Canada: Recent Lessons In Preparing For And Responding To Security Breaches

As an alternative to resolving issues before the courts, parties frequently include dispute resolution clauses in their commercial contracts setting out how certain issues or potential disputes will be resolved and by whom. These clauses often take the form of an arbitration agreement, pursuant to which all disputes arising under a contract (or, in some cases, certain specified disputes) will be decided by one or more arbitrators to the exclusion of the courts. In some cases, however, parties agree that an issue will be determined by a third-party decision maker, who is acting as an "expert" (such as an appraiser or accountant who has expertise in a particular area), as opposed to an arbitrator. These clauses, commonly referred to as expert determination clauses, often involve a specific, technical or financial issue, such as, for example, establishing the fair market value of an interest in real estate, the appropriate method for calculating a post-closing purchase price adjustment, or determining whether goods supplied comply with contractual specifications. While arbitration agreements and expert determination clauses may have similar features, they do not have the same legal effects.

Differences Between Arbitration and Expert Determination

Under both Québec and Ontario law, the distinction between an arbitration agreement and an expert determination clause is an important one. The provisions governing arbitration in Québec and Ontario do not apply to an expert determination which leads to a number of important differences. First, these provisions grant important procedural rights to parties involved in an arbitration (as opposed to expert determination), such as the opportunity to present their case and to respond to the opposing party. A party may also require the arbitrator to hold a hearing, and arbitrations are governed by specific rules with respect to, for example, evidence at hearings and notice of facts and opinions. In contrast, an expert is only required to abide by the terms of the contractual agreement and is not bound by the same obligations as an arbitrator.1

Second, these provisions significantly limit the grounds for challenging an arbitration award, including by generally precluding a court from inquiring into the merits of the dispute that has been arbitrated. It is also, generally, easier and quicker to have an arbitral award recognized (which is done by way of a motion) for purposes of enforcement and it is very difficult for a dissatisfied party to successfully challenge an arbitral award. In contrast, a disagreement between the parties over an expert's determination pursuant to the terms of a contract would typically involve a longer process, including the filing of an action before the courts claiming breach of contract. In particular, a court will generally only interfere with an expert determination where an expert failed to comply with their mandate as determined by the terms of the contract.

Finally, arbitrators benefit from immunity with respect to their decisions; experts do not.

Factors to Consider

Considering the differences above, when drafting clauses in commercial agreements that involve a third-party decision maker it is important to be aware of the factors that will be applied by the courts when determining whether the decision maker(s) was/were acting as an "arbitrator" or "expert".

The following factors — though not exhaustive or conclusive — have been identified by the Supreme Court of Canada (the "SCC"),2 and are applied by the courts across Canada when considering whether a third-party decision maker was acting as an arbitrator pursuant to an arbitration agreement, or as an expert.

  • Is there a dispute or disagreement between the parties?
  • A submission to arbitration necessarily requires the existence of an existing or potential dispute. This is not the case for an expert determination.

  • What function is the third party exercising?
  • In general terms, the greater the similarity with the judicial process — which includes the rights of parties to be heard, to argue, to present evidence, the presence of lawyers at a hearing, the rendering of detailed reasons, etc. — the greater the likelihood that reference to a third party will be characterized as arbitration. Conversely, a process whereby the decision maker either makes a determination pursuant to his/her own knowledge or expertise or based on a unilateral investigation conducted outside of the presence of the parties is more consistent with an expert determination.

  • Is the decision final and binding?
  • While this criterion is not exclusive to arbitration, it may be an indication that the parties contemplated arbitration. It is also important to note that while it is relevant and advisable to use the word "arbitration" (assuming that this is what the parties intended) the use of "arbitration", in and of itself, is not conclusive as to the parties' intentions.

By way of illustration, the Québec Court of Appeal (the "QCA") recently considered the issue of arbitrator vs. expert in Eacom Timber Corporation vs. Domtar Inc.3 and maintained a decision of the Québec Superior Court (the "QSC") which held that the clause in issue constituted an arbitration agreement. In Eacom Timber, the parties disagreed over the purchase price payable by Eacom pursuant to an asset purchase agreement, which was subject to adjustment based on a post-closing determination of working capital. The agreement included a clause that dealt with the resolution for calculating working capital and the parties disagreed with respect to the nature of such clause. The clause in question provided, in summary, that if a dispute arose between the parties over the working capital calculation, an accounting firm identified in the agreement (defined as the "Accountants") was to make a "final determination [...] which shall be binding on the parties". The clause in question also provided that: (1) the Accountants had to provide the parties the opportunity to explain their position with respect to the dispute and each party had the right to an oral hearing with the Accountants; and (2) the Accountants were instructed to only resolve the "Disputed Matters" and "not to otherwise investigate any matters independently".

Domtar maintained that the dispute resolution clause constituted an arbitration agreement, whereas Eacom argued that pursuant to such clause, which did not contain the word "arbitration", the parties submitted their dispute to an expert, not an arbitrator. Interestingly, another section of the asset purchase agreement, which applied to other disputes under the agreement, clearly constituted an arbitration agreement as defined in the Civil Code of Québec (the "CCQ"). Eacom relied on, among other things, the foregoing fact and argued that when the parties intended to execute an arbitration agreement, they had clearly done so under their agreement.

In first instance, the QSC dismissed Eacom's arguments and held that the clause in issue contained all of the essential elements of an arbitration agreement, which is to be interpreted broadly, as defined under the CCQ. The QSC relied on the fact that: (1) the clause in question referred to "Disputed Matters", which was an essential element of an arbitration agreement and which distinguished such an agreement from a clause which merely sought an expert opinion; (2) referred the dispute to a third party (i.e., an accounting firm); (3) the decision of the Accountants was final and binding; and (4) the arbitration agreement was evidenced in writing.

On appeal, the QCA upheld the decision of the QSC on the basis that: (1) the QSC's findings were based on a clearly identified dispute under the asset purchase agreement; and (2) the QSC sought the true intention of the parties with respect to the role of the third-party decision maker and properly applied the criteria established by the SCC in Sport Maska in doing so.

Conclusion

When executing commercial agreements that involve a third-party decision maker, it is important for parties to keep in mind the principles set out in Sport Maska. While distinguishing between an arbitration agreement and an expert determination clause may not always be clear- cut, the use of the term "arbitration" or "expertise", though not conclusive, is advisable. Another useful drafting tip, if the parties intend to be governed by an arbitration agreement, is to include a reference in the dispute resolution clause to the dispute being resolved pursuant to the arbitral provisions of a provincial legislation, the rules of an administered arbitral body, or one of a number of different ad hoc arbitration rules. While each clause will ultimately be considered based on its own terms, parties should be aware that, generally, the closer the similarity between the process they have chosen and a judicial process, the greater the likelihood that the clause in question will be viewed as an arbitration agreement.

Footnote

1 Cummings v. Solutia SDO Ltd., [2008] O.J. No. 3259 (S.C.J. [Commercial List]) at para. 43, aff'd by 2009 ONCA 510.

2 See Sport Maska Inc. v. Zittrer, [1988] 1 S.C.R. 564 ("Sport Maska").

3 C.A.M. No. 500-09-023813-132, 17 January 2014 ("Eacom Timber").

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