Those who agree to arbitration expose themselves to potential awards of attorney’s fees in cases where courts would likely not award fees.
If you’re a small business or an individual there’s a good chance you’re not fully familiar with certain of the risks associated with arbitration. Clients frequently consult with me when they find themselves saddled with unfavorable awards, and some of these persons are ones who, through no fault of their own, did not appreciate the risks involved and might consequently have missed opportunities to better manage them. In many instances these persons were represented by attorneys who understood that subject matter of the arbitrated disputes, and who were skilled courtroom litigators, but who were not necessarily as well-versed in arbitration-law as are arbitration and arbitration-law practitioners.
This is more than simply an anecdotal observation. My good friends, colleagues, and sometimes co-counsel, Richard D. Faulkner and Charles (“Chuck”) Bennett, who also practice in this field, tell me they share this view and that their experiences are aligned with my own. (Here is a post concerning a Federalist-Society-sponsored webinar Rick, Chuck, and I participated in last year.) Other arbitration attorneys with whom I have spoken also agree.
Readers armed with some practical knowledge may be better able to avoid, mitigate or otherwise manage arbitration risks. It is in that spirit that we discuss a risk that tends to be more severe in arbitration than it is in court litigation: your exposure to an award of attorney’s fees. As always, nothing we say here is or should be construed as legal advice. If you require legal advice you should engage and consult with an attorney.
Exposure to Liability for Your Adversary’s Legal Fees
A commonly overlooked risk associated with agreeing to arbitrate is that, if you lose, you might be on the wrong end of an award that requires you to reimburse your adversary for some or all of the fees it incurred in the arbitration. To be sure, there is a risk that in court litigation, the court may assess attorney’s fees against a losing party, but as we’ll see, the risk is generally higher in arbitration than it is in court litigation. Worse yet, in arbitration the ability to challenge meaningfully such an award (or any other award) in court is extremely circumscribed under the Federal Arbitration Act (“FAA”). The same is generally so where state arbitration law applies.
No one likes paying attorney fees but they are a necessary incident of dispute resolution, especially resolution of high-dollar disputes. But imagine not only having to pay your own attorney’s fees, but also those of your adversary, an adversary who, in effect, is reimbursed for the fees it incurred in making your life miserable.
Things may be worse if your adversary is in a stronger economic position than you. Because if you lose the arbitration, you may end up paying fees in an amount greater than you ever would have agreed to pay your own attorneys. And you’ll still have to pay your own attorney’s fees.
How much might these fees be? In low-dollar disputes perhaps in the thousands or low tens of thousands of dollars, but in more complex and higher value disputes in the tens—or even hundreds—of thousands or more. Awards of attorney’s fees can therefore be financially crippling for individuals and entities that do not have very substantial, realizable assets. But often times parties do not seriously consider their exposure to a fee award when they agree to arbitrate, or even when they contemplate settlement.
By the way, if you’re thinking a few award is effectively a legal bill that can be ignored until someone brings a plenary action to collect it, then you are mistaken. An arbitration award directs you to pay a specific, liquidated amount of fees, usually determined based on the prevailing party’s submission of the backup for its fee claim and the parties’ arguments about the quantum of the claim. The prevailing party may make a timely motion to confirm (i.e., reduce to judgment) the award, a motion that will be granted unless a timely motion to vacate the award succeeds, which happens only in extraordinary circumstances because vacatur standards are so strict. Once an award is confirmed, and a judgment on it is entered, the judgment may be enforced like any other court judgment.
Why is Your Exposure to Paying Your Adversary’s Attorney’s Fees Higher in Arbitration than it is in Court Litigation?
A reason the fee-shifting risk is often overlooked may be because—in court litigation—what is referred to as the “American Rule” ordinarily applies and is enforced fairly strictly. That rule, at least as it is applied by federal courts, requires each party to bear its own attorney fees, except where: (a) the parties’ contract authorizes a prevailing party to collect its fees from the non-prevailing party; (b) a statute or court rule authorizes a party to collect its fees from another; or (c) where one of the parties engages in sufficiently egregious bad faith litigation conduct, the so-called bad-faith exception to the American Rule. See Chambers v. Nasco, Inc., 501 U.S. 32, 35, 45-46 (1991). Under state law, the precise scope of the American Rule may vary from state to state, and it may not be applicable in every state.
In court litigation fee awards are usually the exception, not the rule. Suppose A and B have a dispute over a contract (the “A-B Contract”), which is silent on fee shifting and, as is frequently so, the dispute does not involve a statute authorizing fee shifting. Assuming there is no bad faith conduct, each party will bear its own attorney’s fees, irrespective of the outcome of the dispute.
