Public policy strongly favors requiring parties to arbitrate disputes that arise under a written contract with an arbitration clause. Arbitration is supposed to lessen the burden on court dockets and be a quicker, more cost-effective way to resolve disputes. It often is when both parties take the process seriously and participate.
In principle, when parties agree to arbitrate, they are generally bound by that agreement. It often follows that when a party initiates arbitration proceedings, the other party—the respondent—avails itself of the opportunity to present its case and participate in the proceedings. Ideally (and usually), a respondent will participate effectively; it will comply with the provisions of the arbitration agreement, the provisions of the arbitral rules, if any, and the arbitral tribunal’s directions. However, that is not the case when one side ignores the arbitration altogether. So what happens when one side fails to participate in the arbitration process?
If a respondent refuses to take part in arbitration, the process continues unabated as an ex parte proceeding. That is because widely adopted arbitration rules prohibit basing an award solely on the default of a party. For example, the American Arbitration Association Commercial Arbitration Rules, R-31, provides:
Unless the law provides to the contrary, the arbitration may proceed in the absence of any party or representative who, after due notice, fails to be present or fails to obtain a postponement. An award shall not be made solely on the default of a party. The arbitrator shall require the party who is present to submit such evidence as the arbitrator may require for the making of an award.
This is vastly different from what occurs in litigation. In Texas, for example, when a defendant does not file an answer, all allegations of facts in the plaintiff’s petition—including those establishing liability—are deemed admitted except for the amount of unliquidated damages. This makes the default process in courts more efficient, cost effective and expeditious than the default rules in arbitration.
Consider a scenario where there is a mandatory arbitration clause in a commercial property bailment contract. The clause provides the penalty of having to pay the other side’s attorney fees by the party that files in a court of law any claim subject to arbitration. A dispute arises and the aggrieved party initiates arbitration. The arbitral forum notifies the respondent about the arbitration demand and requests their active participation in the process. The respondent, however, ignores all attempts to communicate. So what happens next?
If this were pending in a court of law, then a default judgment would swiftly follow within 30-40 days. However, since this is in arbitration, the claimant is required to proceed through every step of the process, which could take a minimum of four to six months just to arrive at the evidentiary hearing stage, incurring costs and attorneys’ fees along the way. The arbitrator, who has sole discretion in making an award, could find the submitted evidence insufficient to support one or all of the claimant’s causes of action or damages and decline to find any liability or reduce the amount of damages. In other words, the claimant could lose the arbitration without the respondent even making an appearance.
This is obviously a problem. The current default rule makes arbitration more expensive than court because the evidentiary burden of proof remains with the claimant notwithstanding the other party’s nonparticipation. This may result in claimants incurring extra costs and attorneys’ fees, not to mention the time involved—all for a process that can be ignored, without penalty, by the respondent.
There is also the issue of evidence. The problem with proving a case in ex parte arbitration is producing sufficient evidence, some of which may be in the nonparticipant’s custody—internal corporate documents, electronically stored information (ESI) or witness testimony. Not having access to such vital evidence can make it extremely difficult, if not impossible, to meet the threshold burden requirements to establish one’s claims. Consequently, in such a situation, a claimant would not prevail despite incurring thousands of dollars in attorney’s fees and arbitration costs, not to mention the months spent in the arbitration process. A respondent opting not to participate clearly benefits by defaulting.
There is a dichotomy between the judicial system and arbitration’s treatment of a party in default. On the one hand, the courts’ approach is efficient and expeditious. On the other hand, the impractical approach of arbitral forums is unduly burdensome, needlessly lengthy and superfluous. Arbitration is touted as being the more cost-effective and simpler alternative to courts of law. However, with respect to arbitral forums’ procedural default rule, I humbly disagree.
Jason A. Rose is a litigation attorney with the Houston office of Lightfoot, Franklin & White, llc. His main practice area is insurance defense litigation—with focus in commercial litigation, contract law, personal injury and premises liability.