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Arbitration has long been recognized as the preferred method to resolve international commercial disputes. In many countries, particularly in Europe, there is also a tradition of relying on arbitration, rather than court proceedings, to resolve a wide variety of “domestic” disputes, including those arising out of business relationships.
More than a decade ago, Canada and its provinces took significant steps to harmonize their legislation concerning international arbitration and the recognition and enforcement of foreign arbitral awards, with that of other major trading nations. This also created the incentive, and the opportunity, for legislators to review and modernize out-dated legislation applicable to domestic arbitration. Despite these developments, until relatively recently, most disputants continued to look primarily to the courts for legal recourse arising out of commercial relationships.
Pressures on the court system, and the widely touted benefits of arbitration, eventually spawned a surge of interest in domestic commercial arbitration. Arbitration now has been embraced firmly in Canada as a mainstream method to resolve “domestic” business disputes. These developments have, in their turn, increased the level of sophistication that business people, lawyers, judges, arbitrators, academics and other practitioners bring to bear on commercial arbitration issues.
However, it is safe to say that the “honeymoon” between business and arbitration is over. Knowledgeable business people and practitioners now recognize that arbitration is not a panacea for all the perceived shortcomings of the court system, and that with its benefits it brings its own unique set of problems and potential pit-falls. The challenge now is to learn to manage these issues to reap the promise of arbitration as an efficient and effective process to resolve domestic business disputes.
The purpose of this article is to examine a selection of issues associated with the use of arbitration to resolve domestic commercial disputes, and to identify steps that can be taken to realize the many potential benefits of commercial arbitration.
II. THE BENEFITS OF COMMERCIAL ARBITRATION – Myth or reality?
It is de rigueur for papers such as this to begin with an exposition of the benefits of arbitration. In this instance, the author’s purpose is not to “sell” readers on the use of arbitration, but rather to define the test that proponents of commercial arbitration have set for themselves to meet, so that it is possible to perform a “reality check”.
Generally, the benefits of arbitration are expressed by reference to the perceived shortcomings of litigation. In relation to domestic disputes, arbitration has been said to be more efficient than litigation as it is more final, faster and less expensive. Outcomes are said to be more predictable, particularly in those jurisdictions with a non-specialized judiciary, because the parties may choose their decision-maker. It is often said that arbitration is more suitable than court proceedings for the resolution of business disputes because it is consensual, less adversarial and more private.
While noting some of these potential benefits, proponents of international arbitration have, understandably, tended to focus primarily on the use of arbitration to create a level playing field. None of the parties to an international business transaction wish to be forced to litigate in another party’s home jurisdiction. Arbitration provides the opportunity to choose a neutral place of arbitration, a neutral law to govern substantive rights, well-tested rules of international arbitration procedure and a presiding arbitrator of neutral nationality. However, there is a general perception that these factors are not relevant to domestic commercial arbitration in Canada.
Despite the initial enthusiasm with which Canadians embraced arbitration when it began to come into vogue, one does not have to look far to find sceptics and critics. There are simply too many tales of woe about endless, expensive arbitration proceedings, unexpected judicial intervention and unacceptable results for them to be dismissed as aberrations. The fact is that commercial arbitration has taken on some of the pernicious characteristics of litigation which participants, particularly business people, had hoped to avoid. The promises of arbitration too often are unfulfilled.
The solution to this dilemma does not lie in the wholesale abandonment of commercial arbitration in favour of litigation. As the author hopes to demonstrate in the discussion which follows, the solution lies in taking a more sophisticated approach to tailoring the arbitral process to the objectives of the parties before a dispute arises, the appointment of capable arbitrators, where appropriate engaging the assistance of experienced arbitral institutions, and, in some cases, modifying the behaviour and attitudes of counsel and members of the judiciary.
III. THE PLACE OF ARBITRATION – Choose the right “seat” of arbitration in Canada
International arbitration practitioners agree that the choice of the place or “seat” of arbitration is of critical importance. The designation of the place of arbitration carries with it important legal implications, and the analysis must go beyond identifying a place with a pleasant climate, good accommodation, and fine restaurants. However, there is a popular misconception that where the parties to the arbitration are Canadian, it makes little difference what place in Canada is chosen as the place of arbitration. This misconception has, from time to time, lead the parties or their counsel to agree to a place of arbitration within Canada which is legally inappropriate in the light of their objectives.
