Party Refusal To Arbitrate: Case Law Perspective

Arbitration is a private system of dispute resolution without a judge, jury, or right to appeal. In forced arbitration, a company requires an employee or consumer to submit any dispute to binding arbitration as a condition of employment or the purchase of a product or service. In such cases, the aggrieved party waives their right to sue, to participate in a class-action lawsuit, or to appeal. While arbitration is meant to be a less expensive alternative to litigation, it can be more costly for consumers and employees. Arbitration agreements are increasingly common, with companies including them in the fine print of terms of agreement or contracts. In the United States, a court may refuse to enforce an arbitration agreement if it fails to satisfy the state's conscionability standards. For example, in California, the unconscionability defense remains a valid defense to a petition to compel arbitration. In the context of international arbitration, arbitrators have the power to continue proceedings when one party refuses to participate.

Arbitration proceedings can continue without the respondent's participation

Arbitration proceedings are usually bound by the terms of a binding arbitration agreement. In practice, however, respondents may refuse to participate in arbitration proceedings, either from the beginning or at later stages. This refusal may be due to financial constraints, restructuring, court-supervised moratorium protection, liquidation proceedings, or simply to save money and then to attempt to resist the award at the enforcement stage.

In the absence of a respondent's participation, arbitration proceedings will continue on an ex parte basis. The ICC Rules, Article 6(8) provides, "If any of the parties refuses or fails to take part in the arbitration or any stage thereof, the arbitration shall proceed notwithstanding such refusal or failure." Similar provisions are also provided in the LCIA Rules, Article 15.8; SIAC Rules, Rule 20.9; UNCITRAL Rules, Article 30; SCC Rules, Article 35.2, and the UNCITRAL Model Law, Article 25.

The Chartered Institute of Arbitrators has issued an International Arbitration Practice Guideline on Party Non-Participation, which provides a set of guidelines on the best practices in international commercial arbitration when one party refuses to participate. These guidelines offer practical tips on conducting proceedings when faced with a non-participating party, listing factors that arbitrators should consider when a claimant or respondent does not participate.

It is important to note that a "default award" does not necessarily mean an award in favour of the claimant, as it does not imply a "ficta confession" or "explicit confession". Arbitral tribunals have the power to conduct ex parte arbitration proceedings even without the other party participating, regardless of the outcome.

To ensure the other party has been duly notified, it is important to keep records of "read" and "delivery" receipts for emails, provide hard copies of documents with proof of delivery, and maintain timely notification of each step of the arbitration proceedings.

Arbitrators have the power to conduct ex parte arbitration proceedings

Arbitration is a form of alternative dispute resolution (ADR) that resolves disputes outside of judiciary courts. The dispute is decided by one or more arbitrators, arbiters, or members of the arbitral tribunal.

It is a well-established principle of international arbitration that arbitrators have the inherent power to continue arbitration proceedings when one party refuses to participate and to render an ex parte award. Leading commentators on international commercial arbitration, such as Gary Born, explain that tribunals have the power to conduct proceedings in the absence of one party, even without express authorization from institutional rules or national laws.

However, it is important to note that a "default award" does not necessarily mean an award in favor of the claimant. It does not imply the so-called "ficta confession" or "explicit confession", as is the case in certain national systems. Instead, it simply means that arbitral tribunals have the power to conduct ex parte arbitration proceedings, regardless of the outcome.

To ensure the enforceability of an ex parte award, arbitrators must exercise due diligence in notifying the absent party of the proceedings and providing them with all relevant documents and correspondence. This includes ensuring that the other party has been properly notified of the commencement of the arbitration proceedings and has received the Request of Arbitration/Notice of Arbitration.

Additionally, arbitration rules and laws often provide for the continuation of proceedings on an ex parte basis in the absence of a respondent's participation. For example, the ICC Rules, Article 6(8) states, "If any of the parties refuses or fails to take part in the arbitration or any stage thereof, the arbitration shall proceed notwithstanding such refusal or failure." Similar provisions can be found in the LCIA Rules, Article 15.8; SIAC Rules, Rule 20.9; UNCITRAL Rules, Article 30; and SCC Rules, Article 35.2, among others.

In summary, arbitrators have the power to conduct ex parte arbitration proceedings when one party refuses to participate. However, they must exercise due diligence in notifying the absent party and providing them with relevant information to ensure the enforceability of any ex parte award.

Arbitration agreements can be unconscionable

Substantive unconscionability is present when a term is so one-sided as to shock the conscience of a reasonable person. In the context of employment, courts have found that an agreement is substantively unconscionable when it unfairly favours the employer. For example, in Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2021) 55 Cal.App.4th 223, 246, the court found that an agreement was substantively unconscionable because it allowed the employer to file a lawsuit, while restricting the employee to arbitration.

