Taking Arbitration Clauses Seriously

June 19, 2015

By Brian Babcock

Canadian courts are increasingly willing to enforce the terms of arbitration clauses in commercial agreements. Canadian businesses need to learn to take these clauses seriously.

For many years, even decades, our clients did not take commercial arbitration clauses seriously, and for good reason. If a dispute arose, even if the contract had a mandatory arbitration provision, there was a pretty good chance that a judge would allow a court claim to proceed instead- so why worry about the arbitration clause in that situation? Judges were highly skeptical of anything which took disputes, especially serious disputes over substantial amounts of money, out of the courts. Perhaps judges had a built-in bias or ego that they were the best people to decide commercial disagreements.

In recent years, this has changed dramatically. Guessing “Why?” is mostly speculation – it seems to be partly the effect of newer judges growing up in an era when specialized tribunals are effective in removing many disputes from the courts, and equally, a very old-fashioned attitude of showing respect for the freedom to contract and the power of the parties to make their own rules.

This latter reason is why courts enforce commercial arbitration clauses much more often than arbitration clauses in consumer contracts- consumer contracts are typically not true agreements, but instead are a set of terms that the more powerful party- the business- attempts to impose on the consumer, who has little or no choice in the matter- if they don’t accept the harsh terms, they cannot buy the product. The courts continue in the consumer cases to fulfill their traditional role of levelling the playing field.

In agreements between businesses, however, the judge will assume that you knew what you were signing, and intended to agree to it. They will also assume in most cases that you had true bargaining power.

So this is yet another reason to read your business agreements carefully. If you see an arbitration clause- it might be hidden under a cute heading like “Dispute resolution” – you need to consider what you are agreeing to. Some of the issues that can arise from the drafting of these clauses include:

  • Are you agreeing to a single arbitrator, or a panel?
  • How is the arbitrator selected?
  • Is there a presumption as to who pays the arbitrator(s)? Unlike judges, arbitrators cost money. Often a lot of money.
  • What rules apply? There are at least two sets of general rules common in contracts drafted in Canada or the U.S., which have some very different provisions that can affect cost and speed of the resolution, as well as custom rules in sophisticated contracts, or special rules for certain industries
  • Are there preliminary steps of notice or “on-site dispute resolution” processes required before arbitration?
  • Where will the arbitration be held? Thunder Bay? Toronto? A location to be set by the arbitrator?
  • Will the arbitrator have the power to decide issues between the parties beyond the scope of the contract?
  • Will the arbitrator have powers to impose orders similar to injunctions or specific performance?
  • Is the arbitrator’s decision final, or are there rights to appeal?

If you have true bargaining power, you want to consider first whether you want to agree to mandatory arbitration in the first place- the advantages and disadvantages are beyond the scope of this article, and vary depending on the context, but, because courts will now usually enforce the clause, you need to ask yourself whether you want arbitration or courts to resolve your disputes in the first place. Once you have signed the agreement, you may have to live with it.

Because arbitration clauses in commercial agreements have taken on additional importance, if you are uncertain about what anything in the clause means, just like with other clauses in the agreement, you should seek advice from your lawyer- and in this context; your lawyer should be someone with experience in commercial arbitrations.

If you find yourself in a situation where you only notice the effect of the arbitration clause after the dispute arises, you still should discuss that with your lawyer. Although judges are enforcing clauses in most cases, there are exceptions, such as a 2007 Thunder Bay decision where the judge did not force the parties into arbitration because some of the interested and affected parties were not parties to the agreement, and did not want to arbitrate. Faced with a situation where the same facts could have ended up leading to both arbitration and a court case at the same time, with the risk of conflicting results, the judge ruled against arbitration.

Finally, because arbitration clauses often create shorter time lines than the rules of court, if you have a dispute subject to an arbitration clause, getting to your lawyer as soon as possible is even more important than when facing a dispute headed to court.

The bottom line is that, as with everything else in a contract, businesses need to take arbitration clauses seriously.