In Canada, by virtue of the constitutional division of powers between the Federal Parliament and the Provincial Legislatures, the primary responsibility for enacting legislation with respect to domestic commercial arbitration rests with the provinces. Each province has adopted its own legislation. Although there are common themes to this provincial legislation, and although similar language often is employed, there are significant differences. Ironically, there is more commonality of approach in provincial legislation governing international arbitrations and the enforcement of foreign arbitral awards than there is in legislation regulating the conduct of domestic arbitrations.
It is important to note several fundamental principles of law in relation to arbitration. First, an arbitration agreement is considered to be a separate agreement, severable from the commercial agreement in which it is contained. Second, the substantive law of the contract will not necessarily be the law which governs the conduct of the arbitration (the “lex arbitrii”). Generally, where parties specify a place of arbitration, they are taken to have submitted to the laws governing arbitration in that place, and, if necessary, to the jurisdiction of the courts of the place of arbitration who may have been empowered by that law to intervene. Thus, even if two parties from British Columbia made an agreement governed by British Columbia law, if the specified place of arbitration is Alberta, it is likely that the Alberta Arbitration Act applies and that the Alberta courts will have primary jurisdiction over the conduct of the proceedings.
Despite the general rule, in certain circumstances, provincial legislation governing domestic arbitrations does apply to arbitration proceedings taking place in other provinces. For example, if the place of arbitration is Alberta, and an action is commenced in British Columbia, the British Columbia court could stay the British Columbia action pursuant to Section 15 of the British Columbia Commercial Arbitration Act.
More difficult is the question of whether a British Columbia court would, for example, entertain applications to remove an arbitrator under Section 18 of the British Columbia Commercial Arbitration Act, or applications to extend time under Section 20 of that Act, if the place of arbitration were in another province. Although the court may have jurisdiction over the parties to such an application, or even in relation to the subject matter of the underlying dispute, in ordinary circumstances the court should, and likely would, decline jurisdiction in favour of the courts of the place or seat of arbitration; those courts would then dispose of the matter according to the laws of the place of arbitration.
To further complicate matters, it is possible for parties to a domestic arbitration agreement to expressly agree that the lex arbitrii will be the law of a province other than that in which the place or seat of arbitration is located. It is not clear what the reaction of Canadian courts would be in the light of such an express agreement. To use the same example, if the seat of arbitration were in Alberta but the parties had expressly agreed that the lex arbitrii would be the law of the province of British Columbia, the British Columbia courts might well entertain applications to the court pursuant to the British Columbia Commercial Arbitration Act on the theory that the Act is part of the general law of British Columbia and it does not expressly state that it cannot apply if the place of arbitration is in another province of Canada. Even more uncertain is the question of whether the Alberta courts would entertain applications under the Alberta Arbitration Act in these circumstances. The result might depend upon whether the court would construe an agreement that the lex arbitrii is the law of British Columbia as an agreement to “contract out” of the Alberta Arbitration Act. It does not appear that Canadian courts have yet had to grapple with these issues. However, as it becomes more common to use arbitration to resolve “inter-provincial” disputes, issues such as these will no doubt have to be addressed.
With the qualifications stated above, as a general rule, when one chooses a province in Canada as the place for the arbitration of a domestic Canadian dispute, that choice means that the arbitration legislation of the chosen province will apply, regardless of the law chosen to govern the substantive rights of the parties under the agreement. The law of the place of arbitration becomes the lex arbitrii. If at any stage during the proceeding it is necessary for any of the parties to seek recourse to the courts for a matter relating to the conduct of the arbitration, then such an application will have to be brought to the courts of the province in which the place of arbitration is situate. The circumstances under which access to the court will be permitted or denied, and the procedures to seek access, all will be governed by the statute law of the province in which the place of arbitration is situate. In some provinces it is possible to contract out of domestic arbitration legislation whereas in others contracting out is prohibited or limited. Rights of appeal vary from province to province. Thus, even within Canada, it is essential for the parties and their counsel to be alive to the differences in provincial legislation to ensure that the legislative regime is appropriate to the particular commercial relationship and the manner in which the parties wish to have any arbitration conducted.
It is not feasible within the scope of this article to canvass thoroughly the similarities and differences among the arbitration statutes of Canada’s provinces. Entire books have been devoted to that subject. However, in the course of the discussion that follows, some examples are given of significant differences in provincial legislation.
IV. PROCEDURE AND ADMINISTRATION – Properly balance efficiency and thoroughness
All provinces and territories of Canada have prescribed rules for the conduct of litigation in their courts. These rules are detailed and comprehensive. There is a large body of published, or easily accessible, jurisprudence concerning the manner in which these rules are to be interpreted and applied.
