Patrick J. Kearney – March 2, 2012
Both lawyers and clients agonize over the tactical advantages and disadvantages of arbitration and litigation. Generally, the reason for the prolonged deliberation is the parties are attempting to make a reasoned and informed decision when selecting a dispute resolution provision for their contract.
Some parties prefer arbitration, because they believe arbitration is faster and provides them with a decision-maker who is experienced in the industry. Others prefer litigation, because, among other things, they want access to a trial by jury. Costs are also a decisive factor in determining whether to arbitrate or litigate.
One “cost” that is often overlooked is administrative fees, which can be surprisingly expensive in arbitrations. Parties understand that they will incur fees for the time spent by their attorneys, experts, and the arbitration panel. Some parties, however, are surprised to learn that the arbitration organizations (American Arbitration Association, JAMS, etc.) also charge a fee, which is in addition to the professional fees paid to the arbitrators. The administrative fees cover the organization’s processing and management of cases and the provision of resources to assist the parties through the dispute resolution process.
The American Arbitration Association calculates its administrative fee based on the amount of the claims in dispute. The more money demanded by the parties, the larger the administrative fee. More specifically, for construction cases, the American Arbitration Association has two payment options for its administrative fees.
The first option is the “Standard Fee” schedule, which includes an initial filing fee, and a final fee that must be paid before the arbitration hearing begins. For example, for a claim between $300,000 and $500,000, the claimant must pay an initial fee of $4,350, with its arbitration demand, and a final fee of $1,750 before the arbitration hearing. Thus, the claimant will incur over $6,000 in administrative fees to have the American Arbitration Association administer the arbitration.
The American Arbitration Association has also developed a “Flexible Fee” schedule that includes three payments instead of two. Under the Flexible fee Schedule, if a claimant demands between $300,000 and $500,000, the claimant must pay the initial fee of $1,500, followed by a proceed fee of $3,400, which is due 90 days after the demand for arbitration is filed, and a final fee of $1,750 before the arbitration hearing begins.
If the respondent/defendant files a counterclaim, the respondent also has to pay an administrative fee for its counterclaim using the same fee schedule.
Although these fees are expensive, they do prevent parties from overstating their claims and/or making frivolous demands. For example, in state court, a defendant may file a counterclaim for $10,000,000 without any support. This strategy, however, in an arbitration will cost the defendant $20,000 in administration fees.
Therefore, the big counterclaim, if not supported, may not be the smart approach in arbitration.
The American Arbitration Association does offer a refund schedule on filing fees connected with the Standard Fee Schedule. For cases with claims up to $75,000, a minimum filing fee of $350 will not be refunded. For claims of $75,001 and more, a minimum fee of $600 will not be refunded. Subject to the minimum fee requirements, refunds are calculated as follows:
100% of the filing fee, above the minimum fee, will be refunded if the case is settled or withdrawn within five calendar days of filing.
50% of the filing fee, will be refunded if the case is settled or withdrawn between six and 30 calendar days of filing.
25% of the filing fee will be refunded if the case is settled or withdrawn between 31 and 60 calendar days of filing.
No refund will be made once an arbitrator has been appointed (this includes one arbitrator on a three-arbitrator panel).
Under the Flexible Fee Schedule, no refunds will be provided for the filing fee or proceed fee. Refunds will be given for a final fee if no hearings occur.
In summary, the administrative fees associated with an arbitration can be very expensive compared to state and federal courts which typically charge between $200 and $600 for a complaint or counterclaim. Despite this additional cost, the advantages of arbitrations may still outweigh litigation. Moreover, there is no question that the American Arbitration Association and other arbitration organizations provide a valuable service that entitles them to a fee. Regardless, the parties must be aware of these administrative fees in order to make a reasoned and informed decision when selecting a dispute resolution provision.
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