I. Default Judgment in Court
Generally, the process for obtaining a default judgment in court is more streamlined than in arbitration, and does not require the production of extensive affirmative evidence in support of the party’s claim. In federal court, a default judgment may be granted against a party that has failed to plead or otherwise defend itself. See FRCP 55. A default judgment may be entered by the clerk of the court when only payment of a sum certain is sought, after plaintiff submits an affidavit stating that the defaulting party was properly served but failed to plead, and showing the amount due on a claim for a certain amount. A default judgment may also be entered by the court in all other cases when the moving party submits with its motion for default judgment (1) a clerk's certificate of entry of default, (2) a proposed form of default judgment, (3) a copy of the pleading to which no response has been made. The court will, upon these submissions, determine whether the plaintiff's allegations establish the defendant's liability as a matter of law, and ensure that there is a basis for the damages sought by a plaintiff.
Similarly, New York law permits a plaintiff to seek a default judgment against a defendant that “has failed to appear, plead or proceed to trial of an action reached and called for trial.” See CPLR § 3215. As in federal court, plaintiff may obtain a default judgment by the clerk of the court “if the plaintiff's claim is for a sum certain or for a sum which can by computation be made certain, application may be made to the clerk within one year after the default.” In all other cases, the plaintiff must apply to the court for a default judgment, and may obtain such a judgment based on an affidavit showing the facts constituting the claim, the default and the amount due.
II. Default Award in Arbitration
Generally, unlike federal and state courts, each of the major arbitration providers requires the non-defaulting party to provide evidence in support of its claim, even where the defaulting party fails to participate in the arbitration.
Under the AAA Commercial Arbitration Rules and Mediation Procedures, “the arbitration may proceed in the absence of any party or representative,” and “[a]n award shall not be made solely on the default of a party.” See AAA Rules, R. 31. The non-defaulting party must submit “such evidence as the arbitrator may require for the making of an award.”
Under JAMS Comprehensive Arbitration Rules & Procedures, while the Arbitrator “may proceed” with a Hearing in which a party fails to attend, “[t]he Arbitrator may not render an Award solely on the basis of the default or absence of the Party,” and requires the non-defaulting party to “submit such evidence as the Arbitrator may require for the rendering of an Award.” See JAMS Rules, R. 22(j). “If the Arbitrator reasonably believes that a Party will not attend the Hearing, the Arbitrator may schedule the Hearing as a telephonic Hearing and may receive the evidence necessary to render an Award by affidavit.” Id.
Under AAA International Dispute Resolution Procedures, where a party fails to respond or appear at a hearing without sufficient cause, “the arbitral tribunal may proceed with the arbitration.” See ICDR Rules, Art. 26(1)–(2). However, the arbitrator “may make the award on the evidence before it” where “a party, duly invited to produce evidence or take any other steps in the proceedings, fails to do so within the time established by the tribunal without showing sufficient cause for such failure.” Id. at 26(3).
Finally, under the NAM Comprehensive Dispute Resolution Rules and Procedures, the arbitrator “may” conduct the Arbitration, notwithstanding that a party fails to timely serve written submissions or appear at the Arbitration hearing. See NAM Rules, R. 29. The arbitrator may not “base the Award solely on the failure of the defaulting party” to respond or appear at the hearing, and the non-defaulting party must still “present such evidence as the Arbitrator(s) deems necessary for the making of the Award.” Id.
III. Modifying Arbitration Clauses to Simplify and Expedite Default Procedures
As discussed above, most arbitration rules do not permit an arbitrator to grant default merely based on a party’s failure to appear, and may require the non-defaulting party to participate in a hearing and submit evidence or proof of the validity and amount of the claim prior to obtaining a favorable award. This means a party expecting a quick default judgment through arbitration, despite a default, may have to spend time and money preparing and submitting evidence of their claim and conducting an evidentiary hearing.
Nonetheless, most arbitration rules allow parties adopting the rules to modify any parts of the rules with a written agreement. In other words, when deciding whether to include an arbitration clause, the parties should consider the likelihood that a default scenario may arise. Depending on the analysis, the parties may consider modifying the rules with the goal of simplifying the default process. However, there is no guarantee that the arbitrator will enforce the parties’ agreement to modify the default judgment rules because of due process and other procedural concerns.
IV. Conclusion
If you are headed to arbitration and anticipate that the other side will default, do not assume that the process will be as quick as in court, or that a default award will be entered without providing at least some evidence in support of the claim. To maximize the advantage of choosing arbitration over litigation, parties should consider including a modified rule for default judgment that mirrors default judgment rules in litigation, which may allow the arbitration administrator to make a final award without the need to submit extensive evidence and engage in a lengthy hearing.
Client Alert 2017-164
