No Pay, No Play: Defendant’s Failure To Advance Arbitration Fees Is A Material Breach Of Arbitration Agreement And Precludes Enforcement Of Agreement

 by:  Peter J. Gallagher (@pjsgallagher) (LinkedIn)

Arbitration (pd)One of the more vexing procedural issues in arbitration arises when the other side refuses to pay its share of the arbitration fees. The arbitrator won't work for free so you are faced with a dilemma, advance the fees for the other side and try to recover them through the arbitration or have your arbitration dismissed. And, if you opt for the latter approach, can you then sue in court notwithstanding the admittedly valid and binding agreement to arbitrate? The New Jersey Supreme answered one aspect of this question in Roach v. BM Motoring, LLC, holding that defendant's refusal to advance arbitration fees as it was required to do under an arbitration agreement with plaintiffs was a material breach of the contract that precluded defendant from later trying to enforce the agreement.

In Roach, plaintiffs each purchased used cars, at separate times, from defendant. As part of their purchases, each signed a Dispute Resolution Agreement, which provided that "any and all claims, disputes or issues" would be resolved through arbitration. It further required that the arbitration be conducted "in accordance with the rules of the American Arbitration Association before a single arbitrator who shall be a retired judge or attorney," and that defendant would "advance both party's [sic] filing, service, administration, arbitrator, hearing, or other fees, subject to reimbursement by decision of the arbitrator."

After purchasing her car, Plaintiff Jackson filed an arbitration demand against defendant, alleging that defendant violated the Consumer Fraud Act. The AAA advised defendant that it was required to pay the applicable filing fees and arbitrator compensation, but defendant never did. Accordingly, the AAA declined to administer the claim and further advised (1) that it would not administer "any other consumer disputes" involving defendant as a result of defendant's failure to comply with the AAA's rules, and (2) that defendant should remove the AAA name from its arbitration agreement. Jackson never received a response from defendant's to her arbitration demand.

After purchasing her car, Plaintiff Roach sued defendant in state court, also alleging violations of the Consumer Fraud Act. Defendant moved to compel arbitration and the trial court granted its motion. However, when Roach filed an arbitration demand, the AAA responded that defendant had "previously not complied with the AAA's request to adhere to its policies regarding consumer claims] therefore, the AAA  [could not] accept for administration any disputes involving defendants." Like Jackson, Roach never received a response from defendant's to her arbitration demand. 

Plaintiffs then joined forces and sued defendant in state court. Defendant moved to dismiss the complaint and compel arbitration. Defendant argued that the arbitration provision did not "contemplate using AAA as the forum and venue for arbitration" and that defendant had "consistently not arbitrated disputes with its customers by utilizing AAA" because the filing and administrative fees were "excessive." Plaintiffs responded that, prior to moving to compel arbitration, defendant had never expressed any objections about the AAA administering the arbitration.

The trial court granted defendant's motion, holding that the parties intended to "go to arbitration" by signing the arbitration agreement, and that they "should remain faithful to that clause." He instructed them to attempt to reinstate the case with the AAA. If the AAA refused to administer the case, then plaintiffs could return to court and reinstate their complaint. The AAA reinstated the arbitration demand, but plaintiffs contend that defendant again failed to pay the applicable fees. Nonetheless, the parties agreed to hold the arbitration proceedings in abeyance pending plaintiff's appeal of the court's order.

The Appellate Division affirmed the trial court. It held that there was enough of a factual dispute about the proper forum for arbitration that defendant's failure to respond to the arbitration demand was neither a material breach of the arbitration agreement nor a waiver of the right to enforce the agreement. It further held that plaintiffs were not prejudiced by the order because they had recourse — they could reinstate their complaint — if defendant did not abide by the order.

Plaintiffs petitioned the New Jersey Supreme Court for certification. The court granted the petition and reversed the Appellate Division.

The Supreme Court began by recounting the familiar standard that agreements to arbitrate stand on the same footing as other contracts. As a result, just like other contracts, if a party materially breaches an arbitration agreement, the non-breaching party is relieved of its obligations under the agreement. Before turning to the issue of whether defendant breached the arbitration agreement, however, the Supreme Court first had to address whether the arbitration agreement allowed plaintiffs to arbitrate with the AAA. On this issue, the Supreme Court sided with plaintiffs, holding that arbitrating before the AAA was consistent with the plain language of the agreement, which required arbitration pursuant to AAA rules before a retired judge or lawyer. It further held that (1) the AAA rules provide that "parties who agree to arbitrate in accordance with AAA rules consent to  AAA-administered arbitration," and (2) by requiring that arbitration be conducted under AAA rules, defendant "reasonably should have expected that customers would file claims directly with the AAA."

The Supreme Court then turned to whether defendant materially breached the arbitration agreement by failing to advance the required fees. It noted that this was an issue of first impression in New Jersey. Therefore, it looked to case law from other jurisdictions, specifically the U.S. Court of Appeals for the Ninth Circuit, for guidance. In two cases involving facts similar to Roach, the Ninth Circuit held that the "failure to pay required costs of arbitration [is] a material breach" of an arbitration agreement. In one of these cases, the Ninth Circuit emphasized the delay and gamesmanship that could result if parties were allowed to ignore their obligations to pay arbitration fees without consequence:

[T]he sole remedy available to a party prejudiced by default would be a court order compelling a return to arbitration. The same offending party could then default a second time, and the prejudiced party's sole remedy, again, would be another order compelling arbitration. This cycle could continue, resulting in frustration of the aggrieved party's attempts to resolve its claims.

In the other, it held that allowing a party to compel arbitration after breaching the arbitration agreement would "set up a perverse incentive scheme," whereby parties "would have an incentive to refuse to arbitrate claims . . . in the hope that the frustrated employees would simply abandon them."

 The Supreme Court adopted both the holding and rationale of these Ninth Circuit decisions. It held that defendant's failure to advance the arbitration fees was a material breach: "The benefit expected under an arbitration agreement is the ability to arbitrate claims. A failure to advance required fees that results in the dismissal of the arbitration claim deprives a party of the benefit of that agreement." The Supreme Court also "share[d] the concerns of the Ninth Circuit," that "without a finding of material breach, the result would be a 'perverse incentive scheme' — a company could ignore the arbitration demand and, if the claimant did not abandon the claim, later compel arbitration."

In addition to breaching the arbitration agreement, the Supreme Court also held that defendant breached its duty of good faith and fair dealing to plaintiffs by not raising any issues with the arbitration demand until they moved to compel arbitration after plaintiffs' initial arbitration demands had been dismissed. The Supreme Court held that defendant should have raised these issues sooner. It noted that the Appellate Division found the delay "problematic," but to the Supreme Court, defendant's "failure to pay the AAA fees or respond to plaintiffs' arbitration demands was not only problematic, but also did not comport with the standards of good faith and fair dealing."

While undoubtedly a good result for plaintiffs in Roach, the Supreme Court cautioned that it was not establishing a bright-line rule to be applied in all cases. In other words, not every delay in paying arbitration fees, or every delay in responding to an arbitration demand, will result in a waiver of the right to enforce the arbitration agreement. Rather, determining whether "refusal or failure to respond to a written arbitration demand . . . constitutes a material breach of an arbitration agreement . . . must be made on a case-by-case basis after considering the agreement's terms and the conduct of the parties."

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