Arbitration Dilemma: What if You Do Not Have a Willing Dance Partner?

Written by litigator and mediator Irvin Schein and originally published at irvinschein.com. 

It has now become commonplace for commercial agreements to include mandatory arbitration clauses. Where a party to such a contract seeks to litigate a dispute under such an agreement, the other party should be able to get the lawsuit dismissed on the basis that the dispute must be arbitrated and cannot be litigated in court.

Typically, arbitration clauses are included in agreements at a time when the parties to the agreement are looking forward to a contractual relationship that is harmonious and cooperative, or at least civil and businesslike. Unfortunately, when a dispute arises so that the arbitration clause becomes relevant, normally the attitude of each party towards the other will be very different.

Unlike judges, arbitrators must be paid by the parties. Unless the arbitration clause in the contract provides otherwise, the arbitrator will require an equal deposit from each party with further deposits to be made as the process evolves. But what if one side refuses to pay its share of the arbitration fees?

The other party’s response in these circumstances may be to pay both shares of the arbitration expenses and proceed with the arbitration in the hope of recovering those expenses at the hearing. The conventional wisdom is that a party refusing to pay its share of the expenses is not going to be permitted to attend the arbitration in any event so the exercise will be a one sided affair, presumably resulting in success for the party that paid the entire fee.

It should be noted that while beyond the scope of this post, there is authority for the proposition that a party refusing to pay its share of the arbitration fee nevertheless has the right to attend at the arbitration and present its position. Obviously that is a controversial point, worth exploring in future posts.

For the moment, however, let’s assume that the party willing to pay its share of the arbitration fee (presumably the party that initiated the arbitration) is either unable or unwilling to pay both shares. What are its options?

As indicated above, courts are reluctant to get involved in disputes involving contracts with mandatory arbitration provisions. However, there is now American authority for the proposition that in circumstances in which the opposing party refuses to pay its share of the fees, the initiating party will have the right to abandon the arbitration process and proceed by way of legal action.

The case is called Roach v. BM Motoring, LLC and was dealt with recently by the New Jersey Supreme Court.

In that case, a series of plaintiffs purchased used cars at different times from a car dealer. Each purchaser signed an agreement that provided for mandatory arbitration and, somewhat unusually, that the defendant car dealer would advance both parties’ arbitration fees, subject to reimbursement by decision of the arbitrator.

In each of these cases, the purchasers filed demands for arbitration because of complaints with their vehicles. The car dealer simply refused to respond, by paying arbitration fees or otherwise. The plaintiffs then joined forces and sued the car dealer in state court. The trial court dismissed the case, ruling that the parties had intended to arbitrate by signing the contract and “should remain faithful to that clause”. The plaintiffs appealed and lost again. To the appeal court, there was enough factual dispute about the proper form for arbitration that the car dealer’s failure to respond to the demand was neither a material breach of the contract nor a waiver of its right to require arbitration.

The plaintiffs appealed again, to the New Jersey Supreme Court. That court reversed the decisions below it. It ruled that just as in the case of other contracts, if a party materially breaches an arbitration agreement, the other party is relieved of its obligations under the agreement to proceed by way of arbitration. In this case, the refusal of the car dealer to pay the arbitration fees as provided for under the contract was considered a material breach; therefore, the plaintiffs were no longer bound to proceed by way of arbitration at all.

This case does not mean that every delay in paying arbitration fees or responding to a demand for arbitration will amount to a material breach of the arbitration agreement or a waiver of the right to enforce it. The Court itself made it clear that whether or not such behaviour constituted a material breach would have to be considered on a case by case basis in the light of the terms of the contract and the conduct of the parties.

One way of avoiding the problem at the very beginning, of course, is to draft the arbitration clause in the contract to provide that any failure by either side to advance its share of the arbitration fees will give the other party the option of pursuing the matter in court. However, even without that provision, there is now authority for the proposition that in an appropriate case, the non-defaulting party will be able to do just that.