The Cost of Arbitration: A Defense to the Enforceability of Arbitration Agreements?

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INTRODUCTION

The Federal Arbitration Act (FAA) provides for the enforceability of a written arbitration provision in any maritime transaction or contract involving interstate commerce, and declares that such agreements "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract" (9 U.S.C. [section] 2, 2007). Supreme Court precedent sanctions arbitration as a dispute resolution mechanism, as well (Carrington, 2002). Commercial business, consumer, and employment disputes are arbitrated by organizations such as the National Arbitration Forum (NAF) and the American Arbitration Association (AAA).

Initially, arbitration was touted as a cheaper and more efficient alternative to litigation. Additionally, advantages to arbitration over the primary alternative (civil litigation) presumably include control, confidentiality, cost and time savings, finality, and more predictability for managing risk than litigation (Leasure, 2009). Some studies suggest that the time period from the commencement of the dispute to its resolution is shorter in arbitration than litigation (Rutledge, 2008). Others suggest that whether or not arbitration is cheaper than litigation or more expensive, or which forum provides greater access to justice, may be dependent upon the type of dispute (Drahozal, 2008). Nevertheless, many disputants today are disenchanted with arbitration as a means of resolving disputes, and complain that the complex process shares many of the characteristics of litigation (Stipanowich, 2010). Arbitration has become more formal, and arbitrators follow traditional rules of procedure and evidence, resulting in the arbitration process looking and costing about the same as litigation (Sternlight, 2000). Arbitration as a means of dispute resolution now can be quite expensive as well, particularly since attorneys' should be included in the calculation of costs (Rutledge, 2008).

The American Arbitration Association charges a filing fee per case that ranges anywhere from $125-$7,000 depending upon the amount of the claim. The AAA also requires a hearing fee that can be as much as $250 per party, per case. Public Citizen's statistics in 2002 revealed that an $80,000 consumer claim brought to the Circuit Court of Cook County, Illinois carried a forum fee of $221. However, the same claim brought to the National Arbitration Forum would cost approximately $11,625, and if brought to the American Arbitration Association would result in estimated payments in excess of $6,600. Additionally, many costs associated with arbitration, such as the administrative fees as well as the compensation of the arbitrators, must be paid upfront, which can be a substantial financial burden, making it less likely that some disputants will be able to proceed in that forum (Alleyne, 2003). Comparatively, court costs are relatively insignificant to the cost of arbitration proceedings, many expenses associated with litigation need not be paid in advance, and the salary of the judges are paid by the government in the civil justice system.

In addition to filing and hearing fees, the arbitrator(s) who hear the case charge their own individual service fees. In the state of North Carolina, the average compensation for an AAA arbitrator is $1,225.00 per day (Tillman v. Commercial Credit Loans, Inc., 2008). If a panel of three arbitrators is specified in the arbitration clause, as under AAA complex commercial rules, then that amount is trebled. Arguably, contingent fee contracts provide a mechanism for overcoming possible liquidity and risk aversion problems caused by arbitration costs (Drahozal, 2006). However, if the transaction costs of hiring arbitrators become astronomical in protracted proceedings, and that likelihood is foreseeable, then the contingency arrangement is meaningless as an incentive.

Moreover, contingency arrangements, while lucrative and enticing in tort actions, are not a sufficient incentive in the relatively small recovery world of consumer complaints. …