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Mission: dispute resolution

Does planning out alternative dispute mechanisms mitigate the cost of going to court?
|Written By Glenn Kauth
Mission: dispute resolution

A lawyer representing a company in a contract dispute, Jennifer Smith wanted an international arbitration panel to allow a deposition from one of her client’s former employees. The worker was involved in her company’s decision to terminate a construction contract, so Smith, a lawyer from Houston, Texas, argued her testimony was crucial, especially since the woman was unwilling either to travel to the arbitration hearing or submit her evidence in writing.

Barry Fisher, general counsel & corporate secretary of SAP Canada
Counsel for the other company vehemently opposed Smith’s suggestion. Calling discovery “nothing more than a fishing expedition,” Paris lawyer Raed Fathallah said the process was largely an exercise in counsel trying to trip up witnesses who could otherwise give their testimony in an affidavit. “We are before an international arbitration tribunal, not before Texas courts,” he told the three-member panel.

In the end, the tribunal ruled it needed more information, particularly about why the former employee couldn’t attend the hearing. But the dispute, part of a mock international arbitration session during the International Association of Procedural Law conference in Toronto in June, illustrates some of the key issues that surface where lawyers from common law and civil law backgrounds go head-to-head. Smith, of course, was pushing for a more adversarial approach while Fathallah, with his experience in the more inquisitorial style of civil law, fought hard against Smith’s moves to introduce common law procedures he argued would merely slow down the process and make it unfair. “Witnesses tend to lie. They cannot be trusted to tell the truth,” he said in rejecting his opponent’s bid to have the mock panel hear live testimony.

The case, albeit fictitious, demonstrated some of the challenges inherent in dealing with disputes through international arbitration. While the process takes commercial battles out of the courts, it can still degenerate into legal battles over procedure. Those pitfalls may be especially relevant in cases involving parties from different legal traditions and, as a result, make arbitration cost as much and take as much time as traditional litigation. Advocates, however, counter arbitration institutions have enough experience in handling cases that such battles over process are minimal. As well, they argue, how long the proceedings take depends largely on what the parties do. “It’s what you make of it,” says Tim Martin, a former vice president and special counsel responsible for dispute resolution at Calgary-based energy giant Nexen Inc. “If you plan properly, then you have an opportunity to deal with disputes in a reasonable manner.”

For Barry Fisher, vice president, general counsel, and corporate secretary at SAP Canada Inc. in Toronto, what’s key is negotiating arbitration clauses in a contract early on — “at the courting stage rather than the marital disharmony stage.” In that way, his company, which provides software to businesses, hopes to intercept potential battles during a future arbitration, something lawyers say parties negotiating a contract often fail to do. “The difficulty is that when you’re entering into these projects . . . quite often the last thing you want to talk about is a dispute,” says Martin, who now works as an arbitrator and mediator. “It’s not the last thing you should be discussing. It’s probably the first thing.”

In Fisher’s case, that means putting some detail on the rules of engagement in the contract. Typically, for example, lawyers at SAP will insert a clause stating all disputes will go to arbitration except for those involving intellectual property. “We will never allow the ownership of intellectual property to be determined by an arbitration,” says Fisher. “It’s the core of our business. We cannot afford to have someone get it wrong.”

Also key for Fisher is inserting some language about who the arbitrator will be. Because disputes usually involve software that SAP has provided to a business, finding someone who has both the technical knowledge to understand the dispute as well as legal training as a neutral arbitrator can be difficult. To ensure companies get someone qualified, contracts will often stipulate each party can name a few people it prefers, with the hope they can agree on who the arbitrator should be. Often, Fisher adds, that person won’t be someone who is easily available. “It’s like finding a contractor for your house. The best ones are busy doing it.”

Views on what exactly should go into an arbitration clause differ. For some people, such as Toronto arbitration
practitioner Joel Richler, simple works best. “Less is better is sort of the general rule,” says Richler, a partner with Blake Cassels & Graydon LLP. He advises against including provisions on discovery in an arbitration clause, particularly since the notion of pre-trial investigations is a foreign one in Europe and “because you don’t know in advance what the dispute is going to be about.” Instead, he says, companies are better to avoid risking litigation over a discovery clause by leaving the decision on whether to allow it to the arbitrator, who in many cases will compromise on the issue by setting strict time limits on depositions.

In adopting the simplicity rule, Richler also recommends companies designate a known international arbitration institution — such as the Paris-based International Chamber of Commerce’s International Court of Arbitration (ICC), the American Arbitration Association’s International Centre for Dispute Resolution (ICDR), or the London Court of International Arbitration (LCIA) — to hear the dispute. That way, they can avoid having to be specific about the rules in the contract by leaving them up to the institution itself. At the same time, involving one of the major arbitration bodies adds legal weight to the process should the parties end up litigating. “That guarantees that the courts will recognize the clause,” says Richler.

Of course, the choice of an arbitration institution isn’t always an easy one. Americans, for example, tend to be leery of the ICC, Richler says, especially given the European approach that de-emphasizes processes like document production and discovery. As a result, U.S. companies will often prefer the more familiar procedures of the ICDR.

At the same time, the major institutions do have what many consider a downside — the cost. “The ICC has a bad rap because it’s expensive,” says Richler. However, he says, the Paris agency can nevertheless make up for what appear to be high costs by encouraging greater efficiency since the arbitrators receive a lump-sum fee based on the scale of the dispute, rather than an hourly rate.

