12/28/2025
what happens if a buyer and seller in Washington State dispute earnest money and it goes to arbitration
đź“ť Step-by-Step Arbitration Process (Earnest Money Dispute in WA)
1. Dispute arises
• Example: Buyer backs out after inspection, Seller says Buyer defaulted.
• Both claim the earnest money deposit (held by escrow/closing agent).
2. Escrow requires agreement
• The escrow/closing company cannot release funds without written instructions from both parties or a legal/arbitration decision.
• If no agreement, escrow “freezes” the money until resolved.
3. Mediation (first step)
• The NWMLS Purchase & Sale Agreement requires mediation before arbitration (if both parties initialed the clause).
• A mediator (neutral third party) tries to help Buyer and Seller reach settlement.
• If successful → settlement agreement signed → escrow releases funds.
• If not → move to arbitration.
4. Arbitration demand
• One party files a Demand for Arbitration (often through the American Arbitration Association (AAA) unless another service is specified).
• The demand states:
• Who the parties are
• What the dispute is (e.g., “release $20,000 earnest money to Buyer”)
• What remedy is requested.
5. Selection of arbitrator
• Parties either agree on an arbitrator, or AAA appoints one.
• Arbitrators are usually real estate attorneys or retired judges.
6. Pre-hearing process
• Parties exchange documents (purchase & sale agreement, inspection reports, communications, escrow instructions).
• Limited discovery (not as extensive as court).
• Arbitrator sets a hearing date.
7. Arbitration hearing
• Informal but structured (often in a conference room or via Zoom).
• Both sides may have attorneys, present evidence, call witnesses.
• Buyer might argue: “Inspection contingency wasn’t waived, so earnest money is refundable.”
• Seller might argue: “Buyer defaulted, so Seller keeps earnest money.”
8. Arbitrator’s decision (award)
• Arbitrator issues a written award.
• Example: “Earnest money shall be released to Seller; Buyer pays arbitration costs.”
• Decision is binding — only very limited grounds exist to challenge it in court.
9. Enforcement
• Escrow/closing agent receives the arbitration award and releases funds accordingly.
• If a party refuses to comply with something beyond escrow (e.g., damages), the award can be filed in court and turned into a judgment.
