949-622-8444
Flyer & Flyer A Professional Law Corporation
Working With Clients Throughout Southern California And Across The State

When One Party Bails in Private Arbitration

This article originally appeared in Orange County Lawyer, an official publication of the Orange County Bar Association, Vol. 52, page 34, January 2009

When parties agree in writing to arbitrate a prospective dispute, the law provides a mechanism for compelling arbitration, Code of Civil Procedure '1281.2. Indeed, public policy favors requiring the parties to proceed to arbitration of disputes that arise under a written contract, see Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal. 4th 951, 972. But, there is a gap in legislation with respect to ensuring resolution once arbitration has commenced. The American Arbitration Association has no written provisions for entering the default of one party. So what occurs when one side fails to pay the balance of fees due the arbitrator?

Consider the scenario where there is a written employment agreement calling for arbitration. Both sides pay the initial deposit to file claims and counterclaims. They share in the costs of preliminary matters related to pleadings and discovery. However, when the arbitrator rules in favor of one party on preliminary matters, the disgruntled party fails to pay fees for the arbitration hearing. The arbitrator offers Hobson's choice:
(1) one party pays the share of the disgruntled party; (2) suspend arbitration until the disgruntled party decides to pay, which could be indefinitely; or (3) terminate arbitration without resolution or award.

After tens of thousands of dollars being spent on preliminary matters, none of the arbitrator's offered options seem plausible.

While truly impecunious parties can avoid arbitration by submitting a declaration of poverty, see Gutierrez v. Autowest, Inc. (2003) 114 Cal. App. 4th 77, a party disgruntled by adverse rulings can seemingly avoid resolution in arbitration by simply declining to pay. Another alternative is asking the arbitrator to work without being paid in full in order to resolve the dispute.

COURT INTERVENTION

Once arbitration commences, it is the arbitrator and not the court that takes responsibility for resolving the matter. However, courts do not surrender jurisdiction and retain the power to insure that the matter is in fact concluded. Several appellate decisions have considered issues when one party declines to pay its fair share of the arbitration or to otherwise participate in resolution.

Although agreements to arbitrate are not self-executing, after a court order compelling arbitration, the refusal to participate in arbitration to resolution, such as by paying the required share of the fees, is a default. See The Publicists Local 818 of the International Lions of Theatrical and Stage Employees and Motion Picture Machine Operators of the United States and Canada v. National Screen Service Corporation (2d Dist., 1960) 183 Cal. App. 2d 491, 497:

It is clear from the foregoing section that, it is only after a finding has been made that under a written contract of arbitration a party is in default in the performance thereof, that the court will order the parties to the contract to proceed in accordance therewith. A default in performance is the failure, neglect or refusal of another to perform under the arbitration agreement. The word default, as used throughout the section (1282), obviously refers only to the default of a party in refusing to proceed to arbitration as agreed rather than to a default by a party under the main provisions of the parties' contract.

Also see, Sauter v. Superior Court (1969) 2 Cal. App. 3d 25, 29:

In this case petitioner may decline or refuse to participate in the arbitration proceedings and the real party in interest, Logan, will then be compelled to rely upon the procedures set forth in section 1281.2 of the Code of Civil Procedure to enforce the right of arbitration. Agreements to arbitrate are not self-executing; one desiring arbitration must take steps to secure it. In order to compel arbitration, defendant will have to seek relief in the court in which plaintiff's present cause of action is pending and until he seeks to compel arbitration and to stay the present cause of action, plaintiff is free to prosecute his suit for rescission.

So the arbitrator has the matter, one party won't pay or won't participate after initiation of arbitration, what can a party do to persuade the arbitrator to resolve the dispute without having to pay the disgruntled party's fees?

Where the parties have stipulated to binding arbitration, the arbitration has a life of its own outside the judicial system, and only the arbitrator should determine whether there has been an unreasonable delay in prosecution which would justify dismissal, Nanfito v. Superior Court (1991) 2 Cal. App. 4th 315, 319.

The arbitrator has full plenary powers once the arbitration process has commenced to decide questions of procedure and discovery. It is also up to the arbitrator, and not the court, to grant relief for delay in bringing an arbitration to resolution, Swab Financial, LLC v. E*Trade Securities, LLC (2007) 150 Cal. App. 4th 1181, 1200-1201 (trial court's vacation of arbitration award was overruled, with the appellate court holding that the arbitrators did not abuse their discretion in refusing to grant a continuance to one party and conducting the arbitration with only one party present). Clearly, based on Swab Financial, arbitrators have the power to default a party who declines after invitation, to participate in the arbitration hearing. Participation obviously means paying the costs associated with the hearing.

The arbitrator can make such orders as are necessary to conclude the arbitration and enter the appropriate award as required by law and equity. The court can assist the arbitrator where one side demonstrates recalcitrance in proceeding, since agreements to arbitrate are not self-executing, Brock v. Kaiser Foundation Hospitals (1992) 10 Cal. App. 4th 1790, 1795.

The court retains jurisdiction to entertain a petition for judicial assistance in moving arbitration forward or to dismiss for lack of diligence, Dial 800 v. Fesbinder (2004) 118 Cal. App. 4th 32, 46 (Emphasis added). If the arbitrator will not accept persuasion, there is a remedy in petitioning the court to order resolution by date certain or suffer the consequences of default.

Further where the arbitrator does not complete his job, the court can send the dispute back to the arbitrator. It is true that where the award fails to settle all the issues of the dispute submitted to arbitration, the court may vacate the award and refer the matter back to the arbitrator, Lovret v. Seyfarth (1972) 22 Cal. App. 3d 841, 854.

Once the arbitrator has accepted the case, he should not be allowed to drop the matter without resolution or award. That the arbitrator is owed money by one side, should not justify dropping the dispute since the fees owed by the disgruntled party are not forfeited, but may become the subject of a further action by the arbitrator.

In paraphrasing the picturesque metaphor, in Brock, supra, 10 Cal. App. 4th at 1806, the disgruntled party can effectively set fire to the dock after the arbitration ship leaves the port by refusing to pay its obligation to the arbitrator. The arbitrator retains all powers to resolve the dispute and retains the future right to collect additional fees from the disgruntled party at the conclusion of arbitration. The Court has the power to assist the arbitrator.

APPEAL FOR LEGISLATION

Current legislation does not provide an adequate remedy for dealing with the problem of concluding a matter in arbitration after commencement. The arbitrator who has agreed to serve has the choice of requesting substantial sums up front to ensure that he is adequately compensated for his services (and then perhaps making a refund at the conclusion of arbitration) or filing suit after the conclusion of arbitration against the party who has declined to pay its fair share of the fees. Legislation should be enacted to require arbitrators to conclude arbitration after they have accepted any payments or made any rulings, because resort to courts to compel resolution could adversely affect the arbitrator's decision making process. The arbitrator could easily conclude that the party moving to compel resolution by reliance on court intervention is seeking to cause the arbitrator to work for free. The legislation would allow the arbitrators to enter default of a party who fails to pay or otherwise participate in the arbitration hearing.

If arbitrators cannot be entrusted to perform their ethical duty of concluding arbitration that has been commenced, whether paid in full or not, then legislation is required to prevent the needless waste of legal resources related to failed arbitration when a disgruntled party declines to pay its fair share of the arbitrator's fees.

Contact The Firm

Bold labels are required.

Contact Information
disclaimer.

The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

close

Privacy Policy