Arbitration: The Consequences Of A Party’s Refusal To Cooperate

By: Werner Sabo, Of Counsel

Many contracts contain a dispute resolution provision that provides that, in the event of a dispute among the parties, that dispute will be resolved by arbitration and not litigation. There are a number of reasons to use this procedure. One is the relative speed of the process. A court proceeding can often take years to resolve, while most arbitrations take far less time. Another reason is cost. While the filing fees and arbitrators’ fees are often rather high, the parties usually more than make up for this by reducing their own costs. The amount and cost of discovery is far less in most arbitrations, with corresponding reductions in legal fees for both sides. Finally, in complicated matters, such as construction cases, arbitrators are selected for their expertise in the area, unlike judges who generally lack such expertise.

Parties will sometimes try to “game” the system by refusing to cooperate with the arbitration. This is almost always the defendant against whom the arbitration is brought. This will often involve a failure to pay that party’s share of the arbitration costs. Arbitration providers, such as the American Arbitration Association, will ask the parties for deposits that represent the anticipated arbitrators’ compensation for the upcoming arbitration. If one of the parties refuses to make its deposit (normally one-half of the total anticipated), the arbitration will not proceed unless the other side pays twice its share. This will usually bring the entire process effectively to a halt.

The plaintiff may then try to go to court to compel the arbitration to move forward, but sometimes all a court will do is order arbitration. If the party continues to refuse to pay, this can result in a never-ending circle. One court described this situation as follows:

Under Aden’s interpretation, the sole remedy available to a party prejudiced by default would be a court order compelling a return to arbitration. The same offending party could then default a second time, and the prejudiced party’s sole remedy, again, would be another order compelling arbitration. This cycle could continue, resulting in frustration of the aggrieved party’s attempts to resolve its claims.

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

Today, most courts would find that the party failing to pay has breached the agreement to arbitrate and the other side can then proceed in court against that party. For instance, in the recent New Jersey case of Roach v. BM Motoring, LLC, 2017 WL 931430 (NJ, March 9, 2017), where the purchaser of a car sought to arbitrate a dispute with the dealership and the dealership refused to pay the fees, the court held that the failure to advance certain filing fees or respond to the purchaser’s arbitration demands amounted to a material breach of the arbitration agreement. The dealership was therefore barred from later compelling arbitration and the purchaser could pursue his claims in court.

Courts will uphold an agreement to arbitrate, but if one of the parties tries to take unfair advantage by not paying the proper fees, it is likely that a court will find a way to make that party regret its strategy.

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