The goal of arbitration is to provide a faster, less costly, and more private alternative to litigation in a courtroom. In exchange for these advantages, the parties agree in advance that they will share the costs of the arbitration proceedings and will be bound by its results.

But what happens if, between the time the agreement is signed and when a dispute later arises, one of parties suffers a financial reversal and cannot afford to pay its share of the arbitration fees and costs? That was the issue recently presented to the California Court of Appeal (Aronow v. Emergent, LLP).

Gerald Aronow filed a lawsuit in San Francisco Superior Court against his former law firm, Emergent, alleging legal malpractice.

Emergent, citing the arbitration clause in its retainer agreement with Aronow, responded by asking the court to “stay” or suspend the dispute and order it to be handled through arbitration.

The clause said any dispute had to be resolved through “binding arbitration before a retired judge.” It stated that Aronow waived his “right to submit any dispute or any cause of a jury or court trial,” and that each of the parties “shall bear their own legal fees and costs.”

On August 4, 2020, the trial court granted Emergent’s request, finding that the arbitration agreement was valid.

The two sides agreed to use an arbitrator who charged $600 per hour or $6,000 per day. Aronow was asked to make an advance payment of $1,500. At the initial meeting with the arbitrator, Aronow said he was unable to pay the arbitration fees. The meeting was adjourned, and the arbitration did not proceed.

Aronow went back to court and asked the judge for an order waiving his obligation to pay the arbitration fees and costs, or alternatively, to end the stay so the dispute could go to trial.

The trial court, noting conflicting higher court rulings, said it did not have the legal authority to lift a stay based on a plaintiff’s claim that he cannot afford arbitration fees. It also said Aronow had not fully documented his share of the costs and his inability to pay them.

Aronow then asked the appellate court to rule on his request, noting that he is now living in Alaska and receiving public assistance because of his adverse financial circumstances.

The higher court acknowledged that appellate courts in California have disagreed about whether a trial court can lift a stay in response to a plaintiff's claimed inability to pay arbitration costs.

In a 1962 case involving a dispute between franchisees and a franchisor, Division One of the Fourth District Court of Appeal said that “a trial court may not lift a stay of litigation merely because a party cannot afford the costs associated with arbitration.”

To do so, it said “would be fundamentally inconsistent with California’s ‘strong public policy favoring contractual arbitration.”

But a later decision by Division Three of the Fourth Circuit came to the opposite conclusion.

It said impoverished plaintiffs should be excused from the obligation to pay arbitration fees because “to rule otherwise might effectively deprive them of access to any forum for resolution of their claims.”

In that decision, the justices acknowledged that a trial court cannot order an arbitration provider to waive its fees. But it can issue an order saying that the other party has the option of either paying all of the costs of arbitration or waiving its right to arbitrate and allowing the case to proceed to trial.

They noted that California courts have the power to permit an indigent person to litigate a civil action without paying the statutorily required filing fees, and that “the Courts of Appeal have afforded indigent civil litigants the ability to obtain meaningful access to the judicial process in a great variety of contexts.”

Following this line of reasoning, the justices hearing Aronow’s appeal directed the trial court to lift the stay and allow Aronow to prove he is unable to pay the arbitrator’s fees. If he is successful, the lower court can then give Emergent a choice: it could pay Aronow’s share of those fees; or it could waive its right to arbitrate and allow the case to go to trial.

Aronow was awarded his costs on appeal.

By Laurie Murphy