That’s the result most businesspeople in the U.S. would expect. It makes legal fees more manageable and avoids the “chill” the prospect of having to pay the adversary’s fees may have on a party that might otherwise attempt to enforce its legal rights rigorously.
The rule is different in certain international jurisdictions, including, for example, England. See Reliastar Life Insurance v. EMC National Life Co., 564 F.3d 81, 88 (2d Cir. 2009). As a general rule English Courts generally follow a “loser-pays” rule, under which the prevailing party can claim back its attorney’s fees. That rule is known as the “English Rule.” Id. Arguments for or against it may be made, but our focus is on the reasonable expectations of U.S. persons in U.S. arbitration and the economics of U.S. dispute resolution.
Shouldn’t the American Rule apply equally to arbitration? The short answer is that it usually does, but arbitration law rules, principles and norms tend to make it more likely that arbitrators will order fee shifting in circumstances where courts generally would not.
Incorporation by Reference of Arbitration Provider or Other Rules May Provide at Least an Arguable, Contractual Basis for an Award of Attorney’s Fees
If a contract does not appear expressly to authorize fee shifting, one cannot blame the businessperson who assumes that an arbitrator will not interpret the contract as authorizing fee shifting. To that businessperson the risk might appear inconsequential, but there are at least two reasons why that assessment would generally be misplaced.
First, parties often think their “contract” is simply their formal, written, executed contract, but is not always so, particularly where the parties have agreed to arbitrate. Parties often incorporate by reference into their arbitration agreement a particular set of arbitration rules, usually those promulgated by the designated arbitration provider. For example, the American Arbitration Association Standard Arbitration Clause recommends that the parties who wish, on a pre-dispute basis, to arbitrate commercial arbitration disputes agree that “Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules. . . .” American Arbitration Association, Commercial Arbitration Rules and Mediation Procedures (“AAA Commercial Rules”) 8 (Rules amended and effective September 1, 2022).
Under this or similar contract language, the arbitration provider rules are generally made part of the contract as if they were expressly set forth in it. See, e.g., Blanton v. Domino’s Pizza Franchising LLC, 962 F.3d 842, 846 (6th Cir. 2020) (and cases cited). So even if the parties’ written, executed contract may say nothing about fee shifting, there may be language in the incorporated-by-reference rules that an arbitrator could arguably interpret as authorizing fee shifting, either alone or in conjunction with language that is already set out in the written contract.
Second, under the Federal Arbitration Act’s “manifest disregard of the agreement” standard Courts cannot second guess any decision by the arbitrator provided it is at least arguably based on an interpretation of the contract. See Oxford Health Plans v. Sutter, 569 U.S. 564, 569, 572-73 (2013). Under that standard, arguable interpretations of the parties’ contract are free from challenge even if the arbitrator’s interpretation was not one the Court would ever reach because it constituted a serious mistake of law. Once it appears that the arbitrator has at least arguably interpreted the contract, she is deemed not to have exceeded her powers. Id.
Third, attorneys’ fees often slip in by accident, design or submission even where excluded by contract terms. One party asks for them in a pleading and that request is not clearly contradicted. Often one party asks for its attorney’s fees and the opposing party says, “me too” in a preliminary conference or at the hearing on the merits. Or more typically, the arbitrator assumes attorneys’ fees are to be awarded and innocently asks counsel how they want to submit any request for attorney’s fees. Frequently, an attorney, perhaps only a junior lawyer unmindful of the risk, replies in a way suggesting acceptance to a suggestion for using attorneys’ fee affidavits to avoid a separate or a longer hearing. Any or all of these may suffice to grant an arbitrator the power to award attorneys’ fees and costs. Alternatively, the circumstances at the conclusion of an arbitration may be sufficiently confused on the attorneys’ fee issue that it will be impossible to vacate an award including attorneys’ fees and costs. Care and extreme caution must be continuously exercised.
Fourth, arbitrator provider rules may vest in the arbitrator: (a) the authority to interpret the provider rules to the extent they relate to the arbitrator’s powers, and (b) the power to determine their own jurisdiction. For example, the arbitrator “interpret[s] and appl[ies]” the AAA Commercial Rules “insofar as they relate to the arbitrator’s powers and duties.” AAA Commercial Rules R-9. And Rule 7(a) of the AAA Commercial Rules authorizes the arbitrators to decide their own jurisdiction, and other arbitrability issues. AAA Commercial Rules R-7(a).
