What to Do When a Party Refuses to Pay Its Share of Arbitration Costs

Vol. 18 No. 2

By

Most commercial arbitrations are administered by an arbitral association such as the American Arbitration Association (AAA), JAMS, or the International Institute for Conflict Resolution and Prevention (CPR). These organizations typically require the party commencing the arbitration to pay a filing fee to get the arbitration started. Once the arbitrator has been selected, the arbitrator usually holds a case management conference and issues an order setting a schedule for the arbitration.  At that time or shortly afterward, the arbitral association asks the parties to deposit funds to cover the arbitrator’s anticipated fees and expenses. The AAA and JAMS invoice each party for its share of this amount and expect payment within a stated time frame in advance of the hearing. In this regard, Rule 52 of the AAA Commercial Arbitration Rules states:

The AAA may require the parties to deposit in advance of any hearings such sums of money as it deems necessary to cover the expense of the arbitration, including the arbitrator’s fee, if any, and shall render an accounting to the parties and return any unexpended balance at the conclusion of the case.

Sometimes, one of the parties is unable or unwilling to pay its share of the arbitration fees and expenses. This article explores the options available to an arbitrator in those circumstances. 

What Do the Rules Say?

When a party refuses to pay its share of arbitration expenses, the first place to look for guidance is the rules the parties selected to govern the arbitration. These rules are usually identified in the arbitration agreement itself or are provided by the arbitral association that the parties have selected to sponsor or administer their case. For example, Rule 54 of the AAA Rules provides a framework for arbitrators faced with a non-paying party:

If arbitrator compensation or administrative charges have not been paid in full, the AAA may so inform the parties and order that one of them may advance the required payment.  If such payments are not made, the arbitrator may order suspension or termination of the proceedings.  If no arbitrator has yet been appointed, the AAA may suspend the proceedings.

Thus, Rule 54 allows an arbitrator to order that one party cover the other’s costs. If that party refuses, the arbitrator can suspend the arbitration until payment is made or dismiss it outright. Consistent with AAA Rule 54, two federal appeals courts have held that an arbitrator can dismiss an arbitration proceeding if one party refuses to advance the non-paying party’s fees.[i]  In both of those cases, the claimants requested the court to undo the arbitrator’s order requiring the claimant to advance all of the arbitration expenses. The courts rejected these requests and refused to interfere with the arbitrator’s authority to decide how the arbitration costs should be allocated.

If one party agrees to cover the non-paying party’s share of the arbitration expenses and the arbitration goes forward, the arbitrator should adjust the final award to reimburse the party that advanced the other side’s share of the expenses. The Ninth Circuit emphasized this and noted that the arbitrator’s failure to fairly redistribute costs “could likely be subject to challenge in a suit to enforce, modify or set aside an award.”[ii]

Suspending or dismissing the arbitration when one party will not cover the other side’s share of the expenses is not always a satisfactory approach. In a commercial setting, if the claimant does not pay its share of the expenses, then it is eminently fair to suspend the arbitration until the claimant makes such payment, or if payment is not made within a certain time, to dismiss the claimant’s case. A claimant should not be permitted to hold a case open and waste the arbitrator’s and other party’s time if it is not able or willing to pay its share of the cost for the proceeding that it initiated.

If the respondent refuses to pay its share of arbitration expenses, however, suspending or dismissing the arbitration proceeding may be inequitable. Suspension or dismissal usually would punish the claimant, who is seeking relief, for the respondent’s failure to fulfill its obligations, and it rewards the respondent for being uncooperative. This is particularly true if the respondent is deliberately attempting to thwart the claimant’s contractual right to arbitration or if being required to advance all the arbitration expenses creates a financial hardship for the claimant. The Ninth Circuit noted that, although it is within the arbitrator’s discretion, dismissing the arbitration when the claimant refuses to cover the non-paying respondent’s costs “may not be an ideal solution.”[iii] Instead, the arbitrator should consider other options, but must be careful not to overstep his or her authority. 


 

Send the Parties to Court

One option is for the arbitrator to determine that the respondent waived its right to arbitrate by failing to pay its share of the expenses. Thereafter, the arbitrator should terminate the arbitration and clear the way for the claimant to litigate its case in state or federal court. 

