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Arbitration: Proceed with caution

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For many reasons, the number of civil jury trials in California is on the decrease. In fact, last year in California County Superior Courts, there were only 1,172 jury trials where the amount in controversy was more than $25,000 -- an unusually low number. A key reason for this is the growing popularity of binding arbitration.

While the general perception is that an arbitrator is more predictable and reliable than a California jury -- and can resolve any dispute privately, expeditiously and economically -- this is not always the case.

The growing trend toward arbitration has proliferated an industry of arbitration services and impressively credentialed arbitrators, but the kinds of arbitration, rules and outcomes are still the subject of debate, controversy and litigation.

The majority of arbitrations of business controversies arise from provisions written into the parties' contracts. These provisions are often written by professionals who may not have experience in arbitration or have not considered important issues, such as the choice of service provider, the ideal arbitration procedure or how the arbitrator's decision will be enforced. For these reasons and more, it is important that arbitration provisions in contracts be carefully considered when written.

Potentially thorny aspects of arbitration that can sidetrack a resolution include: what disputes can be ordered by the courts to arbitration, the arbitrator's authority in issuing awards and who must submit to arbitration.

Additional questions both parties should take into account when negotiating agreements include the skill set of the potential arbitrators, whether deposition discovery will be needed and whether the rules of evidence should apply at the hearing.

From a business litigator's standpoint, the kinds of controversies that could arise must be carefully considered when contracts are negotiated. When business relationships have deteriorated to the point of litigation, it is too late to negotiate better arbitration provisions. In fact, a poorly drafted arbitration provision will likely defeat the objectives of selecting arbitration in the first place.

As examples, a commercial landlord may not want to have an arbitration provision in a lease that fails to exclude disputes about a tenant's default in rent -- as arbitration may delay obtaining an enforceable eviction order. Or, a general contractor may not want an arbitration provision in his agreement with a developer unless there are mirror or pass through provisions requiring subcontractors to submit to the same proceeding.

Additionally, a real estate broker attempting to collect a commission may need to specify in the arbitration provision of his commission agreement that deposition discovery will be permitted; otherwise, he may be unable to gather testimony from reluctant witnesses to prove his efforts were the "procuring cause" of a deal.

Like most legal options, arbitration provisions have many advantages and disadvantages. It is always worthwhile to consult with an attorney with significant arbitration experience.

In any event, arbitration provisions should be carefully considered and skillfully negotiated, or you might as well join the ranks of litigants facing a jury.

-Submitted by Charles T. Hoge, managing partner, Kirby Noonan Lance & Hoge LLP.

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