Weilers LLP

Taking Arbitration Clauses Seriously

Taking Arbitration Clauses Seriously

May 13, 2022

By Brian Babcock

Until now, arbitration clauses in your commercial contract have likely been one of those “boilerplate” provisions tucked away deep into the document, drafted by a lawyer but largely ignored by the clients. If you have not been giving the arbitration clause serious thought until now, it is time to start.

Not long ago, commercial arbitration was not very common. That has changed in recent years, as sophisticated parties learned that arbitration could be quicker cheaper and that arbitrators might have industry specific experience that a random judge might lack. The further slowdown of the court system due to COVID just hastened the process. In Toronto, where courts have been clogged for years, the shift was well underway. Thunder Bay has never suffered backlog problems, but the trend has reached the Northwest.

A skillful drafter like the lawyers at Weilers LLP can help you avoid many pitfalls in arbitration clauses, but as with all terms of the contract, it is your deal, not the lawyers’, and it is up to you to make sure that you understand the terms, and that they reflect your intention.

Why is this important?

Let’s look at just a few of the things that might vary in the drafting of an arbitration clause, which might have significant impact on your rights, and cost you money:

  • What is the scope of the clause? If “all disputes” must go to arbitration, this may discourage small claims. But it is more complex than this – courts may interpret the clause differently if it says “under the contract” or “connected to the contract” or “arising from the contract”.
  • Is the arbitration clause compulsory? There may be advantages to being able to opt out of arbitration, but not making it compulsory likely adds uncertainty and cost.
  • What about the liability of persons not subject to the contract? That cannot be settled in arbitration, so judges will often refuse to enforce the compulsory arbitration clause. Are you okay with that? Even the best drafting might not solve the problem, but it is worth thinking about.
  • Is the arbitration final and binding or subject to appeal? And if there is an appeal, can only errors of law be appealed, or is the judge or judges hearing the appeal allowed to change findings of fact?
  • Is there one arbitrator or three? One arbitrator may be quicker and cheaper, but three allows for diversity of expertise and views.
  • How is the arbitrator selected? A clause that requires agreement increases the likelihood that you end up in front of a judge arguing over the choice. Increasingly parties are nominating panels in the contract, or designating an authority to supply the arbitrator.
  • What rules apply? In court, there are set rules. In arbitration, the law provides only very basic set rules. You may agree to follow rules of various national or international committees. But do you, or your lawyer, know what those rules are? Are they subject to change during the life of the contract? Or will the arbitrator set most of the rules?
  • Where will the arbitration be held? Thunder Bay? Toronto? Calgary? Delaware? London, England? Singapore? Beware particularly if dealing with multinationals.
  • What law apples? Ontario? The place of the arbitration? The home law of the other party? Or some random jurisdiction selected by the other side for their advantage?
  • What time limits apply? This overlaps with questions of place, rules and selection of law, but also may leave a lot to the arbitrator, making that selection even more important. For example, the requirements on documentary production may greatly affect timing and cost.
  • Will the arbitration be live, or virtual, or a combination? Is there flexibility? This is not covered in older clauses, but it can greatly affect cost and scheduling.
  • Who pays the costs? The usual Ontario “losers pays part of the winner’s costs” provision may not apply. With arbitrator’s fees being substantial, it makes a big difference if the cost is split, or set by the arbitrator. Most arbitrators will require a substantial deposit from the parties jointly up front, even if the final bill is subject to some version of “loser pays”. This is very different from how Ontario courts work.

These dozens issues are only examples of why you need to take the wording of the arbitration clause in your contracts seriously. The experienced business lawyers at Weilers LLP may help draft a clause that reflects your intentions, or at least make sure you understand what you are agreeing to. They work closely with our dispute resolution lawyers to keep current and aware of the evolving times. And if you do end up in a dispute, our lawyers are adept at either litigation or arbitration.

If you want to know more, just contact Weilers LLP.