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3 February 2023

Lies My Arbitration Clause Told Me

TL
Torys LLP

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In the heat of negotiation, your agreement's arbitration clause may not be in the spotlight. It's often not until disputes happen that these clauses can take centre stage.
Canada Litigation, Mediation & Arbitration
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In the heat of negotiation, your agreement's arbitration clause may not be in the spotlight. It's often not until disputes happen that these clauses can take centre stage.

In this video, Torys litigators Andrew Bernstein, Ryan Lax and Emily Sherkey discuss key areas to consider around arbitration clauses, including:

  • Timing and jurisdictional nuances
  • Procedural matters that can arise, including looking to a supervising court for challenges and enforcement matters
  • Ways to approach drafting these clauses in agreements to mitigate disputes down the road

Click here to see other videos in this series.

Video transcript

Andrew Bernstein (00:07): Today, we're joined by the two experts from our Torys litigation department, Ryan Lax and Emily Sherkey, who have a great session for us called "Lies my Arbitration Clause Told Me". Thanks for joining us, both of you. Arbitration clauses can be a terrific way of resolving disputes. You can choose your own decision maker, you get to pick where it happens, it can be faster than going to court, and you can keep the dispute between the parties. But arbitration is not a bed of roses, or more particularly, it is a bed of roses in the sense that if all you see is the flowers, you're going to run into a few thorns.

Andrew Bernstein (00:47): Ryan, arbitration is supposed to help alleviate some of the pressures by putting issues on a path to resolution. That's why you signed an arbitration clause in the first place. So what happens next?

Ryan Lax (00:59): Thanks, Andrew. Well, sometimes what we see is in the heat of negotiation and deal making, you agree with the other side that you want the agreement to be kept confidential. You agree that you want any disputes that arise to be settled by confidential arbitration. But the other deal points are more immediate and pressing, and the arbitration clause just doesn't receive as much focus during the negotiation process. Now, when a dispute starts to arise, you're looking at the arbitration clause, and instead of focusing on the dispute on the merits, you're fighting about the process and meaning of the clause. So we thought we would try to help people avoid this by discussing—drum roll—five lies my arbitration clause told me.

Andrew Bernstein (01:42): Okay, Emily, we'll start with you. Lie #1 is, "I can resolve any claim through arbitration."

Emily Sherkey (01:50): So just because you have a contract with an arbitration clause does not automatically mean that all disputes with that contracting party are going to be arbitrated. That depends on the word and scope of the clause. So when drafting a clause, parties need to pay careful attention about this and decide, do they want all the issues between them to go to arbitration, or do they want to carve out certain issues to go to court? And one issue I'm very mindful of is statutory remedies. As an example, in Ontario, the law has evolved so that it recognizes a broad arbitration clause with language like "all disputes under this agreement will include statutory claims for shareholder oppression under a shareholder agreement." That was not always the case in Ontario, and it's not necessarily the case in every jurisdiction. So parties need to pay particular attention to how statutory remedies interact with their arbitration clauses. Another issue to be mindful of is the pre-conditions to arbitration. An arbitration agreement may require a cooling-off period, mediation, notice, which often allow parties to try to find a consensual resolution before going to arbitration. And depending on the phrasing of these terms, they may be permissive or mandatory. And if they're mandatory, they could be fixed requirements before an arbitration is commenced. And so if they're not complied with, an arbitrator would be deprived of jurisdiction.

Andrew Bernstein (03:28): So, Emily, do you recommend against these kinds of requirements—the cooling-off period, mediation? You sometimes see these kind of incremental steps towards arbitration. Is that a bad thing?

Emily Sherkey (03:42): Not necessary. It's all context-specific. The ever hated "it depends" answer. But generally these pre-conditions can be useful opportunities for settlement before either party spends too much money. Parties may want the flexibility, however, to decide or have discretion about whether to take these steps. And so they should focus on the language being permissive. Ultimately, it's a judgment call based on the context of the agreement and the relationship.

Andrew Bernstein (04:15): I mean, I find sometimes it's useful to have some period of time to allow tempers to cool because tempers can flare and it can lead people to regret things later. Let's turn to our next lie, Ryan. Lie #2 is, "I can arbitrate anywhere under any law and under any rules."

