It was the sort of setback that used to send Anthony Capetola, a restaurateur and caterer in East Meadow, N.Y., racing to the courthouse. A customer had canceled a $60,000 wedding reception, and Capetola could only book a $30,000 reception to replace it. But Capetola, who is also a lawyer, had learned from his own case history: "It's often not worth going to a regular court because of the time involved."
Rather than waiting months--or even years--for a trial, Capetola turned to alternative dispute resolution (ADR) to determine how much money she owed him. Capetola, owner of Carltun on the Park, and his estranged client had agreed beforehand to subject any disagreements over their contract to an arbitrator provided by the American Arbitration Assn. (AAA). He paid a $750 filing fee, and 90 days later, their case was heard. Within a week, the arbitrator found in Capetola's favor, awarding his company $23,000 and allowing him to keep the $5,000 deposit. His total out-of-pocket costs? About $1,000.
Whether squabbling with a supplier, customer, employee, or partner, a small business can often solve its conflict more readily with ADR. It allows the parties to choose the date and place for the proceeding and, usually, to select a "neutral" (the industry's term for a mediator or arbitrator) who will handle the case. And often, ADR's nonadversarial tone lets you retain working relationships that otherwise would be shattered. It's a lot cheaper, too. While both sides usually bring attorneys along for consultation, legal and other fees are usually much less than for a full-blown trial. An expert witness, for example, can submit a written report, rather than appear for a formal deposition and court testimony.
ADR comes in two flavors: arbitration and mediation. Arbitration is the more formal approach, in which a neutral, much like a judge, makes a ruling based on the facts presented by each side. Arbitration is usually stipulated in a contract beforehand, along with who will administer the proceedings. Arbitration and mediation groups can recommend sample contract clauses.
With arbitration, decisions are final, binding, and, in general, almost impossible to appeal. In contrast, "mediation works best when both sides are willing to talk," says Harvard Law School professor Frank E.A. Sander. The parties try to reach a settlement rather than decide who was right or wrong. A mediator meets with all sides to set the stage and then privately caucuses with each group until they can agree on a resolution. According to the AAA, mediation results in settlement about 85% of the time.
FINDING COMMON GROUND. For example, George L. Bowen, senior vice-president at Calco Insurance Brokers & Agents in San Mateo, Calif., was nine months into litigation with a client in a contract dispute when both sides took the court's advice and hired a mediator through JAMS/Endispute (JAMS), a mediation and arbitration group. By the afternoon of only the first day of mediation, both sides made the radical decision to terminate their lawyers. A mere eight hours later and a little less than $2,000 into mediation, the case was settled. "We discovered common ground that we wouldn't have when our defenses were up," says Bowen, who still works with that client.
How much does ADR cost? Whether you choose arbitration or mediation, expect to pay a neutral $150 to $500 an hour. A daylong mediation session will run, on average, about $2,500. Arbitration cases last an average of three days, according to the AAA, which boosts the average cost to $7,500. The hourly charges are usually split between the parties, along with a filing fee that can range from a few hundred dollars to a few thousand for a complex dispute.
If you're convinced alternative dispute resolution could work for you, how do you choose a neutral? With tens of thousands of arbitrators and mediators available nationwide through both nonprofit associations and for-profit firms, the challenge is finding one with the appropriate expertise in small-business disputes rather than, say, marital or neighbor-related cases. The easiest way to find one is to go through a national ADR provider with an assembled roster of neutrals (table). We took a careful look at the rules and procedures of these national firms, and surveyed their costs.
If you decide to choose the mediation route, you'll want to use a provider that allows you the flexibility to find a mediator with whom you can work effectively. It's often more efficient for a small business to hire a firm that provides administrative services. That means they'll give you advice on possible neutrals, not just hand you a list, and take over the scheduling and day-to-day coordinating responsibilities, which are best handled by an impartial party rather than one of the disputants. With these requirements, we had to drop the venerable AAA from consideration for mediation. Although it does administer cases, the AAA appoints mediators without giving the disputing parties a say in the matter. This can be a problem when adversaries aren't comfortable with just any neutral. (Although it's possible to modify these rules in the contract, we figured it's easier to work with procedures that build in choice.)
We also ruled out the Center for Public Resources' Institute for Dispute Resolution. Although CPR does administer cases, the think tank and association generally advocates the do-it-yourself approach. It also tends to work with larger companies, with plenty of in-house resources, that just want access to its list of neutrals. In 1997, it administered just 130 cases.
Of the remaining providers, JAMS receives our nod. JAMS has 25 offices across the U.S., which gives you a decent chance of being able to use their facilities--a real plus if you're looking for a neutral location to hold your hearings. Also in its favor, the majority of JAMS mediators are full-time ADR professionals, who may be more skillful and less distracted than part-timers.
If mediation won't do the trick, you'll need an arbitrator with sound decision-making capabilities. If possible, seek one who has experience in your type of case or industry. For the greatest choice, try the AAA, whose mammoth 18,000-person Rolodex counts former judges, active lawyers, corporate counsel, and businesspeople among its arbitrators. However, the AAA process has one major downside: The larger the disputed claim, the higher the filing fees.
If you can't abide the loss of control typically associated with arbitration, call Resolute Systems Inc. Next to the AAA, Resolute has the most neutrals in its registrar--1,500. Like many of the other major arbitration groups, Resolute lets the disputants predetermine the maximum and minimum awards the arbitrator can set. Moreover, it's the only one among the major firms that doesn't stipulate that it can appoint an arbitrator if the parties can't agree on one.
Regardless of which mediation or arbitration provider you choose, look for one with a local case manager in your area. That's a good indicator that the firm has enough established, active neutrals on its list in a given region to justify setting up an office. To choose among neutrals, talk to past clients for references. John B. Bates Jr., a senior mediator in San Francisco who has handled over 2,500 cases, suggests asking for contact names from the mediator's last three cases, so the information is timely and the references aren't cherry-picked.
Particularly in the case of binding arbitration, you'll want someone who understands your situation well enough to render a fair verdict. Look at the number of cases the neutral has heard, particularly related to the experience you're seeking. The firm should be able to provide vitae on potential neutrals. Capetola, for one, prefers working with an arbitrator with a business background, not just a long legal resume. "I try to stay away from arbitrators that are pure lawyers," he says.
Whether you choose the firm hand of arbitration or the gentler guidance of a mediator, ADR might leave you and your adversary shaking hands rather than butting heads.