Legal Memorandum: Enforceability of Arbitration Provisions

Issue: Are arbitration agreements that make arbitration unduly costly for one party enforceable?

Area of Law: Alternative Dispute Resolution
Keywords: Payment of prohibitive costs; Arbitration provisions
Jurisdiction: Colorado, Connecticut, Federal, Oregon, Texas, Utah
Cited Cases: 167 F. Supp. 2d 892; 325 F. Supp. 2d 1252; 242 F. Supp. 2d 862; 175 S.W.3d 315; 134 Cal. Rptr. 2d 446; 88 F. Supp. 2d 1158
Cited Statutes: None
Date: 10/01/2006

  Arbitration provisions that necessarily would cause a claimant to face prohibitive costs—such as the American Arbitration Association (AAA) requirement that each party pay witness fees, or an inherently costly arbitrator-fee-splitting provision—are unenforceable.  Owner-Operator Indep. Drivers Ass’n v. C.R. England, Inc., 325 F. Supp. 2d 1252 (D. Utah 2004); In re Luna, 175 S.W.3d 315 (Tex. App. 2004); McManus v. CIBC World Mkts. Corp., 134 Cal. Rptr. 2d 446 (Ct. App. 2003); Torrance v. Aames Funding Corp., 242 F. Supp. 2d 862 (D. Or. 2002); Fuller v. Pep Boys—Manny, Moe & Jack of Del., Inc., 88 F. Supp. 2d 1158 (D. Colo. 2000).

Agreements that make arbitration too costly preclude a party from effectively vindicating his or her rights because the arbitral forum becomes financially inaccessible.  See C.R. England, 325 F. Supp. 2d at 1261-62 (arbitration clause providing that arbitration would be conducted under the rules of the AAA, which rules require payment of filing fee, and splitting of arbitrator’s fees and associated costs of renting a hearing room, paying for a court reporter, etc., when balanced against the plaintiffs’ relatively modest incomes, “effectively deter[ed] use of the arbitration”); McManus, 134 Cal. Rptr. 2d at 458-59 (because the plaintiff might be obligated to pay a deposit of $500 plus $1,200 for each anticipated hearing session, which was beyond any expense the employee would be required to bear in a court action, the arbitration costs provision was unenforceable); Camacho […] href=”http://www.lexis.com/research/buttonTFLink?_m=fd5bc64f45398bd6d7a52401b1640534&_xfercite=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b240%20F.%20Supp.%202d%20350%5d%5d%3e%3c%2fcite%3e&_butType=3&_butStat=2&_butNum=52&_butInline=1&_butinfo=%3ccite%20cc%3d%22USA%22%3e%3c%21%5bCDATA%5b167%20F.%20Supp.%202d%20892%5d%5d%3e%3c%2fcite%3e&_fmtstr=FULL&docnum=1&_startdoc=1&wchp=dGLbVtb-zSkAW&_md5=b411d3ba005225bb985682e35b3460db” target=”_parent”>

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