Pay to Play in Consumer Arbitration

Some companies that include predispute arbitration clauses in their contracts have refused to pay these arbitration costs as a defendant in consumer cases.  In the case of the AAA,  nonpayment of fees will result in the AAA refusing to administer the arbitration.  Additionally, consumer claimants in such cases can then raise the same dispute in court, arguing that the arbitration requirement no longer applies because of the defendant’s material breach.

Roach v. BM Motoring, LLC, 2017 WL 931430 (N.J. Mar. 9, 2017), provides an example of what happens when a defendant refuses to pay arbitration costs.  In that case, the New Jersey Supreme Court joined other courts that find the defendant’s refusal to pay arbitration costs waives the arbitration requirement by materially breaching the agreement. See e.g. Pre-Paid Legal Services, Inc. v. Cahill, 786 F.3d 1287 (10th Cir. 2015).  The defendant car dealership included an arbitration provision in its consumer contracts that required arbitration in accordance with AAA rules, but did not explicitly require arbitration before the AAA. Nonetheless, the defendant failed to pay the AAA’s filing fees and arbitrator compensation deposit when a consumer filed a complaint against the dealership with the AAA.   Indeed, the defendant ignored the AAA’s notices — leading the AAA to send  the parties a letter stating that because of this failure it would not administer the arbitration or any other consumer disputes involving the dealership.  The consumers then filed their claims in state court and the dealership moved to compel arbitration. The New Jersey Supreme Court concluded on appeal that the dealership was precluded from enforcing the arbitration agreement.

Confirmation of Pay to Play

The Roach court confirmed basic contract law:  when a party breaches a material term of an agreement, the non-breaching party is relieved of its obligations under the agreement. The court then concluded that the arbitration terms (by requiring use of AAA rules) permitted arbitration before the AAA, even if the AAA was not stated as the exclusive forum for the arbitration.  Accordingly,  the court would not disturb the consumers’ choice to arbitrate with the AAA. The dealership materially breached the agreement where the consumer paid the consumer’s filing fee and the dealer did not pay its fees.  Therefore, the consumers were then free to litigate their claims in court.

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