This approach is consistent with federal law. Section 3 of the Federal Arbitration Act provides that a court can enter an order compelling parties to arbitrate so long as the party seeking the order “is not in default in proceeding with such arbitration.”[iv]  In Juiceme LLC v. Booster Juice LP, a federal district court held that an arbitrator – not a court – must determine whether a party’s failure to cover arbitration costs constitutes a “default in proceeding with arbitration.”[v]  If the arbitrator finds such a default, then the claimant can litigate its case in court.

That is exactly what happened in Sink v. Aden Enterprises, Inc., in which the arbitrator held the non-paying respondent in default and terminated the arbitration.[vi] The claimant then pursued his claims in federal court.  Later, the respondent came up with the funds to pay its share of the arbitration expenses and asked the court to order the parties back to arbitration.  The Ninth Circuit affirmed the trial court’s denial of this request, holding that respondent waived its right to arbitrate by materially breaching its contractual obligation to pay arbitration fees. The court also ruled that respondent’s failure to pay its required arbitration costs was a “default in proceeding with arbitration” under Section 3 of the FAA.[vii] The court found that compelling arbitration would “allow a party refusing to cooperate with arbitration to indefinitely postpone litigation.”[viii]  Accordingly, the claimant was permitted to pursue its claims in a court of law. 

Although this approach preserves the claimant’s right to have its case heard without undertaking a disproportionate financial burden, it also is not ideal because it allows the respondent to circumvent the parties’ agreement to arbitrate and denies the claimant the benefits of arbitration. 

 

Hold a Streamlined Arbitration Hearing

Another option is for an arbitrator to keep the parties in arbitration and hold a streamlined hearing proportionate to the funds available. An arbitrator must give each party the opportunity to present relevant evidence and witnesses to support its claim or defense. However, the AAA Rules give an arbitrator the discretion to vary this procedure so long as each party is treated equally and is given a fair opportunity to present its case. Rule 30(a) of the AAA Commercial Rules provides:

The claimant shall present evidence to support its claim. The respondent shall then present evidence to support its defense.  Witnesses for each party shall also submit to questions from the arbitrator and the adverse party. The arbitrator has the discretion to vary this procedure, provided that the parties are treated with equality and that each party has the right to be heard and is given a fair opportunity to present its case.[ix] 

The JAMS Comprehensive Arbitration Rules and Procedures (the JAMS Rules) grant the arbitrator the same leeway. JAMS Rule 22 allows the arbitrator to vary the arbitration hearing if it is “reasonable and appropriate to do so,” provided that all parties “are afforded the opportunity to present material and relevant evidence.”[x]

For example, if the estimated fees for a two-day arbitration are $6,000, and the claimant already paid $3,000 but the respondent refuses to pay its remaining half, the arbitrator could hold a one-day hearing costing approximately $3,000. Instead of allowing each party a full day to present its case, the arbitrator can allot each party a half day and limit the number of witnesses each party can present at the hearing. As long as each party is treated fairly and given a reasonable opportunity to present its evidence, the arbitrator can hold a streamlined hearing with whatever funds he or she has to work with.[xi]

Holding a streamlined hearing has the obvious advantage of upholding the parties’ agreement to arbitrate. It also avoids rewarding a respondent for refusing to pay its share of the arbitration costs and does not place an undue financial burden on the claimant. Of course, this option is also not ideal. The arbitrator may find it difficult to hear all of the evidence needed for a proper resolution of the case in an abbreviated hearing. 


 

An Arbitrator Has No Authority to Enter Judgment against a Non-Paying Respondent

Importantly, an arbitrator does not have authority to enter judgment against a non-paying respondent without giving it an opportunity to defend itself. The AAA and JAMS Rules require that the respondent be given an opportunity to present evidence in support of its defense.[xii] As stated earlier, both sets of rules permit the suspension or dismissal of a claimant’s claims for failure to pay fees. The JAMS Rules state that a non-paying party may be precluded from submitting evidence to support an affirmative claim, but cannot be barred from presenting its defense.[xiii]  In Coty, Inc. v. Anchor Construction, Inc., the Supreme Court of New York held that barring a non-paying respondent from putting on a defense was a due process violation.[xiv] Thus, unless the parties’ arbitration agreement expressly states that a non-paying party can be precluded from presenting its case, an arbitrator may not invoke this remedy.[xv]

 

Summary of an Arbitrator’s Options

An arbitrator faced with a party who will not pay its share of the arbitration expenses has several options to move the case forward.  He or she can:  (1) dismiss the proceeding or suspend it until payment is made; (2) order one party to advance the nonpaying party’s share of the arbitration costs and award them back in the final award; (3) hold the non-paying party in default under its arbitration agreement and terminate the arbitration in favor of litigation; or, (4) conduct an abbreviated hearing that is commensurate with the financial resources available.  Undoubtedly, the most appropriate option will depend on the facts of each case.

