Arizona’s New Arbitration Act
By: Thomas A. Stoops
As most of you are aware, arbitration has become an increasingly prominent method of resolving real estate legal disputes.
When a real estate contract has an enforceable arbitration provision, then the parties must adhere to Arizona’s Arbitration Act. Unfortunately, until recently Arizona’s Arbitration Act has been very, very limited in detail, and there were a great many questions associated with the previous Act which were complicated, ambiguous or simply not addressed at all. On January 1, 2011, Arizona’s new Arbitration Act came into effect. See A.R.S. Chapter 21 Revised Uniform Arbitration Act, § 12-3001, et seq.
While the new Act is extensive, at least in comparison to the old Arbitration Act, and it is beyond the scope of this article to explore all those provisions, there are some changes made substantively which will be important for real estate practitioners to be aware of. First of all, in accordance with A.R.S. § 12-3003, which applies to an arbitration agreement made prior to or after January 2001, but does not apply to an agreement to arbitrate any existing or subsequent controversy:
1. Between an employer and employee or their respective representatives;
2. Contained in a contract of insurance;
3. Between a national banking association or a federal savings association or its affiliate, subsidiary or holding company and any customer; and
4. If the arbitration is conducted or administered by a self-regulatory organization as defined in the securities exchange act of 1934 (15 United States Code § 78c), the commodity exchange act (7 United States Code chapter 1) or regulations adopted under those acts.
Those agreements to arbitrate in paragraphs 2, 3 and 4 are instead governed by Chapter 9, Article 1 of that title.
One thing that is both a benefit and a detriment to the arbitration rules is the limited ability to appeal from an arbitration which is conducted pursuant to contract. In the past, essentially no matter how badly an arbitrator may have mistaken the law, the right to appeal the arbitrator’s award to the courts was so limited that it almost did not exist. There are two areas; however, that suggest that the superior courts now have at least some limited review of an arbitrator’s decision based on mistakes of law. This is because the two provisions in question simultaneously grant and limit the authority of the arbitrator to make certain awards.
Under A.R.S. § 12-3023(A)(4), an award may be vacated if an arbitrator exceeded the arbitrator’s powers. Under the new Arbitration Act, A.R.S. § 12-3021(B), “An arbitrator may award reasonable attorney fees and other reasonable expenses of arbitration only if that award is authorized by law in a civil action involving the same claim or by the agreement of the parties to the arbitration proceeding.” (Emphasis Supplied.) This both grants additional authority which was not addressed in the prior Act and creates a limitation on the power of the arbitrator to grant attorney fees. There are several reasons that this is an important change.
First, under the previous Act, the issue of whether or not an arbitrator could award attorney fees was quite complicated and could end up with parties who otherwise would have been entitled to receive attorney fees being denied them, because the contract provision was written in a one-sided fashion. Under the new Act, attorney fees should be awardable in most contract actions because under A.R.S. § 12-341.01, attorney fees are awardable in contract actions to the prevailing party. While this grant of additional authority is important, it should also be kept in mind that there is also a limitation as to an arbitrator’s power to award attorney fees. Therefore, since in a tort action under Arizona law, attorney fees are generally not awardable, if an arbitrator awarded attorney fees in a tort matter that would seem to exceed the authority of the arbitrator’s powers and, therefore, would be appealable to superior court. There are other circumstances in which attorney fees, even in a contract matter, might not be awarded. For example, where the attorney fees are not properly accounted for in accordance with Arizona law, attorney fees are not awardable. Therefore, based on an arbitrator exceeding on the arbitrator powers, the arbitrator’s award of attorney fees could be challenged on a variety of grounds in superior court when the prevailing party seeks confirmation of the arbitration award under A.R.S. § 12-3022.
Another important area expanding the authority of an arbitrator is found under A.R.S. § 12-3021(A), “An arbitrator may award punitive damages or other exemplary relief if such an award is authorized by law in a civil action involving the same claim and the evidence produced at the hearing justifies the award under the legal standards otherwise applicable to the claim.” Because an arbitrator may now grant awards of punitive damages under the Act, clearly the Act also limits the arbitrator’s power to grant such an award to only those matters in which punitive damages could be awarded in superior court, and has a specific evidence threshold that, “justifies the award under the legal standards otherwise applicable to the claim.” Thus, when there has been an award of punitive damages and the prevailing party seeks a confirmation of award, he will have to argue the level of evidence required to support an award for a punitive damages award was met. It should be kept in mind that a punitive damages award under Arizona law is a difficult standard to meet. First of all, it requires proof showing of an evil hand motivated by an evil mind by clear and convincing evidence. Because this standard is very high, and because there is a limitation on the authority of the arbitrator to grant such damages, it seems that such an award can be challenged on the basis that the arbitrator exceeded the arbitrator’s powers by awarding punitive damages where the evidence or claims fell below the standards set in Arizona.
There are many issues, which have not been resolved by the New Act. One of the more troubling is whether third-party non-signatories to the arbitration agreement are bound by an award. This has been a difficult issue since many times controversies between two signatories to a contract also involve claims of a non-contractual nature which may have involved third parties who are not bound to arbitrate. This is an issue which appears to have been left open by the New Act.
Because real estate contracts increasingly have binding arbitration clauses within them, and because arbitration is becoming an increasingly important alternative for dispute resolution, the changes in the Act are significant to all real estate practitioners, and the New Act beginning at A.R.S. § 12-3001 through § 12-3029 will have increasing relevance to all real estate practitioners and particularly for designated brokers, it is recommended that they become familiar with the terms of the Act.
 This is in contrast to court ordered arbitrations before disputes below a certain dollar amount, the results of which are freely appealable.