ARBITRATION CAN BE RISKY ALTERNATIVE TO COURT CASE.

Byline: Terrence Sternberg Guest Column

Contracts, from megadeals between large corporations to the simple agreement you sign at your doctor's office, increasingly call for contractual arbitration. Just what is contractual arbitration, and why is it fast becoming a fixture in so many different kinds of contracts?

In a nutshell, arbitration is a procedure for resolving disputes without the need for a traditional court action. In arbitration, the parties submit their dispute to one or more independent, third-party decision makers. These arbitrators hear the evidence and render a decision. There is a growing industry of companies and individuals who serve as arbitrators.

In contractual arbitration, the parties have included in their contract an agreement to resolve their disputes through arbitration rather than the courts.

Although arbitration has been an available alternative for years, its use has exploded in this decade. It is estimated that the parties have chosen arbitration over the courts in up to 30 percent of all disputes today.

Arbitration is touted as providing decisions far faster and far less expensively than the courts can. While arbitration can deliver as promised in the right circumstances and with a carefully drafted agreement, too often the parties chose arbitration with too little consideration given to whether it is truly the right choice.

The consequences of such autopilot choices can be devastating. Even when the cost and savings benefits are realized, they may have come at the sacrifice of some extremely important rights.

The key to making arbitration work is a clear understanding of what is gained and what is given up, as well as the careful preparation of a workable agreement to arbitrate. While the particular facts of each situation affect the ultimate decision, the following issues are present in most settings:

The downside. The most important right surrendered in arbitration is the right to a jury trial. As some highly publicized trials have shown, the right to a jury, no less the makeup of a jury, can be decisive to the outcome of a dispute.

Whether giving up the right to a jury trial is a worthwhile trade-off often depends on who the parties are. For instance, businesses which are leery of juries find arbitration an attractive alternative precisely because it eliminates them. Consumers, on the other hand, are generally viewed as benefited by a decision made by a jury of their peers.

In arbitration the right to discovery - that is, the right to gather evidence

from the other side or from independent witnesses - is extremely limited. While this keeps costs down, it may prevent a party from obtaining crucial evidence for the case.

The parties' ability to have an erroneous decision reversed by a court of appeal is far more limited in arbitration than in court. Some of the horror stories about arbitration are those in which obviously improper awards are upheld because the court is powerless to correct them. Such problems have focused attention on the fact that, unlike judges, arbitrators need have no particular qualifications to serve, and the arbitration industry is almost entirely unregulated.

The upside. Most of the pitfalls of arbitration can be avoided by a carefully drafted agreement.

This usually means avoiding the urge to accept a standard form of agreement. As with almost any such form, the only thing standard about it is that it is other guys' standard form, drafted by their attorneys with their best interests in mind. This does not mean that such forms should be rejected automatically. It does mean, however, that there is nothing magical about standard forms and, more importantly, that you should always read and carefully consider any proposal, standard or not.

Many arbitrators specialize in one particular field, such as construction or finance, and their services should be considered whenever they are available. Whether or not such specialists are available for your situation, the agreement should always identify the arbitrator or arbitration service to be used or describe how that selection will be made.

The speed the parties want is best ensured by setting specific time limits in which things must happen. For example, establish time limits for the selection of the arbitrator and the start and completion of the arbitration hearing. And require that the arbitrator render his decision within a specified time after the hearing ends.

The parties can balance their need for the discovery necessary to prepare their case with desire to limit costs by specifying that discovery will be allowed within limits. One solution is to allow depositions but to place a limit on the number each side can take.

Recent cases have opened ever so slightly the door to more effective court review of erroneous arbitration decisions. Take every opportunity to ensure a fair and correct decision by requiring that the arbitrator apply California law and issue a written explanation of the legal and factual basis for the decision.

The bottom line. The decision to arbitrate demands thorough investigation, thoughtful analysis and careful drafting of the ultimate decision.