If you want to play, you have to pay.

Just because you have included an arbitration provision in your contract does not mean that any dispute arising out of or related to the contract will be arbitrated. The Mississippi Supreme Court found in Sanderson Farms, Inc. v. Gatlin, that the refusal to pay the required share of the American Arbitration Association ("AAA") fee resulted in Sanderson Farms, Inc. ("Sanderson") waiving its right to arbitration. In that case, the arbitration clause provided in pertinent part as follows:

The cost of such arbitration will be divided equally among the parties to the arbitration. Each party will bear the costs of their own expenses and attorney’s fees. Failure to arbitrate all such claims or controversies arising under or related to this Agreement shall be deemed a breach of the Agreement.

Gatlin paid its share of the arbitration fees but Sanderson failed to pay its share. Gatlin filed suit in circuit court against Sanderson who filed a motion to dismiss arguing that the dispute was subject to arbitration. The circuit court denied Sanderson’s motion to dismiss. On appeal the Supreme Court held:

Sanderson farms waived its right to arbitrate by refusing to pay its one-half of the cost associated with the filing and administrative fees and/or the additional charges presented for payment one month before the scheduled arbitration hearing. This refusal amounts to an act inconsistent with the right to arbitrate. By waiving its right to arbitrate, Sanderson Farms has relinquished the right to seek the protections of the arbitration provision in the boiler contract.

It should also be noted that Rule 54 of the AAA Commercial Rules and Rule 56 of the AAA Construction Industry Arbitration Rules provide for procedures where a party has not paid its share of the arbitrator compensation or administrative charges.

The bottom line is a party may waive its right to arbitration if it does not comply with the requirements set forth in the arbitration clause and find itself in court rather than in arbitration.

Choose Your Arbitration Clause Wisely

During the last several decades arbitration has become a valuable method for resolving disputes between parties in the construction setting. A simple arbitration provision might read as follows:

Claims and disputes not resolved shall be decided by arbitration which shall be in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association currently in effect.  The locale of any arbitration shall be Jackson, Mississippi.

Simple and straightforward, but is it enough? It depends on what your expectations are for arbitration. An arbitrator is bound by the requirements of the arbitration clause. Therefore, if you are drafting an arbitration clause, you might want to consider including certain "bells and whistles" that will get you to the finish line faster. Here are some items you might want to consider including in an arbitration clause. 

  • Location of the arbitration proceeding;
  • Number of arbitrators and experience requirements;
  • Limitations on discovery;
  • Specific rules governing admissibility of evidence at hearing, i.e. state or federal rules of evidence verses the liberal rules for admissibility of the AAA;
  • Time within which arbitration hearing must be conducted; and
  • Payment of fees and costs.

Remember, it is your arbitration clause so draft it to suit your business objectives.