There are substantial advantages to commercial arbitration in resolving disputes — matters can be resolved quicker, cheaper, and with more finality than litigation, not to mention the flexibility and confidentiality that arbitration affords. However, give considered thought before including an arbitration clause in commercial contracts, experts say.
Arbitration is an increasingly popular way to resolve disputes, especially in business transactions, both domestic and abroad. It’s a party-driven, neutral, and confidential process that has many advantages over dragging a party to court. Due to its confidentiality, taking a case to arbitration can also avoid negative media attention and can even help salvage a continuing relationship with the party you are disputing with.
It would follow then that including a clause in your commercial contracts that all disputes be arbitrated is an iron-clad way to avoid litigation pitfalls. Not necessarily so, said a panel of experts at a recent International Centre for Dispute Resolution conference held in Toronto.
Including an arbitration clause in contracts is something that should be carefully considered.
The focus of the seminar was dealing with disputes in the technology industry, but most of their advice can be applied to any industry.
Regarding the benefits of arbitration, Ethan A. Berghoff, an international arbitration and commercial litigation partner at Baker & McKenzie LLP in Chicago, says there are two advantages that immediately come to mind.
“The first is that a lot of times there’s an ongoing relationship and with arbitration there’s the ability to at least establish some form of continuity into the relationship,” he says. “Equally, if not more, important is the confidentiality that’s available particularly with international arbitration.
“Technology companies, more than most, value confidentiality of what they’re doing and who they’re doing it with. Arbitration gives you much greater freedom to keep that away from the public eye, at least until you choose to disclose it.”
Babak Barin, a lawyer at BCF in Montreal, says another advantage is the ability to pick an arbitrator who has knowledge in the desired area of expertise.
However, he says, you must be careful about the way the clause is drafted.
“You have to be very careful of the type of description you give, if in fact you decide to give one, for the selection of the arbitrator. That causes a major, major issue because then you have to find someone with that expertise and then you’ve narrowed your pool.”
Daniel Urbas, a lawyer at Borden Ladner Gervais LLP in Montreal, agrees and says there are so many issues involved and each one has a different expert. For example, an arbitrator who is good with technology might not be the best to arbitrate if a dispute about pricing pops up.
“That type of problem might arise because the solicitors drafting the clause are actually putting too much effort into the quality of arbitrator,” he says.
Barry Fisher, general counsel with SAP Canada Inc., says the worst kind of clause you can put in an agreement is, “all matters or disputes be settled by arbitration.”
“When you’re dealing with technology, I would advocate on the side of making it overly complex rather than underly complex, because of the nature of what you’ll likely be dealing with,” he says.
Critics of arbitration clauses may say that it just makes the contract another paragraph longer and adds another item to the list of issues to be negotiated.
“I certainly won’t defend that, but I find it an interesting perspective,” says Fisher. “An issue comes around in whether or not putting these clauses, whether it’s considered boilerplate. My personal view is that I prefer to deal with how disputes are going to be resolved early on rather than at the end.”
Another option is including a “step clause”; one that requires mediation and/or negotiation before ramping up to arbitration. Is this a better option?
“Let me make it clear from the outset that I’m a true believer in mediation and negotiation, but I am dead against putting in what we call ‘negotiation first, then mediation, then arbitration’ clauses,” says Babak.
“I think they’re senseless. I think in every true dispute, if the parties want to mediate they are welcome to do so and there’s no need to bootstrap themselves in a situation where they have to mediate first before they can arbitrate,” he says.
“I know certain in-house counsel think that’s a way for lawyers to make money, but I disagree because I’ve seen situations where these clauses have gone bust and have in fact cost the client a significant amount of money.”
Steve Andersen, vice president of the International Centre for Dispute Resolution in San Diego, says you have to look at whether the step clause is included in a domestic or international contract.
“I’m a big proponent of mediation and I think if you think to the global community of mediation you have to think culturally and the acceptance of arbitration in different communities,” he says.
“There are some places where mediation is very comfortable and I think in other areas of the world, that conversation doesn’t come very easily and, in fact, I think it’s completely out of the comfort zone of some advocates and parties to bring up mediation because they’re unfamiliar with it, they’ve never done it. So in my opinion, a step clause is fantastic because it brings that point up prior to the filing of an arbitration.
Fisher says a clause of this nature can be beneficial.
“It’s helpful to be able to point to a clause to say, ‘Before you charge off like Don Quixote, it is important that you sit down and have a level of discussion,’ and that’s often done at my level — general counsel to general counsel of the organizations. Most times they are resolved there.”
Choice of location of the arbitration is also something you may want to consider for inclusion in a clause. As Fisher quips, “where you sit determines where you stand.”
Berghoff says he’ll often look to jurisdictions such as the 7th Circuit, for example, where there is a clear precedent of the courts stepping to aid an arbitration issue and then stepping back out and letting the arbitration go forward.
“I might be a little more hesitant to choose a seat where I don’t have a case I can point to where the courts have done that,” he says.
Andersen says you also have to investigate whether the arbitrators in that area have the expertise that you wish.
“Clearly if you look in the area of northern California [in tech disputes] you’ll have a number of arbitrators there, and because of the Silicon Valley, have the experience. If travel isn’t an issue, there are pockets around the world that have a large core of arbitrators that have that area of expertise.”
However, sometimes, including arbitration clauses in commercial contracts can give you more litigation than you bargained for. A recent Supreme Court of Canada decision in Dell Computer Corp. v. Union des consummateurs brings home the point that in certain circumstances, arbitration can take longer and cost much more than litigation.
Although Dell deals with consumer contracts, it underlines that arbitration clauses may not work as intended because the goodwill between the parties that existed at the time the arbitration clause was agreed to will likely have disappeared by the time a dispute arises, says John Birch of Cassels Brock & Blackwell LLP in Toronto, who practises in the areas of banking, commercial litigation, and insolvency law.
He says that when a dispute arises about the scope of an arbitration clause and the role of the arbitrator, the parties have to go to court to determine whether an arbitrator should be appointed. Unless the scope of the clause can be determined as a question of law and it is obvious the clause doesn’t apply, the court will appoint an arbitrator and let him or her decide if he or she has jurisdiction to decide. However, that decision is appealable back to the courts. It’s easy to see how a situation like this could result in more time and money.
Birch says you really need to think about whether there is a specific purpose in remitting a matter to arbitration or litigation. “For example, in the commercial leasing area, disputes relating to rents are often remitted to arbitration because there’s a body of experienced adjudicators, or in the case of trade secrets or something that’s highly confidential,” he says.
“But one should not put an arbitration clause in merely based on the blind assumption that arbitration is going to be cheaper or faster, because in many cases arbitration can be equally expensive, if not more expensive.”