5th Circuit Says Court Cannot Force a Party to Pay Arbitration Fees and Why Arbitration Is Not Always The Best Option

You have to wonder if this recent ruling might cause some companies to pause over the recent craze to automatically include arbitration clauses in their contracts.

In Dealer Computer Svc v. Old Colony Motors the 5th Circuit ruled that a trial court did not have the authority to compel a party to pay an arbitration deposit.  The underlying dispute is not important for this post.   Neither party disputed the existence and validity of an arbitration clause in the contract.  That arbitration clause specified that the AAA Commercial arbitration Rules would govern any dispute.

The issue was Old Colony’s inability to pay its portion of the arbitration deposit.  Old Colony was still willing to arbitrate but it could not pay its portion of the fees involved.  As a result, the arbitrator asked Dealer Computer to pay the entire fee.  Dealer Computer refused and the arbitrator suspended the matter indefinitely.   Dealer Computer filed suit to compel the arbitration and the trial court ordered Old Colony to pay its share of the deposit.

On appeal, the Court agreed with Old Colony’s argument that the trial court did not have the authority to order it to pay those fees.  The key to its decision is that the Supreme Court has stated, “absent an agreement to the contrary, the parties intend that the arbitrator, not the courts, should decide certain procedural questions which grow out of the dispute and bear on its final disposition.”  Payment of fees is just such a procedural question.

The Court turned to a 9th Circuit case, Lifescan, Inc. v. Premier Diabetic Servs., Inc. in support of its ruling.  In that case the 9th Circuit noted that arbitrators have the discretion to require fee deposits and could change those rules to require one party to pay the deposit if they choose.  Such a decision was entirely a procedural matter and not subject to a court order.

The Court also noted that AAA rules allowed arbitrators the discretion to order either party to pay the fee in full and to suspend or terminate the arbitration if those fees are not paid.  Any award could be adjusted upward or downward as appropriate if one party paid more than its fair share of the fees involved. The Court specifically avoided deciding whether a party could challenge an arbitrator’s decision if they did not adjust the award.

So why would this decision cause a company to rethink an automatic commitment to arbitration?

First, expenses.  The commonly misunderstood belief is that arbitration is a cheaper alternative to the court system.  But look at this case, the arbitrator’s deposit was in excess of $50,000.  Dealer Computer was asked to pay Old Colony’s portion of $26,000 as well as its own just to get the case before an arbitrator with no guarantee of success.  The fees to file suit in court are no where near this amount.  A company has to pay attorney’s fees in both cases.  If Dealer Computer had filed suit and Old Colony could not afford legal counsel, Dealer Service’s attorney’s fees would likely be minimal and the case would end relatively quickly.

Second, collectibility.  Now this is an issue in any dispute: does the other party have the assets available to satisfy a judgment?  But in this case Dealer Computer has to double down on its filing fees. If it wins in arbitration and if those additional fees are part of the award, it won’t matter one bit if it can’t collect.  Dealer Service will have just thrown good money after bad.

Third, indefinite delay.  Is it possible that Dealer Computer could never get its day before a decider of fact?  Because there is an arbitration clause, a Court cannot order Old Colony to pay its share of the fees.  Because there is an arbitration clause, Dealer Computer cannot bring suit in court.  As long as Old Colony does not pay its share, Dealer Computer’s only option is to shoulder the costs and risks involved by paying both parties’ fees.  If the merits of the case are a close call, say a 55/45 deal(or even 60/40) in Dealer Computer’s favor it might not be worth it.  A party could escape its liabilities by simply stating it is willing to participate in arbitration but then refusing to pay its share of the fees.

David B. Willis

David B. Willis

David Bryan Willis is a Tyler area business lawyer providing legal services to private companies, startups, and small businesses across Texas.
David B. Willis

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