 

Mitchell L. Marinello is a partner in the Chicago-based law firm of Novack and Macey LLP and specializes in complex business litigation, including disputes involving partnerships, commercial contracts, real estate transactions and professional liability.  Mr. Marinello is a Director of the Chicago Chapter of the Federal Bar Association, a member of the Commercial and Business Litigation and ADR Committees of the ABA Section of Litigation, and a member and former Chair of the Civil Practice Committee of the Chicago Bar Association.  He frequently serves as an arbitrator for the American Arbitration Association (Large, Complex Case Panel), the Financial Industry Regulatory Authority, the International Institute for Conflict Prevention and Resolution and other arbitral organizations.  Mr. Marinello is a graduate of Wesleyan University in Middletown, Connecticut and New York University School of Law.  He is also a Fellow of the Thomas J. Watson Foundation.  Contact Mr. Marinello at mmarinello@novackmacey.com.

 

Alison Talbert Schwartz is Of Counsel at Novack and Macey LLP.  She has over 12 years experience in complex commercial litigation and arbitration.  She represents public and private corporations, government entities, partnerships, and individuals in manufacturing, real estate, energy, insurance, law and securities matters.  Ms. Schwartz is a frequent author on issues relating to alternative dispute resolution and civil practice for the American Bar Association and the Illinois Institute of Continuing Legal Education.  She is a member of the Civil Practice, Commercial Litigation, Federal Civil Practice and Alliance for Women committees of the Chicago Bar Association.  Ms. Schwartz received her B.A. from the University of Illinois and Urbana-Champaign, and her J.D. magna cum laude from the University of Illinois College of Law. She can be contacted at aschwartz@novackmacey.com


[i]               See generally Dealer Computer Services, Inc. v. Old Colony Motors, Inc., 588 F.3d 884, 887-88 (5th Cir. 2009); Lifescan, Inc. v. Premier Diabetic Services, Inc., 363 F.3d 1010, 1012-13 (9th Cir. 2004); accord Williams v. Tully, No. C-02-05687, 2005 WL 645943, at 6-7 (N.D. Cal. Mar. 18, 2005) (applying Lifescan, Inc.). 

[ii]               See Dealer Computer Services, Inc., 588 F.3d at 888, n.2.

[iii]              See Lifescan, Inc., 363 F.3d at 1013.

[iv]              9 U.S.C. § 3.

[v]               See Juiceme LLC v. Booster Juice LP, 730 F. Supp. 2d 1276, 1283 (D. Or. 2010).

[vi]              Sink v. Aden Enterprises, Inc., 352 F.3d 1197, 1199 (9th Cir. 2003).

[vii]             Id.

[viii]             Id. Federal courts have applied Sink to hold that a party refusing to pay its required arbitration fees waives its right to arbitrate and must proceed in court. See Garcia v. Mason Contract Prods, LLC, No. 08-23103-CIV, 2010 WL 3259922, at 4 (S. D. Fla. 2010) (by refusing to pay its share of costs, respondent “forfeited its right to proceed with arbitration, and is now bound by the normal procedures of federal law.”)

[ix]              See Am. Arb. Ass’n (AAA) Rule 30(a) (2010).

[x]               JAMS Comprehensive Arb. Rules & Procedures (JAMS) Rule 22(a) and (d) (2010).

[xi]              In the unlikely event that both parties consent, an arbitrator can forgo a hearing and enter an award based on the parties’ written submissions which may include affidavits and supporting documents.  See AAA Rules 30(c) and 32(a) (2010); see also JAMS Rule 23 (2010).

[xii]             See AAA Rule 30(a) (2010); see also JAMS Rule 22(d) (2010).

[xiii]             See JAMS Rule 31(b) (2010).

[xiv]             See Case No. 601499-02, 2003 WL 139551, at 8 (N.Y. Sup. Ct. 2003).

[xv]             See, e.g., Richard DeWitt and Rick DeWitt, No Pay No Play: How to Solve the Nonpaying Party Problem in Arbitration, 28 Disp. Resol. J. at 27 (2005).

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