Copyright 2008, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Litigation/Dispute Resolution, August 2008
Increasingly common are dispute resolution clauses re-quiring the use of Alternative Dispute Resolution (ADR) processes in sequence. Such "stepped" or "multi-tiered" dispute resolution provisions (Stepped Clauses) may stipulate, as prerequisites to a binding determination through arbitration or litigation, any combination of processes including negotiation, mediation, neutral evaluation, or expert determination.
Significant substantive benefits may result when solutions are crafted by the parties themselves, as opposed to third parties, where opportunities can arise for win win outcomes and increased creativity. In addition, procedurally, though Stepped Clauses may prolong the dispute and escalate costs in cases where settlement is not reached, well drafted Stepped Clauses increase the chances of settlement, a net savings in cost and time, and a decreased focus on the inherently backward looking nature of litigation and arbitration. That is especially the case for substantial and complicated disputes, where the early stage processes are drafted in a manner that keeps them on a relatively short leash.
There is the risk of potholes on the path to the potential benefits. If not avoided through a properly structured process, these pitfalls can lead to negative consequences, ranging from a net increase in delay and cost, to more fundamental problems including, at worst, a complete loss of the right to pursue resolution of the dispute.
The case law in Canada on Stepped Clauses is thin. This article identifies some of the relevant Canadian decisions. The main thrust of this article, however, is to provide practical drafting solutions, on the theory that parties would prefer to avoid the issues, rather than becoming contributors to a more robust body of court decisions in this area.
Three key issues will be addressed:
1) limitation periods;
2) interim relief in urgent cases; and
3) the triggers and standards stipulated for each dispute resolution step.
A conflict may arise between an obligation to participate in a non binding dispute resolution process, versus the expiry of the relevant limitation period. In some circumstances, it may not be possible to complete the predecessor dispute resolution step(s) before the loss of the right to arbitrate or litigate.
Some practitioners suggest that the safe and sure fire way to address this concern is to commence the arbitration or court action within the limitation period, pending satisfaction of the preliminary dispute resolution steps. That is most likely not correct.
This view is reinforced by a relatively recent decision of the Alberta Court of Appeal, in Babcock and Wilcox Canada Ltd. v. Agrium Inc. That case involved the filing of a statement of claim before the relevant limitation period expired, and the issuance of notices of arbitration and selection of arbitrator after the limitation period expired. Based on the section of the Arbitration Act (Alberta) requiring the court to stay parallel litigation when the parties have agreed to arbitration, the Alberta Court of Appeal found that the arbitral clause in the agreement implicitly made arbitration a condition precedent to litigation, effectively eliminating any remaining distinction between "ordinary" arbitration clauses and Scott v. Avery clauses. In the result, the statement of claim was dismissed as a nullity, and the arbitral process was commenced out of time and therefore statute barred. The right to a binding determination was lost.
It is true that the Babcock decision did arise in the arbitration versus litigation scenario, and was based, in part, on the statutory provisions of the Arbitration Act (Alberta). However, there is no principled reason why this result would not apply to sufficiently well defined, objective and certain obligations to negotiate or mediate, as conditions precedent to either arbitrating or litigating. Common law contractual principles and the remedy of specific performance would be expected to arrive at the same result, requiring a party to honour its agreement to participate in such a process. Indeed, the author of this article was counsel in a matter before the Alberta Court of Queen's Bench in the fall of 2006, in which the court decided that the opposing party was prohibited from commencing the arbitral process before fulfillment of the contractual obligation to undertake direct negotiation between senior management over a specified period of time. As a result, the court ordered that the parties not return to court to have the arbitral process commenced through the appointment of an arbitrator until the expiry of the timelines stipulated for the negotiation process. (There are a variety of decisions to similar effect, in other Canadian provinces.)
Fortunately, the solution to this fundamental concern is straightforward: Include a "standstill" clause that stops the clock on any applicable limitation period or deadline, pending completion of any prerequisite dispute resolution process.
Sometimes, Stepped Clauses stipulate that a party may terminate the preliminary dispute resolution process simply by providing written notice to the other parties. While this certainly would deal with the limitation period issue, this would defeat, at least to a great extent, the parties' intention of forcing themselves to focus their attention on trying to develop a consensual solution. Although disputing parties cannot be compelled to reach a settlement, in many circumstances, if parties are locked into a process, there are increased chances that the dispute will be solved nonetheless.
