Lee Kanon Alpert

Arbitration has been touted as a quick and cost-effective panacea for resolving civil disputes, but it also has been criticized for not living up to many of its claims.

The truth about arbitration and other forms of alternative dispute resolution known as ADR lies somewhere in between. While not quite the ultimate solution to horrendous legal costs and lengthy court battles, ADR can still be a most effective means of resolving certain small-business disputes.

ADR gained popularity in the early 1990s because of the overburdened civil court system. While state and county budget problems reduced available funding to build more court facilities and supply additional judicial officers, the last two decades have seen a boom in litigation. The resulting docket delays mean a steady increase in the overall costs of trying cases.

ADR provides two major types of resolution options arbitration and mediation. Arbitration permits the parties to have an arbitrator or a panel of arbitrators hear and decide the dispute in an informal, non-courtroom setting.

Both sides present their cases before an arbitrator or panel (selected and approved by the parties). A decision is rendered that's usually binding. Cases can be resolved in this way in months rather than years, and while the cost of the arbitrator can be steep (as high as $500 an hour, with expenses usually split by the parties), the cost for this legal process can still be far less than a traditional court case.

Small-business owners should ask the following questions when deciding whether to use arbitration to resolve a dispute:

? Do you want a quick result? Arbitrations take months instead of the customary years to resolve a civil dispute.

? Do you wish to keep the dispute private? While trials are a matter of public record, arbitrations can be confidential.

? Can industry-specific knowledge help resolve the dispute? Arbitrators can be selected from the industry in which the dispute occurred.

? Do you want to select where and when the case will be decided? Arbitrations take place at a mutually agreed-upon location and time.

The key to a successful resolution through arbitration is the skill level and impartiality of the arbitrator or panel. If your opponent regularly hires a specific arbitrator to hear cases (and the outcomes tend to favor your opponent), you might want to think twice about agreeing to use that arbitrator.

One drawback to arbitration (which some consider a strength) is the finality of the arbitrator's decision. Except in rare instances, it's final. If an arbitrator is incompetent or has an undisclosed or undiscovered bias, the binding decision might be incorrect. In that case, the losing party could be without a legal avenue to argue its arbitrator-related grievances.

Another possible drawback is the cost-splitting aspect of arbitration. Many arbitration clauses require that costs be split evenly between the two parties. For a large corporation, this represents a significant cost savings compared to the expense of trying the case in court. For small-business owners bringing the action against a large business, the clause may actually increase legal costs.

For example, if an attorney is willing to represent the small business on a contingency basis in court, the firm would have less out-of-pocket costs and expenses with a trial than if the dispute was settled by arbitration.

Mediation, another form of ADR, is much less structured than arbitration. It is a method in which the two parties come together to discuss mutually agreeable solutions that will end their dispute. The mediator acts as a third-party intermediary who is responsible for keeping the dialogue flowing and making recommendations that assist in resolving the dispute.

The agreements reached through mediation are binding, but mediators cannot impose their will and make decisions unless all parties agree to the resolution.

Small businesses should consider mediation when the following occurs:

? The parties in the dispute have a desire to continue their relationship after the dispute is settled. Mediation diminishes the acrimony that usually develops when parties differ and no one is told what to do by a judge or arbitrator.

? The parties want to maintain control over how the dispute is resolved. Mediation gets people talking. It gives small-business owners a vehicle to communicate and resolve their differences without having to set foot into the rigid, adversarial setting of a courtroom.

The skills needed for mediation are often quite different from those necessary for arbitration. While an arbitrator must render a decision that favors one party or the other, the mediator is a negotiator and a facilitator who helps both sides reach common ground.

The American Arbitration Association (www.adr.org) maintains regional offices throughout the United States, including Los Angeles. The organization provides lists of qualified local arbitrators and mediators, usually experts in specific industries, retired judges and experienced attorneys. Private local ADR companies also maintain rosters of arbitrators and mediators.

Trade organizations within industries also often have names of arbitrators who hear industry-specific disputes.

Many businesses and specific industries (construction, architecture, and banking) are now requiring by contract that ADR be used instead of court when disputes arise. A number of courts are upholding those ADR agreements as binding.

The following issues should be considered and resolved when crafting an ADR clause or agreement:

? Confidentiality provisions relating to the contract and the ADR process.

? Type of law to use in resolving the dispute (California state law or some other jurisdiction).

? Whether to allow normal litigation discovery, such as depositions and interrogatories as part of the ADR process, or to limit or eliminate discovery.

? Whether to limit the scope and the nature of damages that a party may recover (i.e. eliminating or including punitive damages, capping the dollar damage amount, and defining the type of damages).

? The location of ADR proceedings.

? How the arbitrator/mediator will be selected and the specific experience or qualifications to be required.

? Who will pay for attorney's fees, expert fees and costs of the ADR proceeding.

ADR generally offers small businesses the opportunity to seek equitable solutions to disputes that could otherwise deplete the business of precious time and financial resources.

Lee Kanon Alpert, founding principal with the Encino law firm of Alpert, Barr & Gross, practices business law and is an experienced private arbitrator and mediator. His e-mail address is LKA13@aol.com.

Entrepreneur's Notebook is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact James Klein at (213) 743-1759 with feedback and topic suggestions.

For reprint and licensing requests for this article, CLICK HERE.