Ryan Lax (04:35): That's not necessarily true, Andrew. And what the Supreme Court of Canada has told us, is that for an arbitration clause to be valid, it has to fit the context of the agreement in which it's found. So where you have a contract of adhesion or a standard form contract that's not negotiated and in any great depth by the parties and is subject to significant power imbalances between the parties, like many consumer contracts, for example, those contracts are going to be scrutinized for unconscionability. And arbitration clauses requiring arbitration through an expensive process in another jurisdiction in that type of contract may be struck. But that same rule likely does not apply to contracts negotiated by sophisticated parties of relatively equal bargaining power, where there's not really significant power imbalances in the negotiation process. Those types of parties can choose whatever seat, governing law, and venue that suits their needs, and the courts are probably going to defer to upholding that choice of arbitration.

Andrew Bernstein (05:42): So in a nutshell, two Ontario companies could agree to arbitration in Saskatchewan. I hear Regina is extremely nice in the summertime, but an Ontario company couldn't, for example, force an Ontario consumer to go to Nova Scotia, even though Halifax is also delightful in the summertime.

Ryan Lax (05:59): Yeah, I'm not entirely sure about the Saskatchewan and Nova Scotia examples because they are closer to home. The Supreme Court told us that Ontario gig economy workers cannot be forced to arbitrate overseas through a costly procedure on a contract of adhesion. Nova Scotia and Saskatchewan are a little closer to home, so it's a bit of a gray zone. You can still have an arbitration clause in those contracts for sure. With consumers, it would be safest to say Ontario consumers and workers will arbitrate in Ontario. But for sure, if it's a contract where sophisticated commercial parties and their counsel are exercising negotiating power, the agreement to arbitrate wherever they choose is likely to be upheld.

Andrew Bernstein (06:39): Okay. Well, I've never been to Saskatchewan and I'm hoping to go sometime, so there you go. Let's get back to Emily. Emily, Lie #3 is, "Arbitration clauses avoid disputes over procedural steps." That would be great if it was true.

Emily Sherkey (06:55): That would be an ideal world if it was true. And in most cases it's not. And it would be great if parties could focus on the substance of the dispute and actually spend the money litigating the reason they're there and they're arbitrating. But what happens in the actual world often depends on the language of the clause, and to best avoid disputes over procedural steps and wasted money on often unnecessary motions and issues, these issues could be avoided if they were put in the arbitration clause when negotiated, and it's easier to agree when negotiating a clause than it is when the dispute actually arises. Parties are more likely to agree up front and then if you have a clear arbitration clause, you can narrow the room for disagreement over issues like timelines, applicable steps, the format of the arbitration, and instead focus on the actual merits of the dispute. One recent example. We recently litigated in an arbitration whether an agreement to a specific set of rules that were made in the 1970s precluded a virtual hearing because of course, in the 1970s, Zoom wasn't a thing yet. And this caused significant delay, especially because this was during the pandemic. And ultimately, the tribunal ruled that those old set of rules didn't envision a virtual hearing. So you had the delay of the motions of this argument and now a delay of the hearing itself. And if the parties had drafted a clearer clause upfront that said subsequent amendments to the rules are included, it would have covered off this issue and this wasted time and money wouldn't have been spent.

Andrew Bernstein (08:51): So like seventies fashion, seventies arbitration rules are probably best avoided. I mean, I want to say on behalf of Gen X, not everything out of the seventies is bad, but—

Emily Sherkey (09:02): Bellbottoms have made a return.

Andrew Bernstein (09:05): Lord, I hope not. But what's the takeaway? Like, what shall we do to avoid this?

Emily Sherkey (09:12): So too often what I see is arbitration clauses copied and pasted from precedents. They're not given thought. It's not the important issues at the time that a party are negotiating a contract. But really it's a little bit of time spent upfront to avoid time and money later. So parties just need to be mindful of the arbitration clauses when they're getting negotiated, and realize that a detailed clause is often a better clause. Set out what procedural steps are going to govern, or just specify the recognized arbitral rules that will apply, which often cover off those details. And this will just avoid ambiguity down the road.

Andrew Bernstein (09:53): That's good. Would you recommend expressly saying in a clause, "Virtual hearings are permitted in the discretion of the arbitrator"? As I'm listening to you, I'm thinking this might be a good specific thing to put in.

Emily Sherkey (10:05): I think if you don't specify the arbitral rules, oftentimes arbitral rules may have already covered that off. But in a more ad hoc arbitration where you're setting out the procedure yourself, often sometimes that appendix to the arbitration agreement will be the procedural rules, that would be an example where I would specify that.

