Marc J. Goldstein Arbitrator & Mediator NYC
June 29, 2016

Penniless Parties

Get ready for the upcoming conference on Impecuniousness in Commercial Arbitration. No, not another session on third-party funding. Rather, our subject will be the law applicable to the inability of a party to pay its share of the arbitrators’ fees. And our main text will be a new (really) decision from the US Ninth Circuit Court of Appeals, holding that when an AAA commercial arbitration under the Commercial Rules has been terminated by the tribunal due to Claimant’s non-payment of deposits for arbitrator fees, and the reason for non-payment was genuine inability to pay, the federal district court should allow the Claimant’s case to proceed on the merits in court. (Tillman v. Tillman, 2016 WL 3343785 (9th Cir. June 15, 2016)).

I spare you the specifics of the case, save to note the Claimant did indeed try quite diligently to pursue the arbitration but simply ran out of money and could not pay, that Respondent declined to advance Claimant’s share of deposits, and that the arbitrator first suspended and ultimately terminated the case all as provided in AAA Commercial Rule R-57.

The case had originally been brought in court, but having been stayed pending arbitration under FAA Section 3 upon the granting of Respondent’s motion to compel arbitration. After the termination of the arbitration, Claimant sought to have the Section 3 stay vacated so that the case could proceed in the district court on the merits. Respondent sought to have the stay vacated so that the district court could enter an order of dismissal. The district court round went to the Respondent, with the district court finding that the FAA deprived the court of power to permit further litigation once a stay of proceedings pending arbitration had been granted. The Ninth Circuit rejected this conclusion in the narrow circumstances of this case where there was a clear evidentiary showing by the Claimant that she had attempted to participate in the arbitration in a fulsome way but was prevented by financial incapacity for proceeding to the stage of a merits hearing and a final award. On that foundation of facts, the Ninth Circuit drew two conclusions in applying the FAA’s text: first, that Section 3’s requirement that a stay pending arbitration endure until arbitration “has been had in accordance with the agreement” was satisfied where the arbitration had proceeded up to the point of a final order of termination under Commercial Rule R-53; second, there would no statutory basis for a renewed order compelling arbitration under Section 4, because there was no “failure, neglect, or refusal” to arbitrate.  Thus finding no basis in the FAA itself to penalize Claimant with summary dismissal of her court case under Federal Civil Procedure Rule 41(b) (involuntary dismissal for failure to comply with a court order), the Ninth Circuit held that such dismissal by the district court was erroneous,  a violation of the public policy-driven principle that “‘[d]istrict courts have an obligation and a duty to decided cases properly before them.'”

And in response to the position of Respondent  (and maybe a few naysayers in the arbitration community) that this position is an affront to the “‘liberal federal policy favoring arbitration,'” the Ninth Circuit says NO: “Our decision that Tillman’s case may proceed does not mean that parties may refuse to arbitrate by choosing not to pay for arbitration…. Here… the district court found that Tillman had exhausted her funds and was ‘unable to pay for her share of arbitration.'” Accordingly, the Court’s judgment that the case should proceed on the merits before the district court “does not run afoul” of the pro-arbitration policy.

What should be the result on the same question an arbitration governed by FAA Chapter Two and the New York Convention? Article II(3) of the Convention provides that the Court of a Contracting State shall refer the parties to arbitration at the request of one of them but need not do so if the arbitration agreement is (inter alia) “incapable of being performed.” Section 206 of the FAA speaks in permissive terms, i.e. that “[a] court having jurisdiction under this chapter may direct that arbitration be held in accordance with the agreement…” Thus Chapter 2 presents no unique obstacle to a result similar to that achieved in Tillman. And FAA Sections 3 , the sections interpreted an applied in Tillman, applies with equal force to international cases under Chapter Two — as Chapter Two has no separate provision concerning stays of proceedings in the US District Courts.

On the theory that good law sometimes promotes bad behavior, it is worthwhile to consider some possible consequences. Perhaps even as this is written some creative 9th Circuit plaintiff’s lawyers are devising schemes to contrive a state of impecuniousness for their clients.  Defense lawyers keen to maintain the arbitral forum or at least to stymie efforts by Claimants to escape may demand discovery into the Claimants financial affairs, hoping to show that the position of impecuniousness is a ruse. Arbitrators suspecting a ruse may be reluctant to enter termination orders, and may conclude that indefinite suspension — putting the Claimant in limbo with no recourse to the courts — has more potential effect than the threat of termination to influence Claimants to come up with the necessary funds.  And what shall become of the AAA’s longstanding practice, in domestic and commercial cases, to withhold from the tribunal both the identity of the non-paying party and the circumstances of non-payment (even though this is usually self-evident, and in any event a party may bring the matter to the arbitrator’s attention, e.g. Rule R-57(a))? And what of the position that under a broad arbitration clause, the question of whether non-payment is a material breach of the agreement to arbitrate, or a non-performance excused by “impossibility” to perform, is an arbitrable issue that the tribunal should decide — presumably before entering a termination order?

All of this is surely wonderful fodder for our first annual Impecuniousness in Commercial Arbitration conference, appropriately to be convened at a sunny Ninth Circuit locale. Beverly Hills in February perhaps?

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