At SAP Canada, Fisher says while the company has used the major arbitration institutions, it has tended to prefer an ad hoc process in which the parties determine the procedures themselves. In international situations, it will then always default to standard arbitration rules set out by the International Bar Association. The potential pitfall, of course, is without an official body to run the process, the parties risk doing what they set out to avoid in the first place. “If you don’t have prescribed rules and you’re in a fight, you tend to find more things to fight about,” says Fisher, adding his experience has been competent counsel will usually find ways to get around such wrangling. “It means you need to either be more careful in your drafting or you simply adopt the institutional rules.”

The risk sometimes is that by going outside of an institution, the courts may deem an arbitration clause to be pathological and therefore not enforceable. Barry Leon, a Torys LLP arbitration practitioner, says a common mistake is in clauses saying the process will adopt the rules of a particular institution such as the ICC but not provide for — or perhaps reject allowing — that body to run it. “It doesn’t work because the rules contemplate the ICC, doing things,” says Leon.

Like Richler, Leon believes the most effective arbitration clauses avoid getting bogged down in too many details. Instead, he argues at their simplest, clauses need only specify the place where the arbitration will happen, the language it will take place in, and the number of arbitrators to hear it. “That’s all you really need to have an arbitration,” he says.

At SAP Canada, Fisher says arbitration clauses will also typically include some language about the qualifications the adjudicator should have, something he argues is particularly important for a software company. “The lesson that we’ve learned out of this is to be quite particular in the arbitration clause both to the qualifications of the arbitrator and the rules of engagement,” he says. Fisher adds he usually prefers having one arbitrator instead of three in order to avoid scheduling difficulties among panel members.

Leon says specifying qualifications is a balancing act since it may unnecessarily complicate the process if the requirements are either too general or too specific. “You may get somebody who is an expert in a narrow field, but they may have no ability to conduct a case efficiently.” Additionally, he says, having a clause that is overly broad — such as one that calls for someone with knowledge of computers — can simply lead to disputes as the parties argue over what that means. “The important thing for an arbitration is you want someone who has good judgment [and] who can conduct a hearing efficiently.”

Of course, it was in part the qualifications of the arbitrator that were behind one of the more prominent recent disputes over an arbitration clause to end up in Canadian courts. In that case, Xerox Canada Ltd. v. MPI Technologies Inc., an Ontario Superior Court judge had the task of deciding whether an ICC arbitration panel had exceeded its jurisdiction in making an award. In its claim to set aside the award, Xerox argued the trio of arbitrators erred not only in including U.S.-based MPI’s parent company in France in the case, but also in considering the findings of a panel member with technical expertise related to what was a copyright dispute over the use of software. It faulted the arbitrator for engaging in “extra-judicial investigations” by conducting his own research into the issues raised in the case, something it claimed rendered him an “expert on the panel” rather than a neutral party. The judge disagreed, ruling instead that one of the key purposes of having arbitrators with technical knowledge is for them to apply it to the case at hand.

Richler, who acted for Xerox, says although the result was unfavourable to his client, the court litigation never had much to do with the process of the arbitration itself. Advocates for international arbitration further say despite such cases and the fact that handling disputes that way can sometimes cost as much as going to court, the process still has several advantages. “The key thing when you’re doing things internationally is you want an award that’s going to be enforceable,” says Leon, adding because Canada and most countries have adopted the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, companies have greater certainty they’ll actually receive what they’re owed should they prevail in a dispute.

Taking a case to a foreign court that might be hostile to either the company or the issue at hand can be a bigger risk, he says. At the same time, arbitration has the advantage of allowing parties to exclude punitive damages common in places like U.S. courts as well as offering guarantees of confidentiality and more control over the process.

Perhaps ironically, in Canada arbitration offers less certainty where the dispute is with a state rather than between two companies. That’s because the prime vehicle for handling such battles is the International Centre for Settlement of Investment Disputes (ICSID), an institution of the World Bank established under the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States. Because of its affiliation with the World Bank, ICSID decisions carry significant weight in discouraging states from invoking sovereign immunity in order to ignore an award.

So far Canada has only signed, but not ratified, the convention that would bring it into force here. According to Martin, that’s a problem for oil-and-gas companies with major investments overseas — ones often involving foreign governments — that could benefit from resolving problems through arbitration. “The difficulty is with the provinces,” says Martin, citing Quebec and Alberta as the two jurisdictions most opposed to Canada invoking the convention.

Fisher, nevertheless, says his company has had a generally positive, but still mixed, record in using international arbitration. The key in his view is to actively involve in-house counsel in the process, particularly since, as people like Martin acknowledge, the overwhelming cost of arbitration stems from areas like hiring external lawyers and document production rather than what is paid to the institution itself. In that way, the company can hopefully avoid letting the proceedings drag on over disputes such as discovery, something parties would be wise to limit anyway since the goal in the first place is to have an alternative to the trappings and costs of court litigation.

“I guess we’ve had both good and bad experiences,” says Fisher, noting arbitrators in some cases have rendered decisions surprisingly adverse to his company. “If you don’t handle it properly, it can be just as time-consuming and just as expensive, or more so.”