In the recent California decision in Juen v. Alain Pinel Realtors, broker/defendant appealed from an order denying its motion to compel arbitration, arguing that the trial court erred in finding no enforceable arbitration agreement.
The Court of Appeal affirmed the order because broker failed to show through custom and habit evidence that the broker had initialed the arbitration clause on the original residential listing agreement, or that the broker had assented to arbitration through other conduct.
Seller/Plaintiff engaged broker Pinel to sell his Danville home in 2008. In 2015 he filed a putative class action lawsuit on behalf of California residents who between August 2004 and July 2011 had used Pinel in a transaction to buy or sell a home in California and had utilized TransactionPoint, a real estate software program developed by Fidelity National Financial, Inc.
Plaintiff sued Pinel, certain managing owners and brokers,and Fidelity subsidiaries alleging breaches of fiduciary duties, aiding and abetting, violations of Civil Code section 1710 and Business and Professions Code section 17200, constructive fraud, and unjust enrichment.
Plaintiff alleged Pinel had entered into unlawful sublicensing agreements with Fidelity subsidiaries Ticor Title Company of California, Fidelity National Home Warranty Company, and Chicago Title Company (the Fidelity defendants), allowing those entities to contract their settlement services to Pinel clients using TransactionPoint; during the class period Pinel had used the software to contract for real estate settlement and related services; and the Fidelity defendants paid unlawful sublicensing fees to Pinel in return for the TransactionPoint - generated business.
Pinel and all individual defendants except the Pinel defendants moved to compel arbitration in the trial court, relying on the arbitration clause (paragraph 19B) in plaintiff’s residential listing agreement. Following that clause, the agreement contained a notice provision required by Code of Civil Procedure, section 1298, subdivision (c) with spaces for the client’s and broker’s initials.
In support of their motion, the Pinel defendants produced a copy of the listing agreement signed by plaintiff and Pinel’s listing agent, Sue Smith. The section 1298(c) notice on the copy showed plaintiff’s initials, but the space for Pinel’s initials was blank.
To establish that the original listing agreement had actually been initialed by Pinel, the Pinel defendants submitted the declaration of Lisa Crosby-Torres, the managing broker of Pinel’s Danville office at the time the listing agreement was executed. Crosby-Torres explained that:
- the files maintained by her office relating to the sale of plaintiff’s home (including the original listing agreement) were destroyed in accordance with Pinel’s normal document retention policy;
- that she had obtained a copy of plaintiff’s listing agreement from Smith to support the Pinel defendants’ arbitration demand;
- that at the time Pinel and plaintiff entered into the listing agreement it was Pinel’s policy, custom, and practice to allow a client to elect whether to assent to the arbitration provision by initialing paragraph 19B;
- that “the policy in my office required an agent, like Smith, who had obtained a Residential Listing Agreement to promptly present the executed [agreement] to [Crosby-Torres] for [her] review”; and that in the event the client had initialed the arbitration provision, Crosby-Torres (rather than the listing agent) “would as a matter of policy and custom and practice adopt the election of the client and initial Paragraph 19B on behalf of [Pinel].”
Crosby-Torres further explained: “In the case of Plaintiff’s Residential Listing Agreement, I would have, as a matter of policy and custom and practice, adopted his election of arbitration and initialed Paragraph 19B on behalf of [Pinel], and placed the original Residential Listing Agreement bearing Plaintiff’s initials and my initials on Paragraph 19B in the file maintained by [Pinel] on the subject transaction.”
The declaration continued: “At the time of execution of the Residential Listing Agreement, and continuing to the present, it has been the policy to retain files relating to closed listing and sale transactions for a period of five (5) years. Escrow closed on Plaintiff’s sale of the Subject Property on July 11, 2008. The file maintained by [Pinel] relating to the subject transaction, including the original Residential Listing Agreement bearing Plaintiff’s initials and my initials on Paragraph 19B, was therefore destroyed in 2013 pursuant to the normal document retention policy of [Pinel].”
The Pinel defendants argued in the trial court that destruction of the original listing agreement bearing Crosby-Torres’s initials did not preclude their arbitration demand because Crosby-Torres’s declaration established through practice and custom that the original listing agreement had been initialed by Crosby-Torres on behalf of Pinel.