Andrew Bernstein (10:23): Okay. And I guess, you know, the moral of the story is you're going to call up the environmental lawyers for the environmental reps and warranties, you're going to call the IP lawyers for the IP provisions, you might want to call your friendly neighborhood arbitration expert before you negotiate an arbitration clause.

Emily Sherkey (10:39): Yes, we're very happy to review them.

Andrew Bernstein (10:41): Okay. Now, let's go back to Ryan. We're going to talk about Lie #4, "If arbitration seems to be a hassle, I can always go to court on jurisdictional challenges and enforcement matters."

Ryan Lax (10:56): That's, again, a lie and not a truth unfortunately for those of us who are arbitration practitioners. A supervising court's jurisdiction and enforcement powers, and in respect of arbitration, depends entirely on the applicable arbitration legislation. And some answer here is premised on us practicing in Ontario and Ontario's arbitration legislation. But choosing the right seat of arbitration is crucial to understanding what jurisdiction and enforcement powers a court is going to have, and really don't leave that to chance. Jurisdictions do vary in this respect, and so this is also something that you should turn your mind to when you're drafting an arbitration clause. And every arbitration clause should specify the seat of arbitration. In Ontario, we have a fairly strong legislative regime enforcing arbitration. Courts under that legislative regime do not enthusiastically involve themselves in arbitrations. So if you agree to arbitration, a court is generally going to enforce that choice, absent certain narrow exceptions. And Ontario's courts will not usually involve themselves in a jurisdictional issue. The competence-competence principle under Canadian law means that an arbitral tribunal has the initial jurisdiction to decide on its own jurisdictional challenges or on its own jurisdictional issues or disputes. So Ontario courts will only decide jurisdictional disputes in respect of an arbitration after, in most cases, the arbitral tribunal has ruled on its own jurisdiction. And the context for doing that is through a set aside proceeding, which is a pretty narrowly focused proceeding.

Andrew Bernstein (12:53): Well, I want to just say that there's nothing like a phrase like "competence-competence principle" to tell people that arbitration's an accessible world that anybody can go into. Well that makes perfect sense.

Ryan Lax (13:04): It's certainly a legalistic term, but it really just boils down to the simple principle that an arbitral tribunal has the right to make a first call on its own jurisdiction and it doesn't really require much more thought than that.

Andrew Bernstein (13:21): Well, we did a presentation in this series on "rights of first refusal" and that kind of—maybe that's what it should be called. Okay. So I'm going to tell the last lie about arbitration clauses. I'm going to talk about it myself because it's so near and dear to my heart. And that is, "I can set my own deadlines and they'll be binding!" Every single year, several times a year I see an arbitration clause that says, "The arbitration shall be decided within 30 or 60 days from the time that the matter is binding." And I just want to put a dose of reality into this. Number one, finding a good arbitrator is hard. They book up far in advance and you want somebody who's good and in-demand. Number two, you know, getting a case to a hearing in 60 days—30 days, it's essentially impossible, 60 days, it's really, really hard. And it means, I think, inevitably you're in for some rougher justice, like everyone learns in middle school typing class, there's a bit of a tension between speed and accuracy. And it's no different, I don't think, for decision-makers, right? Not only are you putting pressure on the lawyers to decide things within 60 days, you're putting pressure on the arbitrator to decide things when the arbitrator may really want to be thinking about things. So if it's not an emergency, let's put aside these crazy timelines and just have reasonable expectations. You know, I think you can get a good arbitration done, from beginning to decision, in a year.

Andrew Bernstein (14:45): It's a hectic pace, but it's totally realistic. You could probably get a slightly rough arbitration date in six months if you really needed to. But, you know, "I really want this now" is perhaps not the best the best reason to do that. So, Ryan, can you just sum up for us what's the moral of the story in general

Ryan Lax (15:05): For sure. Well, I think we've highlighted a variety of five different issues that we've seen frequently arise in arbitration clauses. And the moral is each of these issues can be avoided or at least mitigated by careful contextual drafting of your arbitration clause. Give it a thought within the context of the agreement. Do not treat an arbitration clause as an afterthought or a one size fits all provision. Don't just absentmindedly grab from precedents, a little bit of attention here when drafting can save a big headache later on for your neighbourhood litigators if and when a dispute arises.

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.

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