Overall, lawyers need to be as specific as possible when drafting clauses
This article was produced in partnership with ADR Chambers.
Mallory Hendry of Canadian Lawyer spoke with Barry Arbus, mediator and arbitrator at ADR Chambers, about what lawyers need to know about the arbitration clause.
Ten years ago nobody thought about arbitration as an option for commercial disputes — people ran to court. But between ongoing backlogs in the court system, incredible cost savings and now the impact of the COVID-19 pandemic, arbitration’s already increasing popularity has reached new heights.
Barry Arbus, mediator and arbitrator at ADR Chambers, recently did a mediation/arbitration for a shareholder dispute where the four parties hailed from four corners of the globe. After one Zoom session — albeit a 10 hour one — they thanked Arbus not only for his expertise in guiding them to mediation and resolution of their dispute, but also for saving them thousands in travelling costs.
“The pandemic created a whole new approach where we’re doing arbitrations by Zoom, and the parties love it,” says Arbus, who specializes in business and corporate matters including domestic and international mergers and acquisitions. “I don’t think we’ll ever go back.”
A critical component of a smooth arbitration comes down to the arbitration clause. When lawyers are drafting them, there’s no one-size-fits-all approach: each clause should take into account the parties and their particular circumstances. But even in the absence of a universally appropriate arbitration clause, there are some common pitfalls to avoid, warns Arbus.
“I’ve seen certain scenarios arise repeatedly and the result is almost always a court application for the appointment of an arbitrator or for direction,” Arbus says.
Problematic arbitration clauses include those which require the respondent’s agreement in order to proceed to arbitration — for example, where the parties must agree on an arbitrator and there’s no mechanism to appoint an arbitrator absent such agreement — and those with arbitrator qualifications so detailed and specific it’s nearly impossible to find a suitable arbitrator, as well as those which refer to an arbitral institution that doesn’t exist.
“A well-drafted arbitration clause will prevent the need for court proceedings prior to an arbitration,” Arbus says, noting there are a number of considerations best dealt with by the parties and their lawyers at the time of negotiating the contract — because once a dispute arises, it’s much more difficult for the parties to agree on anything.
Arbus recommends asking a string of questions to help shape the arbitration clause. For example, what disputes will it cover? His advice is that the arbitration clause be drafted as broadly as possible to cover “all disputes, claims or controversies.” Another consideration is whether the arbitration will be administered by an institution or ad hoc. While the former is convenient, it’s also more expensive than ad hoc proceedings in which the procedure is decided upon by the parties and the arbitrator. But if you do opt for ad hoc arbitration, how will it be commenced?
“The clause should set out the procedure for initiating an arbitration, including any pre-requisites,” Arbus says. “For example, if the parties require mediation before either party may commence an arbitration.”
It’s also important to decide if there’ll be one or three arbitrators. Though one arbitrator is less expensive, three arbitrators may have an easier time arriving at a decision in a complex dispute. How will the arbitrator(s) be selected? The process for selecting an arbitrator will typically be pre-determined in an institutional arbitration, while the process should be specified in an ad hoc arbitration. Another critical consideration is where the seat of the arbitration will be be, as where it’s conducted will affect the law governing the procedure and may differ from the law that governs the parties’ agreement.
When parties speak different languages, it’s especially important to specify the language of the arbitration, Arbus notes, as well as to consider confidentiality. It’s not a given, he warns — the clause should clearly state if the proceedings are to be private and confidential.
Though these common considerations are helpful for limiting court proceedings before the arbitration, what about the need for court proceedings afterwards? One of the more pressing considerations is whether or not the award will be final and binding, and in Arbus’ experience clauses often include that phrase — but parties may have a variety of reasons to preserve their right to appeal. When does final and binding really mean final and binding?
In 108 Media Corporation v. BGOI Films Inc., a recent decision of the Ontario Superior Court which was affirmed by the Court of Appeal, the court looked at whether there is a right to appeal where the parties’ contract included an arbitration clause which stated that the determination of the arbitrator “shall be final and binding upon the parties.” In this case, following a breakdown in the parties’ relationship followed by an arbitration that found in favour of the respondent, the applicant commenced an application for leave to appeal the arbitral award to the Ontario Superior Court.
According to s. 45 of the Arbitration Act, where an arbitration agreement does not address appeals on questions of law, a party may appeal an award to the court on a question of law with leave, which the court shall grant if two pre-conditions are met, Arbus says. Section 3 of the act provides that the parties to an arbitration agreement may agree to vary or exclude certain provisions of the act, including s. 45.
Reading sections 3 and 45(1) of the act together, the court held that “… a statutory right of appeal on a question of law exists … unless the parties by agreement, whether expressly or by implication, eliminate the right of appeal.” The 108 Media Corporation v. BGOI Films Inc. decision goes on to say it’s “… well-established that an arbitration agreement which states that the parties agree to ‘final and binding’ arbitration does not necessarily preclude judicial review, but it does reflect an intention to exclude a right of appeal.”
After considering the surrounding circumstances and the parties’ subsequent conduct, the court held that there was no right to seek leave to appeal on a question of law under the parties’ contract: there was no ambiguity with respect to the phrase “final and binding.” The decision is part of a growing body of case law that is supportive of commercial arbitration in Ontario, Arbus says.
Overall, lawyers should be very specific when drafting an arbitration clause, outlining as much as possible the process they want to follow — Arbus is a firm believer that simple is better, and favours the ADR expedited rules — as well as exactly what it is they’ll be arbitrating. The latter is where the wording of the clause becomes critical, as Arbus recently saw first hand during an arbitration that resulted from one of the parties triggering a shotgun. The question became what else was included with the price of the shares? If the clause doesn’t spell out specifically the subject matter of the arbitration, “that becomes the subject matter of the arbitration: what is it that we’re fighting about?”
Ultimately, the shift to arbitration “has allowed for the good business lawyers to get in the middle of these disputes and that’s helped push alternative dispute resolution for businesses,” Arbus says.
“It’s become in the business world a much more realistic and viable alternative to court — and it will continue to grow as time goes on.”
Barry Arbus is an experienced mediator and arbitrator who specializes in business and corporate matters, including domestic and international mergers and acquisitions. Barry has mediated and arbitrated two-party and multi-party matters in automotive, entertainment, hospitality, food, communications, commodities, agriculture, and primary resources. He is a member of the Canadian Arbitration Association, the Toronto Commercial Arbitration Society, the International Bar Association, the American Bar Association, the Canadian Bar Association, the Ontario Bar Association and the Canadian Tax Foundation.