ADR Update: Failure to Pay Arbitrator’s Fees

By Paul J. Dubow

Rule R-53 of the Commercial Rules of the American Arbitration Association permits the AAA, in the event of extreme hardship on the part of any party, to defer or reduce its administrative fees. Rule R-53 defines "administrative fees" as compensation for the AAA’s "cost of providing administrative services." Arbitrator’s compensation does not fall within this definition. Thus, what happens when one of the parties is unable or unwilling to pay the arbitrator’s compensation?

[Page 22]

Cases decided by California and federal courts are instructive on this subject. In Lifescan, Inc. v. Premier Diabetic Services, Inc. (9th Cir. 2004) 363 F.3d 1010, 1012, Premier filed a demand for arbitration because of an alleged breach of a contract by Lifescan to supply Premier with medical equipment for resale. A few days before the hearing was scheduled to commence, Premier announced that it could not proceed because it no longer could afford its share of the arbitrators’ estimated fees and costs for the remainder of the proceedings. The arbitrators gave Lifescan the option of advancing the fees so that the arbitration could proceed with the expectation that it might recoup the fees should it prevail. Lifescan declined the offer and instead demanded that the arbitration proceed with Premier barred from presenting evidence. The AAA declined to do so and the arbitration was suspended. Lifescan then petitioned the district court to compel arbitration pursuant to section 4 of the Federal Arbitration Act and order Premier to pay its pro rata share of the forum fees. The petition was granted but the Ninth Circuit reversed. It held that section 4 limited the court’s discretion and that the court can order the parties to proceed to arbitration only in accordance with the terms of the agreement. In Lifescan, the parties incorporated the AAA rules into their agreement. Those rules gave the arbitrators broad discretion to allocate fees and expenses among the parties. The court ruled that the arbitrators had exercised their discretion by allowing the arbitration to proceed on the condition that the claimant advance the remaining fees. Code of Civil Procedure section 1284.2 did not help Lifescan because it provided that each party shall pay his pro rata share of the expenses and fees of the arbitrator "unless the arbitration agreement provides otherwise." The agreement between the parties "provided otherwise" because it incorporated the AAA rules, which allowed the decision to be made by the arbitrators.