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Arbitration Strategies: What Happens When One Party Refuses To Pay the Arbitrator?

by Joseph C. McGowan

The decision to arbitrate disputes or litigate in the courts is similar to the decision parents face in deciding whether to send their kids to public or private schools.  Arbitrators and the organizations that administer arbitrations, like private schools, give you just a little more control over the experience.  You can negotiate the arbitration process and, theoretically, end up with a more qualified arbitrator or arbitration panel as result of your input in the selection process.  On the other hand, our court systems also provide us with many great judges–not unlike the teachers provided by our public schools.

What really differentiates private arbitrators is the duty by each party to pay a hefty fee for the arbitrators and administrators of the arbitration.  And, perhaps more significant than the amounts stated in the applicable fee schedule, this financial element to arbitration has the potential to change, not just the course of arbitration, but also the outcome of the dispute.  The arbitrators’ inherent need to be paid converts arbitrators (and their administrators) into what, at times, feels like additional parties to the arbitration.

 

The Standard Fees For Arbitration

Anyone inserting an arbitration clause into their agreements should understand the amount they will pay in arbitration fees, when they will have to pay, and, perhaps most importantly, the consequences of either side refusing to pay their share.

Parties to arbitration must be ready to dig deep into their pocketbooks even before they get even close to their “day in court.”[1]  For instance, the American Arbitration Association (“AAA”) charges under its standard fee schedule for two-party claims between one and ten million dollars an initial fee of $7,000 paid by the initiating party plus misleadingly named “final fee” of $8,475 to be split between the parties (and paid prior to the first administrative hearing).  Where the respondent has a counterclaim, another set of fees must be paid.  The biggest financial hit, however, is the assessed deposits based upon an estimate of the arbitrators’ time (before during and after the evidentiary hearing), which deposits are collected prior to the hearings from both parties.  The deposits also include estimated costs for hearing room rates and other expenses, which are not included in the standard fees.  Additional deposits can be requested as the arbitration proceeds.

JAMS, for two-party arbitration, charges an initial filing fee of $1,750 and an equal amount for counter claims.  In addition, parties to a JAMS arbitration pay the arbitrators’ fees, expenses, and a 12 percent markup on all of these fees and expenses as an additional administrative fee.  ADR Services charges an initial fee of $450, plus $450 per party for administration fees.  In addition, an estimate of arbitrator fees are paid in advance.

 

What Happens When One Party Chooses To Not Pay the Arbitrators?

Given that both sides in an arbitration are generally asked to pay significant fees and deposits early on in the process, the question arises, “What happens if one of the parties refuses to pay its share of the arbitration fees?  It is true that many arbitrated cases involve true believers in arbitration where neither party quibbles about arbitration fees.  Unfortunately, many disputes involve a party (usually the respondent) who is absolutely incensed about being sued in the first place, and who is certainly not content to pay a significant bill from the arbitrator.  Such a reluctant participant may dispute that he or she is bound by the arbitration provision, believe that the claim is frivolous, or merely object to the amount of the arbitrator’s estimated fees.  With surprising frequency, parties to an arbitration balk at their to pay their arbitration fees.

Not surprisingly, the arbitrator and the administrator will not move forward with the arbitration without being fully paid, in advance. This is hardly selfishness by the arbitrators and administrators: the arbitrator and employees of the administrator need to be compensated, and both have expenses.  Any party not paying the arbitration fees requested in a timely manner will generally receive polite but persistent phone calls and threatening letters from the administrator until the fees are fully paid.  Except for rare hardship cases, the arbitrator will suspend the arbitration and, soon thereafter, and will terminate the arbitration if fees are not fully paid.[2]

Where the opposing side refuses to make payments, the party that has paid its share faces a dilemma.  It may allow the arbitration to be terminated and file a lawsuit in court, claiming that the non-paying party waived the right to arbitrate by failing to pay.  Cien v. Barna (2012) 206 Cal. App. 4th 1383.  Alternatively, the paying party generally has the right to double down on the costs of arbitration and pay the fees of the non-paying party.[3]

In fact, the practice of non-payment by a respondent/defendant is more common than many people realize.  It places the petitioner/plaintiff in the very difficult position of funding the entire operation itself or giving up the right to arbitrate.  The prospect of paying the opponents share of the fees becomes particularly distasteful when that non-paying party rachets up the fees with dispositive and discovery motions (or, more likely, forces the paying party to file motions to compel discovery).  Given that the both parties had agreed to arbitrate, forcing one party to bear all expenses is, of course, patently unfair.  No one ever said, however, that litigation (or arbitration) was fair.

