Legal Question in Real Estate Law in California

You would never win an arbitration over the deposit in this situation. The 17 days gives YOU the right to demand they remove the contingencies or YOU can cancel. If you do not issue a contingency removal demand, they have unlimited time as you note. As for bad faith, buyers as part of the inspection contingency have every right to demand repair rather than a deduction. When you did not immediately accept their condition on removing the contingency, they had every right to cancel unless and until you accepted their conditions. If they found another place while you were getting bids rather than just agreeing, and decided to exercise their right to cancel, that is your tough luck. It's certainly not the first time that a seller trying to nickle-and-dime over repairs has cost them a sale.

I agree with Mr. McCormick. A contingency in a purchase and sale contract really means the contract is not binding unless the contingencies are either met, or removed. If the requirement to having working HVAC was a contingency, and was not removed, your failure to correct means they can cancel, and their cancellation is not treated as a breach of contract.