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What to Do When a Party Won't Pay

It May Be Wise to Consider a Contractual Waiver
12.16.10

In these difficult economic times, arbitration's potential to be a cost- efficient method for resolution of business disputes is often stymied by a party's real inability or tactical refusal to pay the advance deposit against cost and arbitrators' fees required by the rules of arbitral bodies. The claimant is faced with the dilemma of whether to pay the entire advance amount, with the hope of recouping same in the final award, or, for all practical purposes, abandoning the claim. Most courts will not find a party's failure to pay the advance to be a waiver of the right to arbitrate, and arbitral bodies will not let the arbitration proceed without payment. There are no default arbitration awards because the governing conventions and laws require each party to be given a reasonable opportunity to present its case in arbitration.

Recently the Alberta Court of Appeal in Canada, reacting to what it deemed an "audacious" application by a nonpaying respondent to stay litigation by a claimant, held that the respondent's failure to pay its share of advance fees and costs rendered the arbitration agreement inoperative under Article II (3) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) and Article 8(1) of the UNCITRAL Model Law. (Resin Systems Inc. vs. Industrial Service & Machine Inc., 2008 ABCA 104.)

While this decisions is based on common sense, it represents the minority view.

There have been several arguments made to obtain a right to proceed with the claim in a court of law after a party's failure to pay its share of advance costs.

Breach of Contract

This argument is premised on the assertion that the agreement to arbitrate contains an implied undertaking to pay advance calls by the arbitral body or the arbitrators and that a breach of that fundamental undertaking constitutes grounds to void the arbitration agreement. (It is almost universally held that an arbitration agreement is a separate undertaking from the underlying contract.) Unfortunately, this argument has not met with acceptance in most courts. The majority view is that the undertaking to pay arbitral fees is between the individual party and the arbitral body.

The issue was considered by the 9th U.S. Circuit Court of Appeals in two cases, each reaching a different result. In 2003, a panel of the court rendered an opinion denying a motion by an arbitration respondent to dismiss a legal action brought by a claimant. The respondent at first refused to pay the full advance assessment, as agreed in the arbitration agreement, and agreed to pay it only after the arbitral body (United States Arbitration & Mediation of Oregon) dismissed the arbitration – on a finding of default on the part of the respondent – and the claimant brought a legal action. The court refused to dismiss the suit and, under Section 3 of the FAA, reasoned that to allow a party to refuse to cooperate with arbitration would permit indefinite postponement of litigation, which would be contrary to the Federal Arbitration Act's goal of promoting the efficient and expeditious resolution of claims through arbitration. Sink v. Aden Enterprises, Inc., 352F. 3d 1197, (9th Cir. 2003). Subsequently, in the case of Lifescan, Inc., v. Premier Diabetic Services, Inc., 363 F. 3d 1010 (9th Cir. 2004) a different panel of the court held that by incorporating the rules of the American Arbitration Association into their arbitration agreement, the parties had accepted the authority of the arbitrators to set the advance security and to apportion it as deemed fit. Here, the arbitrators amended their original order for equal sharing to direct the entire amount to be paid by the one party. The court, applying Section 4 of the FAA, held this was in accord with AAA Rule 54 and the failure of one party to pay a portion of the advance was not a "failure, neglect or refusal" to arbitrate that would make the agreement to arbitrate voidable. Accordingly, the court directed dismissal of the petition to compel payment.

In the case of Dealer Computer Services, Inc., v. Old Colony Motors, Inc., 588F. 3d 884 (5th Cir. 2009) the court, also dealing with an arbitration under the AAA rules, reached the same conclusion as the 9th Circuit in Lifescan by relying on the rule that procedural issues, such as prepayment of fees, are for the arbitrators.

Interim Relief

Since it is extremely difficult to get an application for an interim award compelling an averse party to pay its share of security for compensation of arbitrators' and administrative expenses – and even if such an award is made, it is doubtful it will be recognized as an "award" by the law courts – applications to compel advance payments of arbitration fees and costs have been made directly to the courts after the arbitration has been dismissed without prejudice. Clearly, this procedure defeats the prospect of arbitration being an economic alternative to litigation. It may be possible, in anticipation of a default in payment by the respondent, for the claimant to seek a lower advance payment in order to have the panel constituted and rule on an application for an interim award compelling the payment of advances.

The uncertainty, cost and time necessary to obtain and enforce an interim award for advance fees and costs render such relief unsatisfactory to a party seeking a fast and economical resolution of a dispute.

Waiver

Because of the strong presumption in favor of arbitration found in the Convention on the Recognition of Foreign Arbitral Awards (New York Convention) and other international agreements and in the United States, the Federal Arbitration Act 9 USFA3 et seq., courts have seldom found that a failure to pay advance fees constitutes a waiver of the arbitration agreement. There is, however, nothing to prevent the parties from providing in their arbitration agreement that a failure of a party to pay its share of advance fees or security will constitute a waiver of that party's right to arbitration and give the other party the option of proceeding in a court of law or paying the full assessment, pending a final award, and proceeding with arbitration. The right of contracting parties to structure their arbitration agreements is universally recognized and enforced, and the concept of contractual waiver of rights is recognized by courts.

While there seems to be a very limited possibility for the nondefaulting party to proceed with arbitration without paying the full assessment when one party refuses to pay its share of the advance assessment, the dilemma of having the defaulting party gain an advantage by not paying and asserting arbitration as a basis for denying access to litigation to resolve the dispute can be avoided by a contractual waiver. Here is one example:

"Not withstanding any allocation made by the arbitral body or the arbitrators, the parties agree that, subject to the final award, each party will contribute equally to all charges or assessments of an arbitrator's compensation, administrative expenses or fees of the arbitral body and deposits with respect thereto. In the event a party defaults in timely payment, the other party shall have the option of paying the full amount of such charge, assessment or fee and proceeding with the arbitration or of voiding this arbitration agreement and proceeding in a court of law in the seat of the arbitration with the defaulting party hereby submitting to the jurisdiction of said courts and the service of process by courier or ordinary mail at the address where notices are to be sent under this contract."

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