Alternatively, they argued (1) under the Federal Arbitration Act, parties to an executed listing agreement are not required to initial the arbitration provision, and (2) even if Pinel had not assented to the arbitration provision, the provision is enforceable against plaintiff under Grubb & Ellis Co. v Bello, which concluded that a mutual agreement to arbitrate was not required in order to enforce an arbitration clause in a real estate listing agreement against an assenting party.
After a hearing, the trial court issued a written order denying the Pinel defendants’ motion. The court concluded that the Crosby-Torres declaration failed to establish that Pinel had initialed the arbitration provision.
It rejected the reasoning in Bello, and instead adopted the reasoning in Marcus & Millichap Real Estate Investment Brokerage Co. v. Hock Investment Co. to find no enforceable arbitration agreement. The court concluded that the language of the arbitration provision contemplated that the seller and broker mutually agree to the provision and that each indicate its assent by initialing the provision.
Having failed to show that the broker had initialed the provision, the Pinel defendants failed to establish the existence of an enforceable arbitration agreement.
The validity of an arbitration agreement in California is determined by a petition or motion to compel arbitration. Motions for arbitration are adjudicated summarily. Factual issues may be submitted on declarations and affidavits, or by oral testimony in the court’s discretion.
A proceeding to compel arbitration is in essence a suit in equity to compel specific performance of a contract. The party seeking arbitration bears the burden of proving the existence of an arbitration agreement by a preponderance of the evidence, and the party opposing arbitration bears the burden of proving by a preponderance of the evidence any defense.
An arbitration agreement must be in writing to be valid and enforceable. The existence of an enforceable arbitration agreement is established under state law principles involving formation, revocation and enforcement of contracts generally.
Code or Civil Procedure, section 1298 is a notice provision applicable to real estate contract arbitration. Section 1298(a) applies to contracts to convey real property (such as residential purchase agreements between buyers and sellers), and subdivision (b) applies to contracts between principals and agents in real property sales transactions, including residential listing agreements. Section 1298(c) provides for initialing immediately before the line or space provided for the parties to indicate their assent or nonassent to the arbitration provision.
Evidence Code section 1105 provides “Any otherwise admissible evidence of habit or custom is admissible to prove conduct on a specified occasion in conformity with the habit or custom.”Defendants argue that the arbitration clause was executed by Crosby-Torres and therefore enforceable because Pinel had established through custom and habit evidence that Crosby-Torres had initialed the notice provision.
While Crosby-Torres’s declaration may have established through custom and habit that she initialed the arbitration notice provision in all residential listing agreements presented to her in which the provision had been initialed by the client, the declaration does not establish Crosby-Torres ever having received or reviewed plaintiff’s listing agreement in particular.
The declaration states that Pinel’s Danville office had a policy requiring its agents to present executed listing agreements to Crosby-Torres for review, but the existence of a policy is not evidence of adherence to the policy, and the Pinel defendants offered no evidence (directly or circumstantially through custom or habit) showing that Smith had actually presented plaintiff’s listing agreement to Crosby-Torres.
“Habit” means a person’s regular or consistent response to a repeated situation. “Custom” means the routine practice or behavior on the part of a group or organization that is equivalent to the habit of an individual.
Here, the evidence presented in the declaration is not of such character and weight as to compel a finding that Crosby-Torres initialed the listing agreement as a matter of law. What is missing is either a statement from Crosby-Torres establishing that it was her habit to account for and review every listing contract executed by Smith, or a declaration from Smith stating that she either presented Crosby-Torres with plaintiff’s listing agreement, or that as a matter of habit she presented all listing agreements to Crosby-Torres during the relevant time period.
Without that evidence, the Pinel defendants failed to establish that plaintiff’s listing agreement was among those habitually reviewed and initialed by Crosby-Torres. Accordingly, the trial court did not err by concluding that the Pinel defendants failed to prove that in this particular instance Crosby-Torres initialed the arbitration provision.
LESSONS:
1. Be careful to read all contracts, and initial the provisions you want enforced in the event of a dispute.
2. Scan the key documents or otherwise maintain digital copies, and make paper copies of all important contracts, especially those that control the rights and obligations of the parties, such as arbitration provisions.
3. Agents should keep their own files of key documents for every transaction and not destroy those files so they are available if the broker's file is lost or destroyed.
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