Is Arbitration Worthwhile For My New York Debt Collection Case?

arbitration-280What do you do when your contract has compulsory arbitration as a fee dispute provision? Arbitration would be the next logical step. Consider the following scenario that happened this week to one of our specialty chemical manufacturers.

The delinquent customer failed to respond to demands for payment. According to the underlying documents, arbitration was required to resolve all fee disputes. The client gave us the go ahead and we then filed a request to arbitrate with the appropriate company.

The request to arbitrate was filed with the company and the requisite case management administrative fee of $3,000 was paid to file the case against the customer who owed a balance due of $19,368.42.

Following the filing and acceptance of the request for arbitration, the delinquent customer was served with the notice by the Arbitration Association. Both parties were required to share the costs of arbitration and the winning party could recover the fees as part of their award.

Unfortunately, the debtor failed to respond and our client was asked to pay the deposit to be applied toward the outstanding arbitrator’s fees equal to three hours of time. Since the arbitrator’s fees was calculated at $700 per hour, our client paid a $2,100 fee representing their advance of the arbitrator’s fees.

The debtor failed to respond to the arbitration demand and to the demand for payment of their portion of the arbitrator’s initial deposit of $2,100. To move the case forward toward arbitration by scheduling discovery, an initial conference and schedule, and continuing proceedings, our client agreed and paid the debtor’s portion of the upfront arbitrator’s fee of an additional $2,100.  (So far, our client had paid the filing fee of $3,000 and fees of $4,200 for a total of $7,200.)

An arbitrator was assigned and the case was scheduled for a preliminary hearing by phone. Since there was no response once again from the delinquent payor, the parties were ordered to appear at the Arbitration Association in person with the authority to resolve the case. Again, the delinquent customer failed to appear.

Since there was an opposition to the statement made by our client supporting their claim against the non-payer, the arbitration was scheduled and our client was required to pay their portion of the final payment to the arbitrator to conduct the hearing and so they did.

The day before the arbitration our client was notified that the arbitration could not move forward since the debtor failed to pay their portion of the additional monies owed to the Arbitration Association.

At this point in the process, our client was asked to consider whether they wish to pay the respondent’s portion of the outstanding fee which would then be added to any judgment.

It was at this moment that our client had to sit back and take a view of the amount they were investing in this case.  The claim was for $19,368.42 and our client had already invested almost $10,000 for the administration of arbitration plus the attorney’s fees. Even if the amount paid was included in the award, would collection be possible?

Our advice to the client was to stop the bleeding by not throwing in any additional monies; to stop proceedings and to walk away.

Although an arbitration clause in your contract for fee dispute resolution may sound inviting, that is not always the case.

The transaction with the customer should be looked at with an eye towards the most economic fee dispute provision that considers the total possible exposure. Including a consideration as to the amount that would be required to invest for arbitration if the delinquent customer pays or fails to pay their share.

In this particular case, having an arbitration clause in the client’s contract made the complete pursuit of the case impossible since the cost far outweighed the benefit.

Although the client was disappointed to not have received a judgment and collect, they made a business decision and decided to write off the claim.

This client’s next steps will be to speak with their main corporate counsel to discuss the continuation of an arbitration clause in smaller claims.

Do you need help deciding which fee dispute provision is appropriate for your transaction? Are you interested in understanding what fee dispute litigation, mediation, or arbitration will cost as far as dollars and cents? If so, please contact Jocelyn Nager, Esq.