Legal Drafting Tip: Arbitration clauses in commercial contracts

Thursday, July 3, 2014       By Tilly Gray

Clients will sometimes ask whether a contract should include an arbitration clause. Parties and counsel often assume that arbitration is less costly and more practical than litigation and is, therefore, a better way of resolving disputes. However, unless the arbitration relates to a very discrete issue, it is often more expensive than litigation through the courts, since, in addition to all the work that must be performed in the ordinary course of litigating a dispute, the parties must additionally pay for the arbitrator, the hearing room, and the court reporter.

Furthermore, the flexibility that arbitration can potentially offer in terms of the procedure that can be employed is rarely utilized in practice. Arbitrations are creatures of contract. Accordingly, almost everything relating to procedure can be stipulated in the agreement, such as the number of arbitrators, the timing for submission to arbitration, the place of the arbitration, production and discovery and the manner of conducting the hearing. By contrast, court proceedings are governed by the provincial Rules of Civil Procedure, which can mean that less flexibility may be available for these matters.

Arbitration may be a preferred option where the parties (a) are located in different jurisdictions or (b) wish to avoid the possibility of litigating in the United States, where discovery is far more intrusive than in Canada and civil jury trials are common (as are high punitive damages awards).

Also, arbitration can provide a more expeditious process for the final determination of disputes. Arbitration clauses may contain very limited opportunities to appeal, and in some cases are drafted to exclude any rights of appeal.
Court proceedings, and the evidence given by the parties, are typically not confidential. However, the contents of and material relating to an arbitration, as well as the final award, can be kept confidential by expressly providing for that in the agreement. If your client believes that confidentiality is important, arbitration is preferable to going to court, especially given that Canadian courts are hesitant to shroud any part of the process under the veil of a confidentiality order.

A dispute that requires specialized knowledge on the part of the decision-maker would be appropriate for arbitration. Time and money can potentially be saved by contracting that any dispute will be resolved by an arbitrator with a high level of relevant experience.

If none of these situations is present, carefully consider whether a mandatory arbitration clause is really the way to go. Once you put it in the agreement, you cannot revert to the court system unless the other party agrees. Remember, even in the absence of a mandatory arbitration clause, parties are still free to elect arbitration by agreement, after the dispute arises.

More detailed guidance as to the considerations for, and the pitfalls of, arbitration clauses can be found in the annotations to the firm precedent arbitration clause that is section 6.24 of the Boilerplate Agreement.

Drafting a clause that properly meets your client’s needs requires care. You should always consult with a member of the Advocacy Practice Group to ensure that the final clause meets those needs.