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Caveat: Know Your Arbitrator

Law: Two tales illustrate the risks in an increasingly common feature of contracts.

January 19, 1997|MYRON LEVIN | TIMES STAFF WRITER

Dolores Soderstrom's legal nightmare began innocuously enough with a routine agreement to sell two vacant lots she owned in Indio.

But the deal landed the 73-year-old widow, against her will, in binding arbitration before the Southern California Arbitration Assn. Last May, an inexperienced arbitrator ordered Soderstrom to pay the putative buyer a staggering $558,000--nearly eight times the value of her properties.

Shocked and depressed by the decision, Soderstrom later discovered that her adversary, Palm Desert businessman Steve Holgate, was closely linked to the arbitration service. The SCAA was run by a former Holgate employee, court records show, and Holgate had recruited some of its arbitrators.

D.D. Dunlap Cos., a Long Beach real estate firm, also went before an SCAA arbitrator last year--with similar results. Following a minor landlord-tenant dispute involving $36,000, Dunlap was ordered to pay an eye-popping $582,000. Holgate served as hearing clerk in the Dunlap arbitration, and the award went to a business firm whose vice president was a Holgate associate, court records show.

Holgate declined to be interviewed for this story.

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The Soderstrom and Dunlap cases are cautionary tales about the risks of binding arbitration--a fast-growing system of alternative private justice that promises speed and cost savings, but often lacks safeguards against legal error.

Soderstrom was the luckier of the two. In December, Los Angeles County Superior Court Judge James L. Wright threw out the award, citing the "close relationship" between Holgate and the SCAA's president. The arbitration was "presumptively biased," Wright said.

Soderstrom still faces legal bills in the tens of thousands of dollars, and may have to wait out an appeal. Even so, she is fortunate, says her lawyer, Paul George. California courts usually are so reluctant to disturb even dubious arbitration awards, he said, that Wright's ruling was "almost a one-in-a-million type of victory."

Dunlap, too, had presented its evidence of potential bias, but drew a different judge, who declined to vacate the arbitration award. Fearing an appeal would go nowhere, Dunlap last September cut its losses by paying a six-figure settlement.

Arbitration clauses have become a standard feature of contracts of all kinds, as people and businesses seek escape from the high costs and crowded dockets of the civil courts. An arbitration clause may appear in the fine print any time you lease an apartment, open a brokerage account or enroll in an HMO.

Major providers like the American Arbitration Assn. typically offer experienced lawyers or retired judges to hear cases. But arbitrators aren't required to earn a license, have legal training or knowledge of how to run a fair hearing.

"Arbitration is not regulated," said Carrie Menkel-Meadow, a UCLA and Georgetown University law professor and arbitration expert. "Anyone can call themselves an arbitrator."

Proponents of arbitration say the system works as intended a high percentage of the time--resolving disputes fairly, quickly and at reduced cost. But critics say there is no way to know how often abuses occur, since no agency monitors complaints and victims often consider court appeals to be a waste of time.

Some critics contend that an overburdened judiciary has put the bureaucratic imperative of reducing caseloads ahead of concern for justice in arbitration cases. Docket clearing has become such a priority that it "has now trumped all other public policies," complained Cliff Palefsky, a San Francisco attorney.

The California Supreme Court underscored the sanctity of arbitration with its 1992 decision in a case called Moncharsh. The court--stressing that binding means binding--decreed that arbitrators can't be reversed for errors of fact or law, even those resulting in "substantial injustice."

In a scathing dissent, Justice Joyce L. Kennard said the ruling "requires our trial courts not only to tolerate substantial injustice, but to become its active agent."

The fact that arbitration clauses often are buried in preprinted contracts raises additional concern, legal observers say. As in the Soderstrom case, they note, many people are at most dimly aware that they have agreed to arbitration.

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Although a Californian for more than 50 years, Dolores Soderstrom still speaks with a vestigial South Dakota twang. Bright and independent, she pitched in with her children to run the family business when her husband died 20 years ago.

But her business experience did not prepare her for her encounter with the Southern California Arbitration Assn., an unfamiliar name in state arbitration circles.

Court records show that its headquarters was a Palm Desert typing service that took its calls and mail. Among those listed on its four-person executive board last year were a deceased businessman and a fitness center operator who later claimed she did not know what the SCAA did.

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