Alternative Fee Arrangement (AFA), Arbitration

Alternative Fee Structure Goes Live for American Arbitration Association

Although arbitral institutions like the London Court of International Arbitration and International Chamber of Commerce have historically based arbitration costs on models other than a pure hourly-basis, the American Arbitration Association/International Centre of Dispute Resolution recently became the first national institution to make a true alternative fee arrangement available for parties arbitrating under the AAA-ICDR.

The scope of the AAA’s alternative fee arrangement (“AFA”) likely will expand over time. An AFA currently is available for two-party commercial and construction cases over which a single arbitrator presides. Right now, two options exist.

  1. The parties and tribunal can agree on a fixed-fee, itemized by the three phases typical of arbitration: pre-hearing, hearing, and post-hearing.
  2. A maximum fee—or, in the construction industry, a “not to exceed” amount—is set and billed by the tribunal at an hourly rate until the agreed-cap is reached. The decision to proceed under an AFA is made at the outset of the dispute and is based on the parties’ approval of the prospective-tribunal’s proposed compensation expectations or budget.

Certainly, challenges lie ahead, particularly with respect to construction disputes where issues commonly arise, develop, or evolve significantly during the course of a proceeding. In other words, the AFA’s effectiveness will be measured over time and may now be best suited for proceedings where the disputed factual and legal issues are fairly straightforward. Nonetheless, when correctly used, parties should experience benefits in the form of cost savings, fee transparency, and predictability in the arbitration process.

 

 

 

 

 

 

 

David Salton is a partner in the litigation practice group, international arbitration, and construction sections of Porter Hedges. His practice focuses on representation of owners, general contractors, subcontractors, suppliers, and other commercial entities in construction, government contracts, oil and gas, trademark infringement, and other commercial disputes. To read David’s full bio, click here.