Most rules of court are stated to have the object of securing the “just, speedy and inexpensive determination of every proceeding on its merits”. However, other than at the small claims level, where the balance between efficiency and thoroughness is somewhat tilted in favour of “rough justice”, the rules and their application reflect a preoccupation with thoroughness and particularity. Pleadings are important, and huge amounts of time may be devoted to interlocutory battles concerning the narrowing, amendment and particularization of pleadings. The discovery process is extensive, both in relation to documents and oral examination of parties and witnesses. When the assistance of the court is required, large volumes of paper in a prescribed form must be prepared and exchanged according to a specified schedule, and communications with judges outside the courtroom take place through a court registry. Although there are opportunities to avoid having to call viva voce evidence through summary procedures, there is a presumption that if there are significant conflicts on the evidence the case will have to proceed to a full trial. When the trial takes place, rules of evidence will be strictly applied and the hearing hours will be more limited than ordinary business hours.
Of course, the rules of court have not evolved with a view to frustrating litigants. Their purpose is to ensure that justice is done in a thorough, orderly and predictable way.
Arbitration is often considered as an alternative to litigation to avoid the considerable burden of time and expense associated with conducting proceedings as contemplated by the rules of court. However, before committing to arbitration the parties must decide that they are willing to sacrifice some of the protections afforded by those rules. Too often, the parties and their counsel, after agreeing to arbitrate, then proceed to conduct the arbitration as though it were a court proceeding. If the primary purpose of choosing arbitration is to secure finality and protect confidentiality, or to be able to choose a decision maker with specific credentials, that may be entirely appropriate. But where the objective is to achieve a faster and more cost-effective result, it is obviously counter-productive to replace the publicly funded court system with, in effect, a privately funded surrogate.
The parties must consider why they wish to arbitrate, and then must adopt rules of procedure consistent with their objectives.
The rules of court have no direct application to arbitrations. Thus, it is imperative that the parties agree to some other rules of procedure to replace them. If they do not do so then the manner of proceeding may have to be determined by the arbitrator; to avoid chaos in such cases it is essential to have a very experienced arbitrator who can direct the process in a fair and orderly way.
The choosing of arbitration rules is one matter concerning which it is important for practitioners to be alive to differences in provincial legislation. The domestic commercial arbitration statutes of some provinces provide only a skeletal outline of the manner in which arbitrations taking place within their jurisdiction must be conducted. Others incorporate very detailed rules, and of course when they do there are significant differences. As noted above, there are also differences from province to province concerning the ability to “opt out” of statutory rules. Thus, when choosing the place of arbitration within Canada, the parties should consider the implications of that choice insofar as it may determine the rules which will govern the arbitration, and, where possible, may want to contract out of some rules and add others as part of their arbitration agreement.
For example, if Vancouver is chosen as the place of arbitration, British Columbia’s Commercial Arbitration Act would apply. Under that act, unless the parties otherwise agree, the Domestic Commercial Arbitration Rules of Procedure of the British Columbia International Commercial Arbitration Centre (BCICAC) will apply. If those rules are not acceptable, the parties must agree that they will not apply and must agree to replace them with other specified rules. If the BCICAC rules are largely acceptable, but the parties wish to make specific changes to them, the rules themselves allow the parties to agree to any desired variations.
The ability to tailor rules consistent with the mutual objectives of the parties is one of the most significant advantages of arbitration over litigation. There are two general approaches to specifying a set of arbitration rules. In both cases, the appropriate language giving effect to the choice should be included in the arbitration agreement.
Arbitral institutions around the world have created and published arbitration rules. In some cases the institutions have more than one set of rules; for example, a set for arbitrating domestic disputes, a separate set for international arbitrations, and possibly special rules for fast track arbitrations or disputes concerning specific subject matters, such as technology disputes. The parties to a commercial agreement can then expressly adopt one of these sets of rules by using appropriate language in their arbitration agreement. In Canada, BCICAC, the ADR Institute of Canada and some of its regional affiliates, as well as several other organizations have such rules. Although many of these rules are very similar, there are, again, significant differences.
Alternatively, subject to any mandatory provisions of provincial legislation in the place of arbitration, the parties may simply choose to write their own rules and to incorporate those rules in the body of the arbitration clause, or as a schedule to their commercial agreement. If this alternative is chosen, great care must be taken to ensure that the rules deal with all essential procedural matters, and that they “mesh” properly with any applicable statute law.
