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

By Burke, Debra D.; Green, Devon M. | Journal of Legal, Ethical and Regulatory Issues, January 1, 2011 | Go to article overview

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


Burke, Debra D., Green, Devon M., Journal of Legal, Ethical and Regulatory Issues


ABSTRACT

Arbitration clauses in contractual arrangements are fairly standard today. By agreeing to arbitrate, the parties to a contract waive their rights to seek redress of their claims in a court in favor of an arbitration tribunal. While litigation is criticized as being expensive and time-consuming, costs associated with arbitration are far from inconsequential. If the parties have waived their right to go to court, even in situations in which fees and costs may be awarded to the prevailing party, and if arbitration costs are cost-prohibitive, could there be a defense to the arbitration contract based upon unconcionability? This paper explores situations in which such an argument could be successful, and suggests ways to make arbitration clauses less susceptible to such a challenge.

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. § 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 (Stipano wich, 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 $22 1 . 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. …

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