Interim Relief In Urgent Cases
Similar issues can arise in circumstances requiring urgent interim relief. Whether the Stepped Clause stipulates negotiation, mediation, or any other form of ADR, an application to a court for urgent injunctive or other interim relief might be met with a response that the parties had contracted out of the right to bring such an application before completion of the pending ADR process(es). In that scenario, the potential advantages of a Stepped Clause would undoubtedly be seen as greatly overshadowed by the certain and irreparable harm being suffered in the meantime.
Again, there is an easy solution to this fundamental concern: Include a provision expressly stating that, pending any preliminary ADR process, any party shall be at liberty to make an application to the court for injunctive, provisional, conservatory, or other interim or emergency relief. That would eliminate the need for a party to argue that, despite the Stepped Clause, the inherent jurisdiction of the court remains available to grant urgent interim relief.
It would also be prudent to stipulate that such an application to a court shall not be deemed to be a waiver of a party's right to insist upon adherence to the Stepped Clause.
Triggers And Standards
There are many difficulties that can be created inadvertently, by the manner in which one drafts the triggers and standards for a Stepped Clause. Landmines of this nature are common. Indeed, Stepped Clauses suggested by some significant international and other arbitral institutions are problematic from this perspective.
It is trite that, as with all contractual provisions, Stepped Clauses should be clear and concise. Other-wise, one might thwart the intended goals of saving time and cost.
Before the dispute about the substance even begins, parties might face disputes about the interpretation of the Stepped Clause, involving jurisdictional issues, or what each process is to involve. Other fertile ground for ambiguity relates to how and when each process is commenced, and how and when each is completed.
Unanticipated results can flow, for example, if a Stepped Clause is found to be unenforceable, such that the dispute is unexpectedly governed by the default court process. That may be fundamentally unacceptable to a party who, for instance, loses an arbitral blanket of confidentiality that, if anticipated at the time of contracting, may well have caused them not to contract at all. This may result from a "house of cards" effect. If, for example, either negotiation or mediation is a condition precedent to arbitration, but the obligation to negotiate or mediate is unenforceable and remains unfulfilled, that may well mean that there is no binding obligation to arbitrate.
As there are a number of potential issues in this respect, there are many drafting suggestions to keep in mind:
Do not use subjective or ambiguous requirements. This is quite commonly seen, such as clauses that require "good faith", "best efforts", or "meaningful" negotiations, or that state that a negotiation or mediation process is completed when it is no longer productive or fruitful. Clauses of this nature are likely unenforceable, both practically and technically. An application for specific performance of an obligation to negotiate in good faith would be less than clear. For instance, in Mesa Operating Ltd. v. Amoco Canada Resources Ltd., the Alberta Court of Appeal commented on the duty of good faith by stating: "... the common law duty to perform in good faith is breached when a party acts in bad faith ...". While Canadian case law does provide other descriptions of the duty of good faith, there remains an understandable absence of anything resembling a black and white test.
Such nebulous obligations leave open to dispute the required duration of negotiations, what is to occur during the negotiations, and how one might demonstrate fulfillment of such an obligation. One party may have no intention of negotiating or mediating in good faith, and might attempt to rely an alleged failure by the opposing party to do so as a tool to avoid or delay a binding determination.
Use simple and clear time periods, that permit an objective determination of the start and end point for each period. To start the clock ticking for any particular time-frame, the clause should specify that unilateral action by one party is all that is required (for instance, through the issuance of a notice to the other parties), with no need for mutual agreement, third-party co-operation, or the occurrence of an external event. In addition, there should be a clear default process set out for the appointment of any third party (such as a mediator or an expert), for example, by a designated appointing authority.
Specify the level of management to be involved in any mandatory negotiation. When choosing the required level of seniority, consider that, often, specifying a level of management above the position of the individual(s) most involved with the implementation of the contract will lead to a bigger picture view, increased authority to resolve, and a decreased personalized attachment to the issues in dispute.
Stipulate that an individual serving as a mediator shall not serve as the arbitrator for the same dispute, unless all parties agree. While there are different schools of thought as to whether the mediation and arbitration functions should be performed by the same individual, addressing this issue in this manner is a clean way to avoid that debate.
If one "steps" carefully around the potholes, multi-tiered dispute resolution clauses can provide significant potential net benefits.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.