When choosing or writing arbitration rules, the parties should bear in mind the kinds of disputes which might arise, and where they wish to strike the balance between efficiency and thoroughness. Some of the most important issues to consider, where choices can be made which will effect that balance are:
Commencing the arbitration – how is the arbitration to be commenced? Will a simple written notice of dispute be sufficient, or should the initiating document set out details of the claim and supporting evidence?
Appointment of arbitrators – how many arbitrators are needed and how are they to be appointed? One is less expensive than three, but can the right combination of experience be found in a single person?
Pleadings – do you need pleadings, and if so what must they say? Some cases (for example an arbitration to fix a fair market rent on a lease renewal) may not need pleadings at all.
Discovery of documents –normally in commercial arbitrations there is discovery of documents – but should it be automatic, or should the requesting party have to satisfy the arbitrator that the documents they want are relevant? Should the scope of production be more limited than under the rules of court?
Examinations for discovery – normally in commercial arbitrations there are no examinations for discovery. Would it make the proceeding more or less efficient to provide for examinations for discovery? If so who should be examinable, and how can the transcripts be used? – remember, the rules of court have no application.
Oral Hearing – most commercial arbitration rules and some statutes require an oral hearing. Is it necessary, or could the dispute be resolved through written evidence and submissions? If there is to be a hearing, what form will the evidence take; do you really need “live” direct examination and cross examination of witnesses, or would sworn affidavits with live cross examination, or transcripts of pre-hearing cross examination suffice?
Award – most arbitration rules and some statutes require a written, reasoned award. Do you really need a reasoned award; if there is to be no right of appeal, what is the point?
Time limits – if speed is the objective, shorter time limits than those contemplated by most rules or statutes may be appropriate. But if they are too tight you may have trouble finding an arbitrator willing to act. Arbitrators may lose jurisdiction if certain steps, like delivering an award, are not taken in the agreed time; you will not want to have to re-start the whole process.
Although there are clearly cases, particularly those involving complex multi-party commercial relationships, where tailor-made arbitration rules are appropriate, the author’s view is that whenever possible parties should adopt the rules of a recognized arbitral institution, with as few changes as possible. Those rules are generally based on models that have been developed and used successfully over many years, and use language and concepts with which experienced arbitrators and counsel, and in some cases the courts, are familiar. There are subtleties embedded in the language that may not be readily apparent to inexperienced practitioners. Tinkering can produce confusion and undesirable results.
Another decision which must be made, and which can have an impact on the efficiency and cost-effectiveness of the arbitral process, is the decision as to whether the arbitration should be administered by an arbitral institution.
Some institutions will, for a fee, assist the parties in selecting and appointing arbitrators. Others institutions provide full administrative services. They not only assist at the appointment stage, but also having continuing involvement throughout the arbitration, serving a function akin to that of a court registry. In that sense, they relieve the arbitrator of some of the administrative burden, with a consequent saving in arbitrator’s fees. Administering institutions also may play a role in deciding challenges, serving as a depository for funds posted as security, following up on directions given by the tribunal and providing logistical support. Relative to those charged by their international counterparts, the administration fees charged by Canadian institutions are very modest. Generally, the arbitrator will order that the unsuccessful party reimburse the successful party for any such fees as part of the award.
For a simple arbitration before an experienced arbitrator, a case can be made that the cost of administration may be an unnecessary expense. If the parties agree to an un-administered arbitration, they should appoint an experienced arbitrator, and some care must be taken when choosing the rules of procedure, for some sets of rules expressly contemplate administrative services being provided and define the role of the administering institution.
Despite the case for un-administered arbitrations in some instances, most experienced arbitration practitioners, and many sophisticated clients, favour having arbitrations administered by a recognized arbitral institution. The comfort and efficiencies of administration and the ready access to arbitration expertise are seen to outweigh any modest incremental cost.
If the arbitration is to be administered, express language to that effect, specifying the administering institution, should be included in the arbitration agreement.
V. CHOOSING AN ARBITRATOR – Identify the right qualifications
An important benefit of arbitration is that it permits the parties to choose their decision-maker. In their enthusiasm at this prospect, business people often insist that the arbitrator or arbitrators be persons who “really know my business”. It is possible, and sometimes desirable to set out the qualifications of arbitrators in the arbitration agreement. Thus, one might encounter an arbitration clause specifying that the sole arbitrator shall be “a mining engineer with at least 10 years experience in the coal mining business in south-eastern British Columbia”. This approach is somewhat misguided. It is based on a misapprehension of the arbitrator’s role, and it can (with all due respect to mining engineers) lead to a disorganized and fundamentally dysfunctional arbitration process.
