The Right to Arbitrate and the Risk of Losing that Right a Reminder from the Alabama Supreme Court
Construction and Procurement Law News, Q4 2020
The Alabama Supreme Court recently found that a party was in breach of an arbitration clause 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 so as to protect 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 regard to a case concerning a Personal Service Agreement (PSA). The plaintiff employee filed her demand for arbitration under the AAA Employment Arbitration Rules while the PSA specified that any disputes between the parties be settled by arbitration pursuant to the AAA Commercial Arbitration Rules.
Upon review of the arbitration demand, AAA issued a letter informing the parties that it had determined the arbitration would be administered in accordance with the AAA Commercial Arbitration Rules and the Employment/Workplace Fee Schedule, which required the defendant employer to submit a non-refundable fee of $1,900.00 while the employee was charged only $300.00. The employer sent a letter objecting to the application of the Fee Schedule. AAA informed the employer that the administrative review was “subject to review by the arbitrator,” and that all such disputes could be raised upon satisfaction of the filing requirements.
When the employer declined to pay its AAA filing fee, the AAA closed the case. The employee then filed suit against the employer in state court. In response, the employer filed a motion to dismiss and compel arbitration. The employer argued that the employee had breached the PSA by filing her demand for arbitration under the Employment Arbitration Rules, which violated the parties’ agreement to resolve disputes pursuant to the AAA Commercial Arbitration Rules. The employer further alleged that the parties had agreed to split arbitration costs 50/50 and that the AAA’s administrative ruling applying the Employment Fee Schedule violated that agreement. 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.
Although the trial court agreed with the employer and granted the motion to compel arbitration, the Alabama Supreme Court reversed. The Supreme Court relied on the AAA Commercial Arbitration Rules, which stipulated that claims regarding employees or independent contractors and their employers that involve work related claims shall be subject to the Employee Fee Schedule. Based on this rule, the Supreme Court found that the employee had not violated the parties’ arbitration agreement by filing her demand on the AAA form titled "Employment Arbitration Rules Demand for Arbitration."
The Supreme Court also disagreed with the employer’s assertion that the parties were contractually bound to split arbitration costs 50/50. The Supreme Court noted that the PSA did not specify that all fees and costs would be split equally, but instead specified that only the “fees and expenses of any arbitrator” and the cost of the hearing locale would be borne equally by the parties. The Supreme Court found that because the parties’ arbitration clause did not specify that administrative fees would be split 50/50, the employer should have paid the fee and then contested the fee allocation with the arbitrator. The Supreme Court held that the employer’s refusal to pay the filing fee constituted a default of the arbitration provision in the PSA, and that based on this breach, the employer had lost the right to compel arbitration.
What can you learn from this decision? If you select arbitration as your means of binding dispute resolution, then you must also adhere to the rules, decisions, and procedures of the chosen arbitral institution or 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. Arbitration can provide the parties an arbitral tribunal that is well-versed in the subject matter and industry, allowing parties crucial expertise they may not have access to in state or federal courts. It also typically offers a more expedient and efficient means of resolution. To preserve the arbitration remedy and all its accompanying benefits, adherence to applicable rules and procedures is important.
The second take away 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.