In most arbitrations, each side pays its own attorney regardless of who wins. That default comes from the American Rule, and it holds unless one of three things changes it: a fee-shifting clause in the contract, a statute that requires the loser to pay, or an arbitrator’s finding that one party acted in bad faith. Which of those applies to your dispute is what decides whether you recover your legal costs, cover the other side’s, or walk away paying only your own lawyer. The question of who pays attorney fees in arbitration almost always comes down to those four possibilities.
The Default Rule
The American Rule is the starting point. Each party pays its own lawyer whether it wins or loses.1Wikipedia. American Rule (Attorney’s Fees) The rule governs court cases and carries straight into arbitration. If your attorney bills $35,000 and you win every issue, you still owe that $35,000 unless something specific overrides the default.
So winning does not make you whole. The exceptions below are the only paths to recovery.
When the Contract Shifts Fees
The most common override is the contract itself. A “prevailing party” clause requires the loser to pay the winner’s reasonable attorney fees, and arbitrators enforce these clauses as written. They are routine in commercial contracts, franchise agreements, and employment contracts.
Read the exact wording before you decide anything. A clause saying the prevailing party “shall” recover fees makes the award mandatory once the arbitrator identifies a winner. A clause using “may” leaves the award to the arbitrator’s discretion. One word can swing the outcome by tens of thousands of dollars.
Some contracts try to let only one side recover fees. Courts have pushed back on these one-sided provisions, especially in employment arbitration. In California, courts have found that an arbitration agreement allowing the arbitrator to shift all fees and costs onto a losing employee is substantively unconscionable and can render the entire agreement unenforceable. When employment is conditioned on signing the agreement, the employee cannot be forced to accept a one-sided fee arrangement. A contract that tries this risks being thrown out altogether.
When a Statute Shifts Fees
Certain federal and state statutes contain their own fee-shifting provisions, and these apply in arbitration even when the contract is silent. The statutory provision can also override a conflicting contract term. These laws exist in areas where private enforcement would collapse if individual claimants had to pay a lawyer out of pocket.
Employment Discrimination
Title VII of the Civil Rights Act of 1964 allows a reasonable attorney fee, including expert fees, to the prevailing party in a discrimination case.2Office of the Law Revision Counsel. 42 U.S. Code 2000e-5 – Enforcement Provisions In practice the provision overwhelmingly benefits employees, because courts apply an asymmetric standard: a winning plaintiff gets fees as a matter of course, while a winning defendant gets fees only if the claim was frivolous or brought in bad faith. The same framework applies when the discrimination claim is arbitrated.
Similar provisions exist in the Americans with Disabilities Act, the Age Discrimination in Employment Act, and the Family and Medical Leave Act. A losing employer in any of these cases faces a real possibility of paying the employee’s legal bills.
Consumer Protection
The Magnuson-Moss Warranty Act lets a prevailing consumer recover attorney fees based on actual time expended, unless the court determines a fee award would be inappropriate.3Office of the Law Revision Counsel. 15 U.S. Code 2310 – Remedies in Consumer Disputes The law was designed to make it economically viable for consumers to pursue warranty claims that would otherwise cost more in fees than the product is worth.
The Fair Debt Collection Practices Act works the same way. A consumer who wins an FDCPA claim is entitled to reasonable attorney fees and costs from the debt collector, in addition to any damages.4Office of the Law Revision Counsel. 15 U.S. Code 1692k – Civil Liability A debt collector recovers fees from the consumer only if the court finds the suit was brought in bad faith solely to harass. The asymmetry is deliberate and carries into arbitration.
When the Arbitrator Awards Fees
Even without a contract clause or statute, the rules of the arbitration provider can give the arbitrator authority to award fees. The two largest providers handle this a bit differently.
Under the AAA’s Commercial Arbitration Rules (Rule R-47(d)(ii)), an arbitrator can award attorney fees if all parties have requested them or if the award is authorized by law or the arbitration agreement.5ArbitrationLaw.com. Prevailing Parties and Attorneys’ Fees – Chapter 42 – AAA Handbook on Arbitration Practice – Second Edition If you want the arbitrator to have that option, your demand or counterclaim should explicitly request fees. If neither side asks, the arbitrator’s hands may be tied.