Arbitrators, like judges, must in all but the most exceptional circumstances resolve disputes according to law. They must decide based on the record of evidence presented to them. Each party must be given a fair opportunity to be heard. Thus, in an arbitration, an expert arbitrator is not entitled to decide the case based on his own opinions and experience, unless they are fully supported by the evidence. If the dispute is a technical matter, concerning which expertise is required, expert evidence must be presented. Each party must be aware of the case they have to meet, and must be given the chance to challenge expert opinions through cross-examination or otherwise. If the arbitrator decides the case according to his or her own theories, or based on facts or opinions not placed in evidence, the parties will have been denied a fair hearing. The arbitrator would have committed an arbitral error and the award could be attacked.
Thus, not only is it unnecessary to have a scientific or technical expert as arbitrator, but also there is a potential danger in doing so, if the arbitrator lacks sufficient experience as an arbitrator. Particularly where there is a sole arbitrator, as is most often the case for domestic commercial arbitrations, it is usually far more important that the arbitrator have an understanding of the law and arbitration procedures. Where the case involves technical issues, it is only necessary that the arbitrator have the ability to understand the evidence.
It is also important to remember that, above all, the parties want an unbiased decision maker, untainted by doubts as to independence or impartiality. Some spheres of business are very small, with the result that it is difficult to find an independent expert acceptable to all parties.
One sometimes encounters arbitration agreements wherein the parties have attempted to have the best of all worlds – “the arbitrator shall be a mining engineer who is also a lawyer, with 10 years experience as an arbitrator and with coal mining in south-eastern British Columbia, who has no past connection whatsoever with either of the parties”. Such a description defines a very small talent pool. It is unlikely that such a paragon could be found easily.
When specifying the qualifications of arbitrators in an arbitration agreement, or selecting an arbitrator, the parties should focus on what they really need. If what they really want is to ask an independent expert to decide an issue according to the expert’s own opinions, with the parties agreeing to accept the result, they may not be talking about arbitration all. They may need to consider some other form of dispute resolution process.
VI. PRIVACY AND CONFIDENTIALITY – Protect your trade secrets
Business people sometimes choose to arbitrate, rather than litigate, because the arbitral process is understood to be private and to afford greater protection to confidential information and trade secrets. However, it is often wrongly assumed that these potential benefits flow automatically from the choice of arbitration to resolve disputes. The reality is that special steps must be taken to achieve that objective.
It is true that arbitration is a private, consensual process. Hearings take place in a private setting from which the public is excluded. However, it is simply wrong to assume that information exchanged during the course of an arbitration, the existence of the arbitration, and the results of the arbitration, including the award, cannot be made public. There is no statute law restricting the dissemination of such information. Nor does the common law afford blanket protection.
If the parties to an arbitration wish to protect confidential information, they must enter into a confidentiality agreement. The best time to do this is when the dispute resolution provisions in the underlying commercial agreement or the submission to arbitration are being drafted; the confidentiality provisions should be built-in to those agreements and should be tailored to meet the expectations of the parties.
There are a number of distinct issues that a properly drafted confidentiality agreement might address. Are there to be limits upon the disclosure of the fact that an arbitration is taking place? If so, the limits on such disclosure will have to be reasonable, bearing in mind that, for example, bankers, shareholders, and other categories of persons may have to be informed. Are documents and information exchanged during the course of the arbitration to be regarded as confidential? If so, the class of advisors and others (counsel, experts, lay witnesses) to whom such information may be disclosed will have to be defined. Perhaps the agreement should provide that all documents and information must be returned following the final determination of the dispute. Is the result of the arbitration, or the text of the award, to be held in confidence? Any agreement reached on this issue must allow for the possibility that the award will have to be made public in the course of enforcement proceedings.
When drafting an arbitral confidentiality agreement, the parties also should specifically consider how that agreement might be applied and interpreted in the event of court intervention in the proceeding or an appeal. Generally, documents filed with the courts are available to the public unless the court specifically makes an order to the contrary. Is it feasible for the parties to consent in advance to an appropriate form of confidentiality order? Bear in mind, however, that anything said in reasons for judgement of a court is likely to be available to the public. Probably the best way of addressing these issues, is to limit as far as possible the opportunities for court intervention, by appeals or otherwise.
Many of the available sets of arbitration rules, which the parties can incorporate into their arbitration agreement by reference, contain abbreviated confidentiality provisions. However, it is likely that these standard confidentiality provisions will not provide the full scope of protection that the parties may expect or desire.
