Mediation – sound guidance for you and your clients

by James L. Goldsmith
July 2020

Most of you have had some experience with the mediation program established by the Pennsylvania Association of REALTORS® and invoked in the agreement of sale, most likely from working with a client who initiates mediation or upon whom a request for mediation has been served. REALTORS® too are named respondents in a mediation, usually by an aggrieved buyer. Here are some helpful tips for you and your clients to consider when attending a mediation conference.

When you are named in a mediation request, the first thing to do is advise your broker.  Remind your broker to notify the company’s errors and omissions (E&O) insurer. Your E&O policy requires prompt notice of claims, regardless of how they are asserted. You may think you have no liability or that the amounts involved are so minimal that there is no need to advise the E&O insurer. Should things go awry and should the matter not resolve at mediation you may find yourself without coverage in the subsequent law suit. Defense costs can be great and not having coverage for an adverse verdict can be devastating. 

For your client who is served with a request to mediate, there is likely no insurance coverage that provides a defense or that pays a mediated settlement or verdict. Regardless, resist the temptation to offer guidance. The only sensible advice is to direct your client to get counsel as soon as possible.

Consider this scenario that relates to our topic. A seller disclosed in her disclosure statement that the property had a sump pump, that it was operational, and that it ran on occasion. She also answered “no” to the question regarding water infiltration in the basement and crawl spaces. After settlement and a rain that overwhelmed the capacity of the sump pump, substantial water flooded the basement. Because the house was at the lowest point in the neighborhood, there was no good way to divert the water and the only recourse was to assure that the sump pump was supplemented by a second pit and pump. The buyers considered this to be a “band aid” and sought to install a catch basin at a cost of $90,000, which is what was sought in mediation.

When the seller received the request for mediation she discussed the matter with her listing agent who advised correctly that mediation was not binding, but that it provided a method for resolving the matter at a minimal expense. She advised, incorrectly, that counsel was unnecessary. The seller, in her reply to the mediation request, noted that she had only had water in the basement on two occasions in her 11 years residing there.  Further, the seller claimed that the buyers were responsible for the loss of their many valuable books because they weren’t packed and stored properly.

When the matter did not settle at mediation, suit was filed. At the trial the seller was confronted with her seller disclosure statement that said that she had had no water in the basement and she was confronted with her mediation statement that she had water on two occasions in 11 years (the fact of mediation was inadmissible at the trial, but the judge correctly ruled that her writing was an admission that could be introduced with references to mediation redacted). 

In addition to the conflicting accounts of water infiltration, the seller was cross-examined about her position that the buyers were to blame for the loss of their valuable books because of how the buyers stored them in the basement of the home. You can imagine that a jury might turn on the seller who gave conflicting accounts of water and who had the audacity to blame the buyers for their loss! 

Had the seller engaged counsel before mediation, counsel would likely have assisted in the preparation of the response to mediation. The lawyer would have learned, in this case, why the seller answered the disclosure as she did. Certainly the lawyer would have advised to not blame the buyers as this seller had. Lawyers generally understand that the more the client says, the greater the likelihood of misstatement and error.

Here’s another example where engaging counsel immediately is important. Frequently in the mediation of claims of misrepresentation, the question of the home inspector’s malpractice arises. An inspector is likely to participate in the mediation of a claim, unless that is, if the statute of limitations has run (a suit is barred against an inspector 1 year from the report’s delivery). If your client waits till after a failed mediation to get counsel, it may be too late to join the inspector.

Hopefully your role in the sale/purchase of real estate ends at settlement. Claims, accusations, mediations and all that can follow are in the lawyers wheelhouse. Make a referral, or if you are the subject, advise the broker and call your insurer.

Mr. Goldsmith is an attorney with Mette, Evans & Woodside and serves as outside legal counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees. He and his firm represent and defend real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. Jim also defends Realtors® in disciplinary hearings conducted by the Real Estate Commission. Jim was one of the voices of the PAR Legal Hotline for the first 27 years following its inception in 1992.

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