In today’s increasingly complex and fast paced corporate world, commercial entities often wish to avoid the expensive, time-consuming and adversarial world of litigation in contemplation of contractual disputes arising between two parties. As a result, alternative dispute resolution (“ADR”) methods, such as negotiation, mediation and arbitration, have been developed as an alternative to litigation (pursuing one’s law suit in the court system).

Arbitration tends to be one of the most commonly used method of ADR. Arbitration is an out-of-court proceeding in which a neutral third party called an arbitrator, who is neither a judge or court official, hears evidence and subsequently makes a decision with regards to the matter being arbitrated. Arbitration can be binding (which means the participants must follow the arbitrator’s decision and courts will enforce it) or nonbinding (meaning either party is free to reject the arbitrator’s decision and take the dispute to court, as if the arbitration had never taken place). Binding arbitration is more common as the primary intent of including such clauses in a contract is typically to avoid lengthy court cases.

Typically, arbitrations are commenced by operation of an arbitration clause in a contract between the disputants. Arbitrations can be commenced in other situations due to particular legislation or by consent by all parties involved. An arbitration clause is a clause in a contract that requires the parties to resolve their disputes through an arbitration process. In Canada, different organizations offer ADR and arbitration services. Accordingly, the arbitration procedure and applicable rules are established by the body selected to govern the process. Bodies recognized in Canada include the ADR Institute of Canada (ADRIC) and the British Columbia International Commercial Arbitration Centre (BCICAC).

A sample arbitration clause may appear as follows:

Any dispute, controversy or claim arising out of or relating to this contract including any question regarding its existence, interpretation, validity, breach or termination or the business relationship created by it shall be referred to and finally resolved by a single arbitrator pursuant to the Arbitration Act of BC. The place of the arbitration shall be ___________.

In Canada, arbitration is regulated by statute. Every province and territory has its own separate arbitration legislation (BC is governed by the Arbitration Act RSBC 1996 Chapter 55). Each province and territory, with the exception of Quebec, has 2 arbitration statutes: one governing commercial and domestic arbitration, the other international arbitration. If two provisions are found to conflict, the more specific provision will prevail.

How effective are such clauses when an issue arises? For instance, perhaps one of the contractual parties alleges misconduct on behalf of the other party and no longer wants to rely on arbitration in favour of litigation. Do the courts tend to strictly enforce them? The courts tend to take a deferential approach, that is, allowing for the arbitrator to decide whether the dispute is arbitrable (absent a clear case to the contrary). The court’s view is that terms of a commercial contract freely entered into should be given effect—including contracts containing arbitration clauses. Further, in the absence of legislated restrictions on arbitration, courts generally take a deferential approach to the jurisdiction of arbitrators such that courts will generally order that any challenge to the validity of an arbitration clause (or an arbitrator’s jurisdiction) should first be determined by the arbitrator.

Finally, what happens if a party is not happy with an arbitrator’s decision?  On what grounds can a party have the decision reviewed?  These clauses will limit the ability for that client to dispute a decision they do not agree with. British Columbia permits an appeal of the arbitral award to the British Columbia Supreme Court on a question of law either with permission from the court or with consent of all parties involved, but does not deal with further appeals. A question of law is a question which must be answered by a judge applying relevant legal principles, by an interpretation of the law. This is distinct from a question of fact, which must be answered by reference to facts and evidence, and any inferences that may arise from such facts.

Arbitration clauses can be found in a wide range of contracts, notably employment, commercial and consumer contracts. With the understanding that these clauses are indeed enforceable, and often binding, contracting parties should carefully consider whether they want an arbitration clause included and in what context such a clause may be beneficial.

Are there specific disputes that would favour the inclusion of such clauses? To determine whether or not an arbitration clause is a suitable contractual addition, further consideration of your particular industry, your business needs, and your areas of potential conflict may disclose that not every type of dispute should be subject to arbitration. You should define and exclude from the arbitration clause the types of disputes where the right to go to court, particularly for preliminary injunctive relief, needs to be preserved. On occasion, clients include boilerplate (aka standard) arbitration clauses in contracts only to learn after a dispute has arisen that the arbitration is not the best forum for their dispute. This arises particularly in certain cases of intellectual property theft.

In addition, the limited appeal rights and recourse available after arbitration may create additional risks to a business. Before committing to an arbitration clause of any kind, you should take a good look at what types of disputes may be on the horizon and how you wish to handle those disputes. Please feel free toconsult Touchstone Law Group LLP to review your situation to determine if an arbitration clause is right for any particular contractual transaction and what the most beneficial provisions are for your needs.

Please let us know if you have any questions regarding arbitration clauses. We would be pleased to answer any questions you may have with regards to the above or any other legal matter.

Author: Kelly Newby

This information is general in nature only. You should consult a lawyer before acting on any of this information. This information should not be considered as legal advice. To learn more about your legal needs, please contact our office at (250)448-2637 or any of our lawyers practicing in the area of business law, real estate law, and wills and estates law at the following: