ARBITRATION FIRMS HOLD AWARDS HOSTAGE

 

Anyone that has gone through an arbitration knows that the arbitrator/arbitration firm fees can be hefty. Four hundred dollars ($400) per hour is not unheard of. Typically, both parties are responsible for 50% of the fees incurred. Each party pay a retainer in the beginning, and pays invoices along the way. But what happens if, after the arbitration hearing but before the award is issued, there is a sizeable balance that the retainers will not fully cover? The answer may shock you.

Until arbitration firms resolve this dilemma by revising their rules, each party in an arbitration with arbitration fee-sharing faces the risk that the other party will refuse to pay their share of the arbitration fees remaining to prevent issuance of an award they anticipate will be against them.

Arbitration Rules Create the DilemmaRules for Arbitration

Arbitration firms generally have their own sets of arbitration rules – they are similar to state or federal ‘rules of civil procedure’ but far more comprehensive, and they cover things like the procedure for selection of the arbitrator, which rules of civil procedure do not. Arbitration rules are often cited or referenced to in the arbitration provision that requires the parties to resolve disputes through arbitration. There are several different sets of rules – for expedited arbitrations, limited discovery, international arbitrations, commercial arbitrations, class action arbitrations, and so on. However, all of these rules suffer from the same deficiency – they create a scenario where a likely-to-prevail party is compelled to pay the remaining balance of arbitration fees due from the likely-not-to-prevail party.

A Hostage of Happenstance

Consider this set of circumstances: You have just completed an arbitration hearing. The testimony and evidence presented at the hearing was very favorable to your client and his/her claims. Within 30 days, you receive notice of an Interim Award from the arbitrator, along with an invoice for several thousand dollars in additional arbitration fees. Your client pays his/her 1/2 of the remaining arbitration fees, but the arbitration firm refuses to release the Interim Award unless and until the other party’s 1/2 balance of the fees is paid in full. However, knowing this, and anticipating that the Interim Award is against them, the other party refuses to pay the balance of arbitration fees due.

Your client is now faced with an unholy dilemma:

  1. not to pay the other party’s balance of the fees due and instead return/go to the Court and file a motion to compel, motion for contempt (assuming the Court ordered the parties arbitration), and/or a motion to default the other party for non-compliance with the Court’s order to arbitrate), or some other legal avenue that will result in further legal fees and expenses; or
  2. not to pay the other party’s balance of the fees due and hope and wait for the other party to pay; or
  3. pay the other party’s balance of the fees due. But this option is problematic. If your client pays the other party’s balance of the arbitration fees due and the Interim Award is, in fact, favorable to your client, then all is right and good – sort of. Your client will only be able to add the additional arbitration fees paid to the collectible amount against your client assuming all the expenses paid: (a) can be awarded to your client due to a contractual fee-shifting provision, and (b) are added to a Final Award amount.

If your client pays the other party’s balance of the arbitration fees due and the Interim Award is against your client, then your client has just paid to obtain, and make effective, an award that would otherwise not have been released or effective without your client’s payment (unless, of course, the other party miraculously decided to pay the balance due).

So an attorney should be wholly confident of a favorable award before paying the other party’s share of the arbitration fees.

rules of arbitration

Problems Beget Solutions

This scenario raises an important question: Why do arbitration firms condition issuance of the award on payment of the full balance of Arbitration fees, especially in cases where the parties split the arbitration fees? The obvious answer is that they want their money – but there’s nothing wrong with that. What is wrong, and in need of revision, is the fact that issuance of the award is conditioned on full payment.

Would not a better method be to condition the occurrence (or even scheduling) of the arbitration hearing on payment of all balances due and a retainer equal to at least the hourly rate x 8 hours (full day arbitration hearing) or 4 hours (half day arbitration hearing) for each day the hearing is expected to take? Any overpayment can then be refunded to the prevailing party in cases involving contractual or statutory fee-shifting provisions or where fees and expenses were awarded to the prevailing party on some other basis.

Until arbitration firms resolve this dilemma by revising their rules, each party in an arbitration with arbitration fee-sharing faces the risk that the other party will refuse to pay their share of the arbitration fees remaining to prevent issuance of an award they anticipate will be against them or to force the other party to pay.

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If you are party to a contract with an arbitration provision and/or are involved in a dispute where the parties are required to proceed to arbitration, please do not hesitate to contact us at Business@TheJacobsLaw.com or click here for our contact information.

Your Attorneys for Commercial and Business Arbitrations