 

The Repercussions To The Non-Paying Party

Some may assume that a party that refuses to pay its share of the arbitration fees would lose its case by default.  Unfortunately, this is not the case—at least to the extent the non-paying party is on the defense as a respondent/defendant.  The AAA Commercial Rules R-57 (b), which addresses the situation where a party does not pay its share of fees, provides, “in no event, however, shall a party be precluded from defending a claim or counterclaim.”  JAMS and other administrators have similar rules.  This language allows a non-paying party to put on its defense in the arbitration regardless of whether it pays its share of the arbitration fees.

On the other hand, a non-paying party may be subject to sanctions related to any affirmative claim it asserts in the arbitration.  The arbitrator may assess sanctions “limiting a party’s ability to assert or pursue their (own) claim.”  The AAA Commercial rules (and rules from other administrators) do not, however, provide for penalties where the non-paying party’s sole role in the arbitration is as a defendant/respondent.  The practical effect of this rule is that the reluctant respondent in an arbitration can avoid paying its fees pretty much with impunity.

The cynical among us may believe that a respondent who refuses to pay arbitration fees subjects itself to some form of unwritten stigma in the eyes of the arbitrator.  Arbitrators certainly know it when a party refuses to pay, and it is entirely possible that this non-payment will color the arbitrator’s judgment.  However, my experience has been quite the opposite.  Most arbitrators go about their duties with self-conscious professionalism, and are unlikely to allow such issues to affect their legal judgment—as unfair as that may seem (given that one party has not paid the arbitration fees).

 

What Is The Effect of Termination By The Arbitrators For Non-Payment?

As noted above, the paying party also has the option of allowing the arbitrator to dismiss the arbitration, and proceeding to litigation.  This option also gives rise to a host of additional strategy decisions.

Where an arbitration is terminated due to non-payment of fees, the parties should consider the legal effect of this termination.  The AAA, for instance, will tell you that the termination is “without prejudice,” meaning that the arbitration (or litigation) can be refiled with the AAA or in court, but the standard termination letters generally do not state this fact.  A judge could find that such a dismissal by the arbitrator is essentially “with prejudice.”  In one case, such a termination for non-payment was determined to be a “lack of prosecution” by the California Superior Court, subjecting a party to liability for costs as a non-prevailing party.  Worse still, an appellate court found that the termination by the arbitrator essentially constituted the law of the case, foreclosing the petitioner from prevailing in a future proceeding.  For a contrary opinion stating that such a termination is not an “award” of the arbitrator see Cinel v. Christopher (2012) 203 Cal.App. 4th 759, 767.

To avoid the potential for such an outcome, a party to a terminated arbitration should request an order from the arbitrator spelling out in detail the grounds of the termination and the effect such termination should have on later proceedings.  Such an order should be requested prior to the issuance of the arbitrator’s termination order, as such an order could be construed to divest the arbitrator of jurisdiction.

Parties to a terminated arbitration may also consider whether the statute of limitations to bring an action in court was equitably tolled for the duration of the arbitration.  See, Marcario v. County of Orange (2007) 155 Cal. App. 4th 397, 407.  To avoid statute of limitation issues, the parties should consider filing a court action and stipulating to stay the court proceeding pending resolution of the case through arbitration.

 

Conclusion

Parties to an arbitration must keep in mind the financial requirements of arbitration, not only for budgeting purposes, but for purposes of strategy.  By not paying the arbitration fees, respondents can essentially force the petitioner into the choice of paying arbitration fees for both sides or having the arbitration terminated.  This prospect of a party bearing all costs for both sides is exacerbated where the arbitrator is forced to rule upon extensive discovery motions and other motion practice.  Where the paying party refuses to pick up the non-paying party’s share, that party should take steps to clarify the grounds for termination by the arbitrator.

In sum, the financial element in arbitration has a profound impact on the process.  This is not to say that arbitration is worse or better than litigation: it is just a different game with its own set of rules, strategies, and costs.

 

If you are in need of experienced litigators for either arbitration or litigation, please contact the firm of Rogers Joseph O’Donnell, a firm specializing in litigation in construction disputes, government contracts, environmental, employment law, retail trade, white collar crime and general litigation.

 


[1] This is not to say that Arbitration is necessarily more expensive overall than litigation in the courts.  Arbitration generally allows for less discovery and a faster, and more reliable trial date.  These factors may offset the additional costs of paying the arbitrator and arbitration administrator.

[2]  The paying party may inform the arbitrator or administrator that the other side’s refusal to pay is merely an attempt to switch out the trier of fact based upon the arbitrator’s preliminary rulings.  It is unlikely, however, that such an argument will make any difference.  Without payment of full fees, the arbitration will be terminated.

[3]  The administrator will tell the party that, theoretically, at least, a prevailing party will recover any arbitration fees if they prevail in the arbitration.

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