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THE DOWNSIDE TO ARBITRATION Kyle W. Ohlenschlaeger and Bruce E. Loren | Nov 14 2019

Proponents of arbitration have long pushed the process as a faster, cheaper and more efficient process to litigation. We largely agree with faster, as it has been our experience that most cases filed in arbitration are resolved between six months to a year, where litigation paths are often drawn out anywhere from one to three years. We also agree that arbitration is more efficient. If there is a pre-trial dispute, such as a discovery issue, in an arbitration we can generally send a formal email to an arbitrator and get a ruling on our dispute within 10 days. In court, we have to draft a motion and get it set for hearing, a process that is sometimes taking in excess of 3 months due to judicial backlog. Arbitration also has the benefit of confidentiality, as you can keep your disputes out of the public eye – potentially providing goodwill and reputation benefits.

Despite these benefits, our clients have increasingly found the cost of arbitration to be oppressive and prohibitive because of increased filing fees and the required arbitrator compensation not included in litigation. For instance, a court filing fee for an action seeking $800,000 in damages is less than $500, and the parties have no obligation to pay the judge or the court beyond that amount. If the same case is filed with the American Arbitration Association (the "AAA") and under its rules (the "Rules"), the total filing and administrative fees due by the Plaintiff to the AAA would be $11,200. In addition, assuming the case would need 5 days for the final hearing, the parties would split arbitrator compensation that would likely be in the range of $50,000. Cases where the damages sought exceed $1 million require three arbitrators under the Rules, so (in addition to higher administrative costs) the parties can expect to pay around $150,000 in arbitrator compensation, assuming a five-day hearing.

The AAA requires the parties to place a deposit for arbitrator’s compensation – much like a large retainer for an attorney. This creates other problems when one of the parties does not or cannot pay its share. If a party refuses or cannot pay its share, the Rules allow the arbitrator to stop the arbitration until the arbitrator’s deposit is paid in full. In a case where a defendant refuses to pay its share, the plaintiff in placed in a difficult position where it is forced to cover the defendant’s share if it wants to proceed with its case. In our example above, this means that the plaintiff could end up paying $60,000 in arbitration costs and fees just to have its case heard. If a plaintiff is unable to afford all these costs, the plaintiff is essentially placed in a position that it cannot have its case heard.

Practical Recommendations

If you are still inclined to include agreements to arbitrate in your contracts, there are some ways that you can mitigate these costs up front. First, include a provision in your agreement to arbitrate that under no circumstances will the arbitration be conducted by more than one arbitrator. This eliminates the possibility that you will be required to compensate three arbitrators for their service.

Second, agree to a private arbitration, not administered by the AAA, JAMS, or some other large arbitration service. The benefit here is avoiding the large administrative fees. When doing so, you can still agree that the arbitration will be governed by the Rules so that there is structure in place. The difficulty in the private arbitration process is often the ability to agree upon or find an arbitrator without the services of the AAA or similar service. Therefore, at the time of entering into a contract to arbitrate, the parties should attempt to agree upon a pool of arbitrators that can be used in the event of a later dispute.

Finally, we recommend including a provision in your contract that allows the prevailing party to recover all arbitration related costs, including all fees and any payments made for arbitrator compensation, from the non-prevailing party. As it presently stands, the law permits arbitrators to award the prevailing party fees and arbitrator compensation, but does not require the arbitrator to do so. If a valid cost and fee provision is added to an agreement to arbitrate, the arbitrator will be forced to comply with that provision and award the prevailing party its costs and fees.

As indicated above, there are benefits to arbitration – most notably speed, efficiency and confidentiality – that may outweigh the downside of the additional costs. In those situations where you wish to arbitrate your disputes, following the above recommendations can serve to mitigate some of the costs you incur. If you have any questions regarding arbitration or additional ways you can protect yourself when entering into an agreement to arbitrate, do not hesitate to contact Loren & Kean Law’s construction attorneys to assist in tailoring an arbitration provision that best fits your particular needs.

Bruce E. Loren and Kyle W. Ohlenschlaeger of the Loren & Kean Law Firm are based in Palm Beach Gardens and Fort Lauderdale. Loren & Kean Law is a boutique law firm concentrating in construction law, employment law, and complex commercial litigation. Mr. Ohlenschlaeger focuses his practice on construction law and a wide range of commercial litigation disputes. Mr. Loren has achieved the title of "Certified in Construction Law" by the Florida Bar, exemplifying the Bar’s recognition of this expertise. The firm’s construction clients include owners/developers, general contractors, specialty contractors in every trade, suppliers and professional architects and engineers. Mr. Loren and Mr. Ohlenschlaeger can be reached at bloren@lorenkeanlaw.com or kohlenschlaeger@lorenkeanlaw.com or 561-615-5701.