was, in essence, a three-party hearing. Now, CB-2 can proceed directly against CB-1 even though there is no contractual relationship between the two cooperating brokers. The old procedure is still available, but this new procedure provides a method whereby the listing broker need not be involved in the arbitration since he has no vested interest in whether the selling share of the commission goes to either of the cooperating brokers.

The second scenario under SOP 17-4 involves a situation in which the seller compensates the buyer’s broker or tenant representative directly. If the listing broker has reduced his commission to provide the funds necessary for the seller to compensate the buyer/tenant representative directly, then a new cooperating broker claiming to be the procuring cause of the transaction may bring his arbitration claim directly against the buyer/tenant representative (and need not involve the listing broker) even though there is no contract between the buyer/tenant representative and the person claiming to be the procuring cause of the sale.

The third scenario under SOP 17-4 involves a situation in which a buyer/tenant representative is compensated directly by the buyer or tenant, and, as with the two scenarios above, the listing broker reduces his commission since he no longer has a need to share the selling portion of the commission with the buyer/tenant representative. Once again, if another broker claiming to be the procuring cause of the sale initiates arbitration, he is now permitted to initiate that arbitration directly against the buyer/tenant representative even though there is no contract between him and the buyer/tenant representative.

The last scenario under SOP 17-4 involves two or more listing brokers, each claiming to be entitled to compensation from the seller pursuant to an open listing. Obviously, there is no contractual relationship between the two brokers claiming to be listing brokers; however, SOP 17-4 now recognizes that the listing broker claiming to be the procuring cause can initiate an arbitration against the listing broker who was paid the commission even though there is no contract between them.

In summary, there normally must be a contract between the two parties to the arbitration before the Arbitration Panel has jurisdiction to decide commission entitlement. There are only four exceptions, and they are discussed above. If none of these exceptions apply, then the Arbitration Panel cannot arbitrate a dispute between REALTORS unless there is evidence of a contractual relationship between them. This is the reason, more fully discussed below, that Arbitration Panels must first focus on the contractual relationship between the parties before applying principles of procuring cause.

2. Code of Ethics and Arbitration Manual
The governing document for REALTOR arbitration is the Code of Ethics and Arbitration Manual promulgated by the National Association of REALTORS and periodically updated and supplemented. NAR mandates the adoption of many of the provisions in the Manual although there are a few that NAR specifies to be permissive, that is, a local Board can choose not to adopt a provision or may adopt alternatives to the provision.

The Manual has been developed over many years, and most of its provisions have been litigated in one forum or another. In essence, compliance with the Manual ensures compliance with due process of law, one of the prerequisites to valid dispute resolution in Ohio. Due process of law is a constitutional principle which requires nothing more than fundamental fairness in the resolution of disputes. Due process is flexible depending upon the right at stake. For example, in a criminal proceeding in which incarceration is a possible outcome of a judicial hearing, then the highest form of due process is required. On the other hand, when there is no risk of incarceration to the accused, and only lesser rights are involved, i.e., the right to money, the right to a license, the right to a permit (like a driver’s license or a fishing license), then lesser degrees of due process are required. Suffice it to say that for purposes of this discussion, NAR has balanced the degree of due process required with the rights involved in REALTOR arbitrations through the provisions of NAR’s Manual. Minimal due process requires only that the parties have notice of what is involved in the proceeding and an opportunity to present their case. The Manual satisfies these fundamental prongs of due process, and then goes on to provide other specific due process rights. It is unnecessary for local Boards and/or Arbitration Panels to determine independently the degree and level of due process required in any case as long as they simply follow the judicially tested provisions in the Manual.

3. Due Process Rights
What due process rights do REALTORS have in the arbitration process? First, they are entitled to notice that a claim to a real estate commission has been filed against them. This is accomplished by the Complainant filing a complaint with the local Board and the local Board then providing notice of the complaint and an opportunity to respond to the Respondent. The parties are then entitled to a hearing before an impartial, unbiased panel of arbitrators. Neutrality is assured by giving the parties an opportunity to challenge any member of the professional standard committee on forms provided by the local Board. The Arbitration Panel is ultimately made up of only those individuals who have not been successfully challenged by any of the parties.

Next, the parties are entitled to be represented by counsel at the hearing. The parties are required to give 15 days advance notice that they will be represented by counsel; however, even if timely notice is not given, the Arbitration Panel should take all steps, including continuance of the matter, if necessary, to guarantee all parties the right to representation by counsel.

The parties are also permitted to call witnesses to testify at the hearing. As with legal counsel, the parties are required to give 15 days advance notice of the witnesses that they will be calling; however, once again, Section 30 of the Manual provides that the Hearing Panel may still permit the testimony of a witness not timely identified if the Hearing Panel believes that the testimony of that witness is essential to insure due process. In this case, the Hearing Panel must offer the adverse party a right to request that the hearing be recessed and continued for a period of not less than five days. Section 28 of the Manual specifically requires members of the REALTOR to cooperate with the arbitration procedure and to appear as witnesses if requested by either party. The failure of a member to attend a hearing if properly requested can constitute a violation of the Code of Ethics. Moreover, Ohio law permits Arbitration Panels to issue subpoenas to witnesses to compel them to attend the hearing. A subpoena issued by Arbitration Panel is enforceable in the common pleas court in the county in which the arbitration takes place.