JAMS takes a slightly broader approach. Under JAMS Rule 24(g), the arbitrator may allocate attorney fees and expenses if the parties’ agreement allows it or if applicable law permits it. When authorized to set a reasonable amount, the JAMS arbitrator can consider whether a party’s failure to cooperate in discovery or comply with orders caused delays or extra costs.6JAMS. Comprehensive Arbitration Rules and Procedures
Arbitrators also have inherent authority in most proceedings to sanction bad-faith conduct with a fee award. Filing a frivolous claim, destroying evidence, or refusing to comply with procedural orders can trigger fee-shifting as a sanction, separate from the merits.
The Other Costs of Arbitration
Attorney fees are only part of the picture. Arbitration also has administrative fees paid to the provider, the arbitrator’s hourly or daily compensation, and sometimes a hearing room or court reporter. These can be substantial, and who pays them depends on the type of dispute.
Commercial Disputes
In business-to-business arbitration, parties typically split the arbitrator’s fees and administrative costs equally, or the agreement specifies another split. Under JAMS Rule 31(a), each party pays its pro rata share of JAMS fees unless the agreement says otherwise.6JAMS. Comprehensive Arbitration Rules and Procedures The arbitrator can reallocate these costs in the final award, so a clear winner may recover its share from the loser.
Employment and Consumer Disputes
The picture shifts in employment and consumer arbitration. Both AAA and JAMS have special rules that limit what an individual must pay. Under JAMS employment rules, the employer pays all fees beyond the employee’s initial filing fee. These rules exist because courts have held that making an employee or consumer split the full cost of arbitration can be prohibitively expensive and effectively deny them a forum.
The Supreme Court addressed the issue in Green Tree Financial Corp. v. Randolph, holding that while high arbitration costs could prevent someone from vindicating statutory rights, the party challenging the agreement bears the burden of showing those costs are actually prohibitive.7Legal Information Institute (LII). Green Tree Financial Corp.-Ala. v. Randolph Silence in the agreement about cost allocation, standing alone, is not enough. But when a company fails to pay its required share, that failure can be a material breach of the arbitration agreement, freeing the other party to take the dispute to court instead.
Collecting or Challenging a Fee Award
An arbitrator’s fee award is not self-executing. The winning party has to convert it into a court judgment before using standard collection tools like wage garnishment or bank levies.
Under the Federal Arbitration Act, any party may apply to a federal court for an order confirming an award within one year after it is made.8Office of the Law Revision Counsel. 9 U.S. Code 9 – Award of Arbitrators; Confirmation; Jurisdiction; Procedure If the agreement names a particular court, you file there; otherwise, you file in the federal district where the award was made. The court must confirm the award unless the losing party successfully argues it should be vacated or modified. Most state statutes have a similar process.
The grounds to vacate are intentionally narrow. Under Section 10 of the FAA, a court may vacate only where the award was procured by corruption, fraud, or undue means; the arbitrator showed evident partiality or corruption; the arbitrator engaged in misconduct such as refusing to hear material evidence; or the arbitrator exceeded their powers.9Office of the Law Revision Counsel. 9 U.S. Code 10 – Same; Vacation; Grounds; Rehearing Challenging a fee award usually means arguing the arbitrator exceeded their powers by awarding fees without authority from the contract, the rules, or a statute. That is a steep hill. Courts give arbitrators wide latitude, and disagreeing with the amount or thinking the fees were disproportionate to the damages rarely succeeds. Some federal circuits also recognize “manifest disregard of the law,” requiring proof the arbitrator knew of a governing legal principle and deliberately ignored it. Wins on that theory are rare.
The Tax Hit on Fee Awards
Receiving an attorney fee award in arbitration creates a tax question that catches many people off guard. If the arbitration settlement or award is taxable income to you, the full amount is generally included in your gross income, including the portion that goes straight to your lawyer. The IRS requires separate reporting of attorney fees paid as part of a settlement or judgment, so both you and your attorney may receive a 1099 for the same dollars.10Internal Revenue Service. Tax Implications of Settlements and Judgments
Congress carved out a partial fix. Under Section 62(a)(20) of the tax code, attorney fees paid in connection with an unlawful discrimination claim can be deducted as an above-the-line adjustment to gross income, up to the amount included in income from the judgment or settlement.11Office of the Law Revision Counsel. 26 U.S. Code 62 – Adjusted Gross Income Defined The definition of “unlawful discrimination” is broad, covering claims under Title VII, the ADA, the Age Discrimination in Employment Act, the Fair Labor Standards Act, the Family and Medical Leave Act, and federal whistleblower protections, among others. For claims outside these categories no equivalent deduction exists, and the tax bite on a fee award can be significant. Talk to a tax professional before accepting any settlement that includes attorney fees.