Another example of substantive unconscionability is when an arbitration agreement limits a party's ability to assert their legal rights. For instance, in De Leon v. Pinnacle Property (2016), the court found that an agreement signed as a condition of employment was unconscionable because it required the plaintiff to settle any disputes arising out of his employment through binding arbitration, effectively limiting his ability to vindicate his rights.

Procedural unconscionability may be proven by showing oppression, which is present when a party has no meaningful opportunity to negotiate the terms or the contract is presented on a "take-it-or-leave-it" basis. In Wherry v. Award Inc. (2011) 192 Cal.App.4th 1242, the court found that an arbitration agreement that was required as a condition of employment was procedurally unconscionable.

Courts often rely on a sliding scale approach when measuring each type of unconscionability, weighing both procedural and substantive unconscionability together as a whole. If one type of unconscionability is more obviously present, it can be easier to prove unconscionability even with a smaller amount of the other. However, a finding of both procedural and substantive unconscionability does not guarantee that a court will invalidate the entire arbitration agreement. Instead, courts have the discretion to either invalidate the entire agreement or sever the specific provisions found to be unconscionable.

Arbitration agreements can be unjustifiably one-sided

Procedural unconscionability examines the negotiation process and whether unequal bargaining power led to "oppression" or "surprise". This element is usually established if the agreement is a contract of adhesion, i.e., a standardized contract offered by a party in a stronger negotiating position that the other party can only accept or reject as is. Substantive unconscionability, on the other hand, looks at the fairness of the contract's terms and whether they create unjust or one-sided outcomes. Clauses are considered substantively unconscionable if they unreasonably or unexpectedly shift risks to the weaker party.

In the case of Armendariz v. Foundation Health Psychcare Services, Inc., the court held that where employment is conditioned on mandatory arbitration, the employer cannot impose on the employee any costs (or fees) they would not normally have to pay if the case were litigated in court. The applicable AAA cost provision depends on whether a dispute arises from an employer-promulgated plan or an "individually-negotiated" employment agreement or contract. For disputes arising from an employer-promulgated plan, the employer bears the bulk of the costs. However, the AAA's "Commercial Fee Schedule" allows the allocation of AAA commercial fees to either party for disputes arising from "individually-negotiated" agreements or contracts.

Additionally, some arbitration agreements include due-process protections, while others shorten statutes of limitations, alter the burdens of proof, limit the time a party has to present their case, or impose restrictive procedural rules. In practice, it is usually the corporation that decides whether to include fairness protections in the arbitration procedure. While employees or consumers can challenge the enforcement of unfair rules in court, their ability to do so has been substantially limited. Furthermore, arbitrators are often reluctant to award generous damages to prevailing parties, and their awards are not appealable. On average, employees and consumers win less often and receive lower damages in arbitration than in court.

Moreover, arbitration agreements that give the employer the unilateral right to amend, supplement, or modify the agreement are powerful evidence of unjustifiable one-sidedness. For example, contracts that give employers unlimited discretion to create additional hurdles for employees to jump through before reaching an arbitrator can be considered one-sided.

Arbitration proceedings can be costly

The costs of arbitration are an important factor for claimants to consider before initiating proceedings. This is especially true for cases with a low amount in dispute, where claimants must determine whether it is financially worthwhile to pursue arbitration. While arbitration is generally considered to be less costly than litigation, this is not always the case. If the parties are cooperative and aware of the cost-impacting factors, the overall costs of arbitration can be significantly reduced.

The structure of arbitration costs is similar across most arbitration rules, but the methodology for their calculation and the precise amounts may vary depending on the institution. Most procedural rules distinguish between two categories of costs: filing or registration fees and administrative fees of the arbitral institution, and costs incurred by each party, such as hearing costs, payment for translators, and arbitrator compensation and expenses.

At the beginning of each arbitration, the arbitral institution typically fixes an advance on cost, also called a "deposit," to be paid in equal shares by the parties. This deposit is used to guarantee payment of the arbitrator's fees and expenses, and additional deposits may be requested during the arbitration. While the distribution of the advance on costs in the early stages does not impact the final allocation, arbitral tribunals have broad discretion in deciding on the allocation of costs at the end of the proceedings.

It is important to note that arbitration agreements and their associated costs can be complex, and there may be instances where a party can refuse to arbitrate. For example, in California, unconscionability remains a valid defense to a petition to compel arbitration, as established in the Sonic-Calabasas A v. Moreno case ("Sonic II"). Additionally, the Armendariz case mandates that employers cannot impose arbitration costs on employees that they would normally incur if the case were litigated in court.

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