A properly drafted confidentiality provision will limit, at least to some extent, the opportunities for public scrutiny of the arbitral proceeding. However, agreements in the form described above will not address the situation where one of the parties wishes to protect its trade secrets from disclosure to the other. This issue often arises in the context of disputes concerning technology or other forms of intellectual property. Indeed, it has been suggested that some claims have been launched for the sole purpose of obtaining valuable competitive information through disclosure in the course of the arbitration proceeding. If, given the nature of the underlying commercial relationship, it is obvious that circumstances such as these might arise, it would be prudent to include protective mechanisms in the dispute resolution clause or submission to arbitration. Perhaps the class of persons to whom trade secrets may be disclosed could be restricted; in some cases it is only necessary that counsel and expert witnesses retained by counsel be able to view the confidential information. The parties could agree that none of the permitted category of recipients will be entitled to receive proprietary information unless they first personally execute a confidentiality undertaking. It could be agreed, for example, that software could be run only on a specified CPU, disconnected from any intranet and from the Internet.
There are even steps which can be taken, where necessary, to make it physically difficult, or even impossible, to copy software or documents. A provision requiring the return of proprietary information should be considered.
One of the greatest difficulties one encounters when attempting to protect confidential or proprietary information by agreement, is establishing penalties or remedies which will give some “teeth” to the agreement. As always, it is important to remember that the arbitrators have only such jurisdiction as is expressly conferred upon them by the agreement of the parties or by an applicable statute. Thus it is useful to provide that the parties will agree to a consent order in the arbitration implementing such arrangements so that the arbitral tribunal buys into these requirements and has the jurisdiction to enforce them throughout the course of the proceeding. One might want to consider providing in a confidentiality agreement that the arbitrators will have the power to impose sanctions on the parties, in the form of costs, financial penalties, or even the dismissal of claims or defences, in the event of a breach of the confidentiality agreement. At the very least, arbitrators should be given the power to enjoin breaches of the agreement.
VII. FINALITY AND JUDICIAL INTERVENTION – Know the limits
The benefits of arbitration can be diluted if there is undue intervention by the courts, during the course of the arbitral process, on appeals, or when steps are taken to enforce an arbitral award. The objective of efficiency is undermined if the arbitral process is merely a precursor to a journey through the courts. The benefits of having a party selected decision maker will be eroded if the decision of the arbitrator is subject to unlimited second-guessing by a judge. The desire to achieve a timely, final resolution of the dispute will be frustrated if the award is subject to several levels of appeal.
The laws of the place of arbitration will almost certainly determine the limits, if any, on judicial intervention during the arbitration proceeding and rights of appeal. The laws of the place of enforcement will determine the approach to be taken by the courts when an arbitration award is to be enforced.
The domestic commercial arbitration statutes of all Canadian provinces authorize judicial intervention during the course of arbitration in specified circumstances. Generally intervention is authorized when assistance is needed to appoint or replace an arbitrator, or to decide challenges to the qualifications or fitness of an arbitrator; where applications are made for “interim measures of relief” pending the constitution of the tribunal or the outcome of the arbitration; to address applications seeking the assistance of the court to compel the production of evidence from third parties or the attendance of witnesses; or applications to seek the advice of the court on issues of law. Each of the statutes also sets out the circumstances under which a domestic commercial arbitration award may be appealed to the court and the manner in which such an award may be enforced.
In several instances the author has been called upon to negotiate the terms of a complex dispute resolution agreement with parties or counsel who previously had an unsatisfactory experience with the arbitral process attributable to excessive judicial intervention. In the light of that experience, a party may seek to limit any and all opportunities for judicial intervention, and may seek to do so by “contracting out” of any potentially applicable statutory provisions.
Before agreeing to a blanket prohibition on judicial intervention, there are a number of issues that the parties and their counsel should consider carefully. First, it may not be possible to “contract out” of applicable statutory provisions. Again, attention should be focused on the statute law of the province in which the place of arbitration is located. Generally, it is that statute which will not only set out the circumstances in which judicial intervention is permissible, but also will determine whether it is possible to “contract out” of those provisions. Different approaches to “contracting out” have been taken from province to province. For example, in British Columbia, only limited contracting out is possible. Under the British Columbia Commercial Arbitration Act, parties can contract out of a right of appeal only if the agreement to do so is made after the commencement of the particular arbitration proceeding. Presumably this provision was included in the statute with an eye to consumer protection, but it applies to all domestic commercial arbitrations.
