INSIGHT: Proper Drafting Can Stop Arbitration Payment Dodgers

Commercial agreements frequently include arbitration clauses that require dispute resolution through binding arbitration, and normally, the parties share the costs of the arbitration on a pro rata basis and a deposit must be replenished as the case proceeds.

This system functions effectively when both parties uphold their obligation to share the costs. But when one party—typically the respondent—strategically withholds their portion of the payment, non-payment can unfairly stall the proceeding and frustrate the purpose of arbitration: the efficient and cost-effective adjudication of claims.

In such circumstances, the rules of leading alternative dispute resolution (ADR) providers allow the arbitrator to terminate the proceeding unless one party—usually the claimant—advances the entire cost of the arbitration. See, e.g., AAA Commercial Arbitration Rule 57(e) and (f); JAMS Comprehensive Arbitration Rule 31(a).

While these rules also permit a prevailing party to obtain their costs, including arbitration fees, as part of the final award, this offers little assistance to a cash-strapped claimant, who may already have suffered a sizeable loss, and is required to advance fees during the course of a proceeding.

Although the rules permit an arbitrator to preclude the non-payer from offering evidence of any affirmative claims at the hearing, that is an inadequate deterrent. The non-payer may not have any affirmative claims to bring, and in certain situations, the non-payer may still have a strategic incentive to avoid paying.

Courts Mostly Unwilling to Get Involved

Strategic non-payment is not a new problem. Parties to arbitration disputes have been seeking judicial intervention for nearly two decades, asking the courts to order the non-payer to pay their share of the fees. However, in the commercial context, judges have mostly been unwilling to interject in such fee disputes. See, e.g., Lifescan Inc. v. Premier Diabetic Servs. Inc., 363 F.3d 1010, 1013 (9th Cir. 2004) (holding that where the parties incorporated the AAA rules into the agreement, the arbitrators acted within their discretion to suspend arbitration and the district court erred in ordering respondent to pay its share of the arbitration fees).

This is in contrast to employment disputes, where the relevant rules typically require the employer to advance the arbitration costs. When an employer refuses to deposit the arbitration fees, courts are more willing to order them to pay or find they waived their right to arbitration, allowing the employee to pursue their claims in court. See, e.g., Brandifino v. CryptoMetrics Inc., 896 N.Y.S.2d 623, 631 (NY Sup. Ct. 2010) (holding if the employer failed to deposit arbitration fees within 20 days, the plaintiff could bring his claims in court).

Such a ruling might be helpful to an employee who prefers to appear before a jury or can leverage a settlement from the decision. But in the commercial context, finding waiver and permitting litigation in court would render meaningless the dispute resolution mechanism the parties negotiated for. Meanwhile, a claimant who must seek court intervention faces a costly hurdle right out of the gate, frustrating the streamlined purpose of arbitration.

Even if court intervention were a desired solution to this problem, motions to compel payment of fees are unlikely to be successful. This is because courts consider arbitration fees conditions precedent to arbitration “left to the discretion of the arbitrator.” Dealer Computer Servs. Inc. v. Old Colony Motors Inc., 588 F.3d 884, 888 (5th Cir. 2009) (holding the trial court erred when it compelled the appellee to pay the arbitration deposit).

Conversely, when claimants turn to arbitrators to issue an interim award requiring the payment of fees, there is no guarantee that arbitrators will order payment of fees without clear authority from ADR provider’s rules. While there is no published record that would indicate how often this takes place, I am aware of instances where arbitrators have declined to order strategic nonpayers to pay, citing a lack of authority under the parties’ agreement and relevant arbitration rules.

Proper Drafting Can Help

Absent clear direction from the courts or ADR providers, commercial parties can remove the possibility of strategic non-payment through proper drafting.

Specifically, this can be done by including language in arbitration agreements that obligate the parties to share the costs of arbitration pro rata, as opposed to simply deferring to the rules of the chosen organization.

Arbitration clauses should also grant the arbitrator clear authority to enforce the cost-sharing provision and permit a default to be entered where arbitration costs are withheld. This language will discourage respondents from strategically withholding payment of fees and strengthen arbitrators’ authority to enforce fee-sharing agreements.

To the extent that such a provision unfairly disadvantaged a destitute respondent, arbitrators could always exercise their discretion to decline to enter a default where the respondent proved their financial inability to pay. As a practical matter, a consideration of financial inability to pay will not harm claimants, who may have limited interest chasing claims against judgment-proof respondents.

The success of arbitration as an alternative dispute resolution mechanism depends on commercial parties upholding their fee-sharing obligations. Including specific language in arbitration clauses to address this issue can prevent the problem from occurring.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Megan Dubatowka is a commercial and employment litigator with Harris St. Laurent LLP in New York who represents both companies and individuals.