In my 35 years of practice as a corporate lawyer, the consideration that dispute resolution clauses have been given has changed. Previously, parties would resort to the court system as the default dispute resolution scenario with arbitration being a relatively uncommon occurrence. However, over the last number of years, particularly in commercial transactions, the trend has been to include arbitration clauses as the default dispute resolution mechanism.
This article reflects my personal perspective and explores whether the surge in the prevalence of arbitration clauses in commercial transactions has lived up to its billing and that it may be prudent to question whether arbitration is appropriate in a particular context, and whether arbitration clauses achieve the perceived benefits they were intended to provide.
Arbitration Clauses – The Theory
The upsurge in arbitration clauses correlates with the extensive delays and costs observed within the court system. This has nothing to do with the COVID-19 pandemic as these increased costs and ever-increasing delays have been on the rise for years. Arbitration is a process whereby parties agree to adjudicate a dispute in front of an arbitrator instead of in front of a judge through the court process. In theory, the rationale for including an arbitration clause to resolve potential disputes had several perceived benefits: it was faster, less expensive, confidential, and the decision was final. Disputes could also be kept private, and parties would avoid long and drawn-out appeals. Parties also had the ability to select their own arbitrators, ones with specialized skills and experience in the topic being arbitrated. This was viewed as an attractive alternative to the court system, where judges could be hearing a case about a complex commercial transaction when their whole legal career was spent as a family law or criminal specialist.
Arbitration Clauses – The Reality
Today, the costs associated with arbitration have surged. There are expenses associated with arbitration which are not applicable to the court system, such as the costs of paying the arbitrator, the costs associated with obtaining a third-party premises to host the arbitration, catering services, and a transcription service all paid by the parties to a dispute. Additionally, while arbitrations are typically faster, the process is still comprehensive in nature as the use of discoveries, motions and witnesses are commonplace, making it the same or similar to a court proceeding. Though arbitrations are often expedited, this is not always the case. The qualified and experienced arbitrators are very busy, and both parties have to agree with the choice of arbitrator. Unlike with judges, who are independently assigned to a case, the participants to a dispute can choose an arbitrator resulting in long waitlists that can span for months. It is worth questioning, if the same arbitrator is frequently engaged by a counsel with significant repeat business, and substantial fees, is the independence found in the court system being whittled away?
Finally, a major concern with arbitration is the finality associated with the process, because the decisions of the arbitrator is final and binding. The barriers to becoming an arbitrator are relatively low, which has resulted in substantial growth in the arbitrator pool and less predictable decisions. This can be detrimental to parties to a dispute if they are not afforded the ability to appeal the decision of the arbitrator — as is their right in the court system. This can be particularly damaging if the arbitrator makes an error in their decision, whether in law or otherwise, which cannot be potentially overturned on an appeal.
Moving Forward – To Arbitrate or Not to Arbitrate:
My perspective as a corporate lawyer is not that arbitration is always inappropriate, but that parties should give more thought and consideration to the appropriateness of arbitration to their specific situation. Clients should ask themselves, if arbitration is the best option for their dispute or, is the court system the better option? Unfortunately, the answer depends on the type of dispute. In some situations, agreeing to an arbitration clause may not be in your best interest. This is of particular importance to the seller in a sale transaction, which is likely the party that will have to defend an indemnity claim. It is also common for a purchase and sale transaction to holdback or place into escrow funds for any indemnity claims that arise. If there is no arbitration clause and the dispute is referred to court, the holdback or escrow funds could be paid into court and remain in court until such time as the dispute is resolved. This could result in the court holding money that could belong to the seller for a long period of time, encouraging sellers to enter into a settlement agreement in order to have the funds released rather than having the funds held up in court.
If parties do want to proceed with arbitration, there are several steps that can be taken to mitigate the concerning aspects of arbitration mentioned above. Parties should consider inserting specific clauses that define the mechanisms for selecting an arbitrator and should consider setting criterion or minimum experience requirements of the arbitrator to be selected. Further, in agreements where dispute resolution clauses are present, parties may want to expressly include that the arbitration is appealable to allow for recourse in the event of an unfavourable, unjustified or incompetent decision to which parties have no recourse.
All things considered, there are gaps between what parties hoped arbitration would entail compared to the realities that are associated with the process. As such, parties would be wise to think twice about the appropriateness of arbitration as a dispute resolution mechanism before inserting these clauses and should not treat arbitration clauses as boilerplate to be included in all agreements.
This publication is intended for general information purposes only and should not be relied upon as legal advice.