The parties also should reflect upon whether it is desirable to contract out of all access to the courts. Judicial assistance may in fact be required. Unless the statute of the place of arbitration gives arbitrators the power to do so, because their authority stems solely from the agreement of the parties, arbitrators do not have the direct power to compel production of documents and information by third parties or to compel the attendance of witnesses. Indeed, even insofar as the parties themselves are concerned, the arbitrator’s authority is more limited than that of a court; an arbitrator cannot hold a party “in contempt”. Thus, before agreeing to a blanket exclusion of access to the courts the parties should consider whether judicial assistance might in fact be required in at least some circumstances.
Careful thought also should be given to contracting out of rights of appeal to the courts. The circumstances under which an arbitration award may be appealed are defined in the statutes of the various provinces, and although the fundamental concepts are similar, there are significant differences. Generally, a distinction is drawn between appeals on questions of fact, appeals on questions of law, and appeals on questions of mixed fact and law. Often, the statutes will preclude any appeal on a question of fact or mixed question of fact and law unless the parties expressly agree. In all instances, there is an opportunity to appeal on questions of law, sometimes with the requirement for the granting of leave by the courts and sometimes not.
Generally, business people will understand and accept that the arbitrator should have the power to make a final determination on all questions of fact. Sober thought, however, should be given to the question of whether the arbitrator also should make final determinations on questions of law, without recourse to the courts. This issue is linked to the question of whether there will be a single arbitrator or three arbitrators, and whether the arbitrator must be a person with formal legal training. There may be less risk in accepting as final decisions on issues of law made by a tribunal of three arbitrators, at least one of whom has significant formal legal training, than there is when there is a sole arbitrator without legal training.
It is with respect to issues such as these that business persons should be looking to their legal advisors for informed, balanced advice. Often, huge amounts of time and money are devoted to drafting complex commercial agreements carefully setting out the rights and obligations of parties. Once those agreements have been signed, in many cases little if any reference to the formal agreements is made throughout the course of the commercial relationship. The carefully negotiated legal agreements only matter when a dispute arises. Commercial parties who may have readily agreed to the concept of a final and binding arbitration, without right of appeal, when the agreement was made, may very much regret such an agreement if, following an arbitration proceeding, they are presented with an unacceptable award based on an error of law.
Again, attention should be paid to identifying in advance the real expectations of the parties, and tailoring the arbitration agreement and the arbitral process to meet those particular expectations.
VIII. THE ARBITRATION AGREEMENT – Take the time to get it right
It has been stated many times, but regrettably it continues to be true, that far too little attention is paid to the drafting of dispute resolution provisions in commercial agreements. The time spent carefully recording business terms and articulating the rights and obligations of the parties is wasted if the parties do not establish a proper framework for the resolution of their disputes. Despite this, very often the drafting of dispute resolution provisions is left until the last minute, and “boilerplate” language is included which may or may not be suitable. Legal or practical difficulties inherent in apparently innocuous language lie undiscovered until a dispute arises, by which time generally it is too late to do anything about them.
A great deal of ink has been spilled describing in detail the essential elements of an arbitration agreement. The issue has been touched upon in the discussion above. For the purposes of this paper, the focus of which is upon domestic commercial arbitration in Canada, the essential elements of an arbitration agreement are these:
The drafter of an arbitration provision must define the scope of disputes that may be submitted to arbitration. Will arbitral disputes be limited to contractual claims, or should the arbitrator also be given jurisdiction to deal with related tort claims? Is it only contract or tort claims closely connected to the particular contract that may be arbitrated, or should all claims arising out of the business relationship of the parties be resolved through arbitration? If, as is often the case, there are a number of inter-related agreements, is the arbitration provision to apply to disputes arising under all of those agreements, or only to disputes arising out of the particular document in which the arbitration clause appears?
When the parties define the scope of issues that are to be arbitrated, they define the jurisdiction of the arbitrators. If the definition is too narrow, the arbitrators will not have jurisdiction to deal with important aspects of the underlying business dispute. The parties may find themselves in the unenviable position of having to arbitrate and litigate at the same time. If the scope of the disputes is described in uncertain language, there may be preliminary objections to jurisdiction. Such difficulties may be avoided by carefully considering, in advance, the kinds of dispute which might arise, making a conscious decision as to which of those are to be arbitrated, and then reflecting the common intent in appropriate language.
