As discussed in our article Arbitration of Business Disputes, arbitration is often a preferred method of resolving business disputes in the United States where the cost of litigation in the courts can become problematical. While not inexpensive, most arbitration proceedings eliminate the prolonged and costly discovery inherent in civil litigation, thereby saving the parties tens of thousands of dollars…or more…in the proceeding.
But the rules of arbitration differ from that of civil courts in some respects and a critical one is taking a default judgment against a party who fails to answer the claim and appear in the arbitration. This article shall deal with the American Arbitration Association rules since it is the most common form of commercial arbitration utilized in California.
As discussed in our article on Default Judgments, in civil court one files the proof of service of the summons and complaint in the court and either via documents or in a hearing, present damages so that the court can render a verdict. Once default is entered in California, the hearing is restricted to the sole issue of the amount of damages: liability is presumed. And, after six months, the opposing party cannot even attempt to remove the default absent a clear showing of fraud.
Arbitration has a quite different procedure and is discussed in this article.
The Basic Rules for Defaults in Arbitration:
In the event that a party fails to appear at the arbitration, the arbitration must still proceed. The party who is present must present evidence in support of their entire claim, proving to the arbitrator’s satisfaction both liability and damages. An arbitrator may not issue an award solely on the default of a party. American Arbitration Association Commercial Arbitration Rules and Mediation Procedures, R-31 (herein “AAA, __.”) .
AAA R-31. Arbitration in the Absence of a Party or Representative. Unless the law provides to the contrary, the arbitration may proceed in the absence of any party or representative who, after due notice, fails to be present or fails to obtain a postponement. An award shall not be made solely on the default of a party. The arbitrator shall require the party who is present to submit such evidence as the arbitrator may require for the making of an award.
With regard to the presentation of evidence, the parties must offer evidence as is relevant and material to the dispute and shall produce evidence as the arbitrator may deem necessary to an understanding and determination of the dispute. (AAA, R-34.) It is not necessary to conform to the legal rules of evidence. (Id.) All evidence shall be taken in the presence of all of the arbitrators and all of the parties, except where any of the parties is absent, in default, or has waived the right to be present. (Id.)
The arbitrator may also allow for the presentation of evidence by alternative means including video conferencing, internet communication, telephonic conferences and means other than an in-person presentation. (AAA, R-32.) However, such alternative means must afford a full opportunity for all parties to present any evidence that the arbitrator deems material and relevant to the resolution of the dispute and, when involving witnesses, provide an opportunity for cross-examination. (Id.)
Resolution of disputes through document submission is allowed only when the claim is for less than $25,000. (AAA, E-6.) In all other cases an actual hearing in which evidence is presented shall be required.
Note that the opposing party is not present and it is up to the claiming party to prove his or her case as necessary to convince the arbitrator that judgment may be entered.
Once the award is received it may be entered in a court of law precisely as any other judgment rendered by an arbitrator.
Practical Issues to Confront:
An initial problem confronting claimants with a defaulting opponent is that the AAA rules provide that the claimant who has appeared has to front all the filing fees plus the arbitrator’s fees entirely, costs normally split between the parties. Thus, the process becomes decidedly more expensive in terms of costs advanced.
Secondly, many arbitrators, determined to be fair, often require a high burden of proof of both liability and damages. At times, arbitrators become defacto advocates for the missing party. Thus, the claimant must be prepared to answer all questions concerning the case and argue effectively.
Third, some jurisdictions, most notably outside of the United States, are inclined to question default judgments and will want to ensure that due process was achieved in obtaining the judgment. AAA rules are known worldwide and normally the fact that such a provider was used is helpful. Nevertheless, especially abroad, be prepared for close scrutiny by the courts in which you intend to enter the judgment.
That said, the overwhelming majority of default hearings are business like and fair and the entry of judgment in court usually without problems.