Many contracts contain a provision requiring arbitration of disputes arising from the contract. Arbitration is resolution of a dispute by one or more private decision makers (arbitrators). Decision makers are frequently, but not always, former judges. With some limited exceptions, the arbitrator’s compensation is divided equally between the parties.
When a party to an arbitration clause files suit in court, the opposing party may ask the court to stay the suit until the arbitration is concluded. Once the arbitration is concluded, the result of the arbitration may be entered as the judgment of the court.
The California Court of Appeal recently held that a party’s inability to pay the cost of arbitration is not a basis for a court to deny or lift a stay pending arbitration. In MKJA, Inc. v. 123 Fit Franchising, LLC, the plaintiffs filed a lawsuit alleging that they lost hundreds of thousands of dollars as the result of being fraudulently induced to enter into health club franchise agreements with the defendant. The franchise agreements contained a mandatory arbitration clause and the court issued a stay pending completion of the arbitration.
The MKJA plaintiffs asked the court to lift the stay because they could not afford the cost of arbitration. The plaintiffs introduced evidence to establish that their requests for a fee waiver from the arbitrator were not granted.
The Court concluded that California law did not authorize the Court to lift a stay pending arbitration based on a party’s inability to afford arbitration.
The result in MKJA raises several questions. It is unclear how the plaintiffs were unable to afford the cost of arbitration, but could afford to hire an attorney to file the lawsuit and to handle the resulting appeal. Also, it is difficult to conceive how California’s public policy favoring resolution of disputes by contractual arbitration is advanced if the cost of the arbitration prevents one party from participating.