There are various phrases that have customarily been used to describe the scope of disputes that are arbitrable, and some of those formulations have been considered by Canadian courts. Thus, for the sake of certainty, it is wise to consider using language that has been used before. Some of the most common formulations are:
“Any controversy or claim arising out of or relating to this contract, or the breach thereof,”
“All disputes arising out of or in connection with this agreement, or in respect of any legal relationship associated therewith or derived therefrom”
“Any dispute, controversy or claim arising under, out of or relating to this contract and any subsequent amendments of this contract, including, without limitation, its formation, validity, binding effect, interpretation, performance, breach or termination, as well as non-contractual claims”
Generally it is preferable to use more comprehensive rather than more limiting language. The risk and expense of multiple proceedings and duplication of effort should be avoided. If there is a good reason to limit the scope of disputes that are to be arbitrable, then the limitation should be stated in the clearest possible language.
In practice arbitral disputes normally are determined either by a single arbitrator or by a panel of three arbitrators. Although it is not always necessary to do so, because the applicable legislation or the agreed rules may address the issue, it is always preferable to state clearly in the arbitration agreement the number of arbitrators.
When drafting a dispute resolution agreement some thought should be given to whether or not it is necessary or desirable to specify particular qualifications of the arbitrator or arbitrators. Usually, the issue is addressed adequately by the agreed rules or the law of the place of arbitration. For the reasons discussed earlier in this article, it is the author’s view that legal and arbitral experience should be given priority over commercial, technical or scientific experience.
The drafter should consider which arbitration rules will be most appropriate for the kinds of disputes which might arise, and should clearly identify and adopt those rules in the arbitration provision.
If the arbitration is to be administered by an arbitral institution, the dispute resolution provision should specify the institution and make it clear that not only will the rules of that institution apply but also the institution will be expect to administer the arbitration.
From the discussion earlier in this article, it should be abundantly clear that the choice of the place or seat of arbitration is of fundamental importance. The dispute resolution provision should specify an appropriate place or seat of arbitration. That means choosing a location within a province or territory of Canada that has a legislative regime consistent with the objectives of the parties to the commercial agreement.
Any properly drafted commercial agreement, whether or not it contains a dispute resolution provision, should expressly state what law governs the substantive rights of the parties and the interpretation of the agreement. As noted earlier in this article, there is a distinction between the law that governs the substantive rights of the parties, which will be determined by the governing law clause in the agreement, and the lex arbitrii, or procedural law of the arbitration, which will generally be the law of the place or seat of arbitration.
As described earlier in this article, there are various other issues that the parties should consider, and perhaps address, in their dispute resolution agreement. Among the most important of these are the issues of confidentiality, the protection of proprietary information, and any feasible and desirable limits on judicial intervention and rights of appeal.
IX. SUMMARY AND CONCLUSIONS - We have promises to keep
In summary, the following factors should be considered by the parties and their advisors when agreeing to arbitrate domestic commercial disputes in Canada:
(a) What are the common objectives of the parties in agreeing to arbitrate rather than litigate?
(b) What relative priority do the parties assign to cost effectiveness, thoroughness, speed, finality, privacy, protection of trade secrets and proprietary information, choosing their own decision maker and avoiding the “home court advantage”?
(c) Where in Canada is the legislative regime most compatible with the objectives and priorities of the parties, bearing in mind that the law of the place of arbitration will likely apply as the lex arbitrii?
(d) What arbitration rules will be most compatible with the objectives and priorities of the parties? Are there institutional rules that can be adopted in whole or in part? Should the parties draft their own rules?
(e) Is there any reason why it would not be prudent to specify an administered arbitration? If not, which institution would be most appropriate?
(f) What are the qualifications that it is most important that the arbitrator have if the parties are to achieve their objectives? Is there any reason why technical expertise must be given priority over arbitral experience and legal training, or will any necessary expertise be provided by expert witnesses?
(g) What are the expectations of the parties in terms of privacy, confidentiality and protection of proprietary information? What form of agreement is needed to fulfil those expectations?
(h) Where, consistent with the objectives and priorities of the parties, is it best to strike the balance between allowing and limiting judicial intervention? Does the lex arbitrii permit that balance to be struck?
(i) What language should be used in the arbitration provision, or the submission to arbitration, to clearly and accurately reflect the choices which the parties make with respect to all of the matters described above?
Now that domestic commercial arbitration has achieved status as a mainstream method of dispute resolution, the challenge facing arbitration practitioners is to ensure that its full potential is realized. This requires that a more sophisticated and considered approach be taken both at the time the arbitration agreement is drafted and during the course of the proceedings, to tailor the process to meet the realistic needs and expectations of the parties. If the parties and their advisors carefully consider and sufficiently address issues such as those listed above, and discussed elsewhere in this article, then the promises of domestic commercial arbitration will almost certainly be fulfilled.