The Right to Arbitrate and the Risk of Losing It

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Bradley Arant Boult Cummings LLP

The Alabama Supreme Court recently found that a party was in breach of an arbitration agreement for declining to pay the fee schedule set forth by the American Arbitration Association (AAA) and thus lost the right to compel arbitration. This case serves as a reminder to follow the orders of arbitral institutions or risk losing the opportunity to arbitrate your dispute. The Alabama Supreme Court’s decision further enforces the sage advice to draft arbitration agreements carefully and meticulously to protect and ensure your rights and preferences in the adjudication of a dispute.

In Fagan v. Warren Averett Companies, LLC, the parties disputed the applicability of the Employment Arbitration Rules in regards to a dispute arising from a personal service agreement (PSA). Upon review of the plaintiff employee’s arbitration demand, the AAA determined the arbitration would be administered in accordance with the Employment Fee Schedule that required the defendant employer to submit a substantially higher filing fee than the employee.

When the employer declined to pay the AAA filing fee, the AAA closed the case. The employee then filed suit against the employer in state court, and in response, the employer filed a motion to dismiss and compel arbitration. The employer argued that the AAA’s administrative ruling applying the Employment Fee Schedule violated the PSA. The employee responded that the employer was precluded from enforcing the arbitration provision in the PSA because it had declined to participate in the arbitration.

The Alabama Supreme Court agreed with the employee holding that the employer’s refusal to pay the filing fee constituted a default of the arbitration agreement in the PSA and that, based on its breach, the employer had lost the right to compel arbitration.

What can you learn from this decision? First, if you elect arbitration as your means of binding dispute resolution, then the rules, decisions, and procedures of the chosen arbitral institution should be followed or you run the risk of losing the right to arbitrate altogether. That risk is not to be taken lightly. Arbitration is intentionally selected as a means of resolution for any number of reasons, but all of them important to the party so choosing. Arbitration can provide an arbitral tribunal that is expert and well versed in the subject matter and industry providing parties with crucial expertise they may not have access to in state or federal courts. It may also offer a more expedient and efficient means of resolution. But, whatever the motivations for selecting arbitration, the parties most likely want to preserve and protect that right. To preserve the arbitration remedy and all its accompanying benefits, adherence to applicable rules and procedures is important.

The second key takeaway from this case is to carefully and precisely draft your contracts. In this case, if the parties had specified they would split all costs and fees 50/50 in the arbitration agreement, the court may have decided differently. Enlisting legal help for an assiduous contract review may not sound appealing, but it is a task that can save you much heartache and expense down the road. Ensuring that your priorities, intentions, and requirements are codified clearly and unambiguously in a binding document is money well spent.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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