Consider how this may affect the arbitrator’s power to award fees in situations where the parties’ contract is silent or at least arguably ambiguous on fee shifting. AAA Commercial Rule 49(d) states that “[t]he award of the arbitrator may include: . . . ii) an award of attorneys’ fees if all parties have requested such an award or it is authorized by law or the parties’ arbitration agreement.” AAA Commercial Rule Rules R-49(d). That Rule appears to reflect the American Rule notion that fees may be shifted if the parties’ agreement so provides. So one looking at the Rule in isolation might reasonably conclude that where the parties’ agreement—other than the AAA Commercial Rules—is silent on fee shifting, the arbitrator is not authorized to award fees unless a statute provides otherwise or the bad faith exception to the American Rule has been triggered by a party arbitrating in bad faith.
But even though the AAA Rules appear to contemplate the parties’ express written agreement to attorney fee awards, the Rules are loosely-enough drafted to permit an arbitrator to interpret them as authorizing fee shifting. Because in effect there is no recourse if the arbitrator decides to go that route, the Rules, as a practical matter, effectively authorize arbitrators to award fees if they so choose. And as long as the arbitrator is even arguably interpreting the rules in making its decision, that decision will be immune from any further judicial review.
The hypothetical contract we are discussing could at least arguably be interpreted to empower the arbitrator to award fees, even though a court would likely disagree with that interpretation:
- Rule 49(d) recognizes that attorney fees may be awarded when “authorized by. . . the parties’ arbitration agreement.”
- The parties’ arbitration agreement incorporates by reference the AAA Commercial Rules, which are made part of the parties’ arbitration agreement as if set forth fully in it.
- Those Rules, and the parties’ arbitration agreement itself, evidence the parties’ intent to broadly empower the arbitrator to award attorney’s fees.
- Rule 49(a) provides: “The arbitrator may grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties, including, but not limited to, specific performance of a contract.”
- The arbitration agreement (patterned on the AAA’s “Standard Arbitration Clause”) is very broad, providing for arbitration of “[a]ny controversy or claim arising out of or relating to this contract, or the breach thereof. . . .”
- An award of attorney’s fees is a “remedy or relief that the arbitrator deems just and equitable” and it is “within the scope of the agreement of the parties[,]” which authorizes arbitration of “any controversy or claim arising out of or relating to the contract.”
- Further support for that conclusion can be gleaned from Rules 49(b) and (c), which authorize arbitrators to “apportion” and “assess” “fees, expenses, and compensation” for both final and interim awards. AAA Commercial Arbitration Rules R-49((b) & (c).
Is this a good argument? Not especially: much of it is circular and the language of Rules 49(b) & (c) is arguably more ambiguous than I have presented it here.
But that does not matter: it is at least arguably an interpretation of the contract, albeit one that a court would likely reject were it permitted to interpret the contract without deference to the arbitrator. A court therefore cannot second guess that interpretation.
What is the Takeaway on Attorney’s Fees Awards in Arbitration?
We could provide more examples of how arbitrators may justify fee shifting, including in cases where the parties expressly and unambiguously agree to empower arbitrators to award fees. Consideration of state arbitration law, where applicable, might, in certain cases, result in different outcomes. But the point is how to avoid problems with attorney-fee awards.
The most effective way is to deal with the problem before it becomes one. Either do not agree to arbitrate or, with the guidance of a skilled and experienced arbitration attorney, make sure that your arbitration agreement clearly and unmistakably forbids the arbitrator from awarding attorneys’ fees and any other types of relief with which you do not wish to be saddled, such as, for example, arbitration provider fees, costs and other compensation.
But if you find yourself embroiled in an arbitration be sure that your arbitration attorney is a skilled and experienced arbitration-law attorney, or that your arbitration attorney co-counsels with an attorney skilled and experienced with arbitration-related litigation. That person can advise your arbitration counsel on strategy and tactics designed to reduce as much as practicable exposure to damaging attorney-fee awards. He or she can also help ensure, among other things, that all objections are preserved; a proper, transcribed record is prepared; and no inadvertent admissions are made.
The extent to which this is possible—and if so, how strategy should be implemented—depends on the facts of each case. The goal is to avoid problems down the road, particularly if it turns out to be necessary and appropriate to challenge the award.
The author thanks Rick Faulkner and Chuck Bennett for their valuable contributions to this article.
Contacting the Author
If you have any questions about this article, arbitration, arbitration-law, or arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094. PJL1@LoreeLawFirm.com.
Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance- or reinsurance-related, and other, matters.
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Tags: AAA, American Arbitration Association, American Rule, Arguable, Attorney Fees, Attorney's Fees, Bad Faith, Bad Faith Exception, Barely Colorable, Commercial Rules, EMC, English Rule, Fee Shifting, Incorporate by Reference, Interpret, Judicial Review, Manifest Disregard of the Agreement, Manifest Disregard of the Contract, NASCO, ReliaStar, Remedies, Sanctions
