Outsourcing Justice

Ninth Circuit: Party Can Proceed in Court If Unable To Pay Arbitration Costs

What happens if there is an arbitration agreement, but the claimant is unable to pay the costs of arbitration, while the other party is unwilling to front these costs?  According to the Ninth Circuit, the plaintiff may now proceed with her claim in court, and it was wrong for a district court to dismiss the complaint.

The Ninth Circuit addressed this fact pattern in Tillman v. Tillman, No. 13-56624 (9th Cir. June 15, 2016) (click here for a copy of the decision).  The case involved a former client suing her law firm for malpractice, and the retainer agreement contained an arbitration clause.  The American Arbitration Association terminated the arbitration because the former client could not afford the $18,500 deposit for the arbitration costs, and the law firm was unwilling to front these costs.

The Ninth Circuit reasoned a stay of litigation pursuant to Section 3 of the FAA was no longer warranted because the arbitration had occurred in accordance with the terms of the arbitration agreement.  (The AAA’s rules allow for termination of an arbitration proceeding for nonpayment of deposits.)  The Ninth Circuit also reasoned that no provision of the FAA justifies a dismissal of the litigation under these circumstances.  The court cautioned that this case did not involve a willful failure to pay arbitration costs, which would trigger an order compelling arbitration under section 4 of the FAA since one party would be neglecting to arbitrate.  Instead, this case involved a plaintiff who was financially unable to pay.  The Ninth Circuit observed that the FAA is silent on this issue of inability to pay and does not require a dismissal of the lawsuit under these circumstances.

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