Additional procedural rights in arbitration hearings include the right of cross examination, the right to make opening and closing arguments and the right to a limited right of appeal to the Board of Directors if a non-prevailing party believes that his due process rights have been infringed in the course of the arbitration process. There is no right to appeal simply because the non-prevailing party disagrees with the judgment of the Arbitration Panel, but if the non-prevailing party can establish that he was not given adequate notice, an adequate opportunity to present his case, that the Arbitration Panel did not act impartially, or some other specific violation of a provision of the Manual, then the Board of Directors can set aside the award of Arbitration Panel and refer the case to a new panel for a new hearing.

4. Mandatory and Permissive Arbitrations
Just as REALTORS are required to submit certain disputes to arbitrations, local Boards are required, by virtue of their charters, to provide arbitration facilities for the resolution of commission disputes. Three types of arbitrations are mandatory, that is, the local Board must provide arbitration facilities for these kinds of arbitrations; and three types of arbitrations are permissive, that is, that the local Board may or may not choose to provide arbitration facilities for these kinds of arbitrations. Mandatory arbitrations include (1) disputes between REALTOR principals of different firms over rights to a real estate commission, (2) disputes between REALTORS, other than principals, provided their principals join in the arbitration, and, (3) disputes between clients and REALTOR principals arising out of an agency relationship, providing that the client agrees to be bound by the arbitration. Permissive arbitrations include (1) arbitrations between REALTORS and REALTOR associates who are or were affiliated with the same firm at the time the dispute arose, irrespective of the time the request for arbitration is made, (2) disputes between REALTOR( principals and non-members provided the non-members agree to be bound by the award and recognizing that it is completely optional for members to agree to arbitration, and (3) disputes between REALTORS and customers, provided there is a written contractual relationship created by a REALTOR principal between a customer and a client.

5. Parties
The parties to an arbitration proceeding must include the Designated Broker of both firms, the complainant and the respondent. This is true not only because of the provisions of the Manual, but because of the provisions of Ohio law. In Ohio, only brokers are entitled to assert claims for real estate commissions, and real estate commissions can be paid only to licensed brokers. Other parties may be included in the caption of the arbitration, for example, the agent involved in the transaction, and these agents may be considered parties for purposes of participation in the hearing; however, the agent’s broker must also be a party.

In Ohio, many firms have corporate broker licenses and the real estate commission in dispute is either paid to or claimed by the corporate broker. Even though membership in the REALTOR Association is individual, that is, corporations are not members of the Boards, the Designated Broker still has a duty to participate in the arbitration process on behalf of his firm in those situations in which the disputed real estate commission has been paid to the corporate broker. The Designated Broker need not attend the hearing if he has no information regarding the transaction, and it is common to designate an office manager or other person who is more knowledgeable about the dispute to be the representative of the brokerage at the hearing.

6. Refusal to Arbitrate
There are several ways to deal with situations in which members refuse to participate in the arbitration process even though they fall within the mandatory provisions discussed above. First, the refusal to cooperate with the arbitration procedures can be deemed to be a violation of a membership obligation and subject the member to discipline pursuant to the Ethics provisions of the Code of Ethics and the Manual. Second, in the instance in which a member commences litigation against another member to recover a real estate commission, the defendant-member may file a motion to stay the arbitration in the common pleas court until the dispute is submitted to arbitration at the local Board. Most often, the common pleas court will agree to stay the legal proceeding until the arbitration is completed.10 Finally, in the event that a party cooperates with the arbitration procedure but then refuses to abide by the award, then this matter should be brought to the attention of Board of Directors directly, and the Board of Directors is permitted to investigate the matter and sanction the non-complying member in accordance with principles of due process of law. On some occasions, a Respondent refuses to participate in a required arbitration, and the Arbitration Panel must decide whether or not it can proceed with the arbitration in the absence of the Respondent. The NAR Manual provides three options to local Boards depending upon what is permitted by applicable state law. The first option provides that if a Respondent will not submit a signed Response and Agreement Form and the appropriate deposit, then the Arbitration Panel cannot proceed with the arbitration. The second option provides that in the event that the Respondent fails to sign and return the Response and Agreement Form and/or fails to make the required deposit, the Arbitration Panel can proceed with the arbitration as long as the Respondent appears and takes part in the hearing. The third option provides that the Arbitration Panel may proceed with the hearing and decide the case based upon the evidence submitted even if the Respondent has not signed the Response and Agreement Form, made the deposit, and appeared at the scheduled hearing. Although there is virtually no case law in Ohio directly in point, Ohio law does suggest that Option 3 is permissible and consistent with Ohio law. In other words, an Ohio court would enforce an arbitration award issued against a Respondent who chose not to participate in any way in the arbitration as long as the Complainant could prove that the Respondent had a contractual duty to arbitrate by virtue of his membership in the REALTOR Association.