Introduction
Arbitration is an inherently flexible mechanism that allows parties, by agreement, to create a bespoke process that suits their preferences and circumstances. However, drafting errors often lead to disputes about basic aspects of the arbitration agreement. Clear and careful drafting is essential to ensure parties obtain the benefit they intended from the dispute resolution process and avoid costly and time-consuming disputes over the meaning of an arbitration agreement.
This bulletin examines the essential features of arbitration agreements and explores circumstances where Canadian courts have been required to intervene due to imprecise drafting.
Scope
The scope of the arbitration agreement determines which disputes must be referred to arbitration. The scope may be broad, covering, for example, “any and all disputes […] respecting this agreement or anything related to it.” Conversely, the scope may be narrower and apply only to specific issues, such as agreement about a budget or narrow payment disputes.
Specifying exactly what is and is not covered by the arbitration agreement is crucial and requires precise drafting to ensure clarity. The importance of precision is even greater where parties can raise multiple claims in relation to one agreement. This issue often arises in post-merger and acquisition disputes where there are various issues to be resolved by expert determination or other means. The entire agreement should be reviewed when assessing whether dispute resolution procedures have been properly drafted.
Seat
An important, and often overlooked, aspect of arbitration agreements is that the “seat” of an arbitration is a different concept from, and can therefore differ from, the physical location of any arbitration hearings.
The “seat” of the arbitration determines the procedural law that will apply to the arbitration, such as relating to oversight and amendment of arbitral awards. It is not uncommon for arbitration agreements to specify a seat of arbitration that is in a different location from where the actual arbitration will take place. In Canada, arbitration is governed by various, often similar, provincial legislation.
For example, in HZPC Americas Corp v. Skye View Farms Ltd., the arbitration agreement provided that the seat of the arbitration was Ontario unless the parties otherwise agreed. To minimize the parties’ costs, they agreed that Prince Edward Island was the appropriate place for the arbitration to be heard. The appellant argued this displaced the presumption that Ontario law applied to the arbitration and that Prince Edward Island law should apply. The Court disagreed. The fact that the parties agreed on the physical location of the arbitration to be Prince Edward Island did not displace their choice that Ontario law governed the arbitration agreement. The Court noted that “the physical location of where an arbitration is conducted does not equate with the seat of arbitration unless of course the parties agree. They did not.”
Governing Law
While it may be assumed that an arbitration agreement contained within a main agreement will be subject to the same governing law of the main agreement, that is not always the case. This is especially so where parties are from different provincial or international jurisdictions, or where the seat of the arbitration is in a different jurisdiction than the governing law of the main agreement.
In Johnston v. Octaform Inc., for example, an arbitration agreement contained in an employment contract specified that Nevada law governed the agreement. It also elected British Columbia as the seat of the arbitration. The arbitrator, correctly, applied Nevada law to determine the validity, effect and interpretation of the employment contract between the parties and applied British Columbia law in relation to matters internal to the arbitration, including the scope of arbitral jurisdiction. This was upheld by the British Columbia Supreme Court.
Choice of Arbitral Institution
There are many arbitral institutions now available that parties may choose to administer their arbitration. When making this choice, it is essential that parties consider the various institutions’ procedural rules before they select an institution. Costs, procedure, decision-maker oversight and other procedural rules vary between the different institutions. Parties should carefully consider those criteria when determining which institution is best suited to resolve future disputes.
Once the arbitral institution is selected, it is also essential to name the institution properly in the arbitration agreement. Far too often, courts are asked to interpret arbitration agreements specifically to determine which misnamed institution is in fact intended to supervise the arbitration. This can lead to serious consequences for the parties.
In Peace River Hydro Partners v. Petrowest Corp., for example, the Supreme Court of Canada noted, in obiter, that “[a]n arbitration agreement is considered ‘incapable of being performed’ where ‘the arbitral process cannot effectively be set in motion’ because of a physical or legal impediment beyond the parties’ control.” The dissolution or non-existence of the chosen arbitration institution was listed by the Supreme Court of Canada as a physical impediment that will render an arbitration agreement incapable of being performed. It is accordingly important to be precise and accurate when selecting and recording the chosen institution to avoid any risk that the arbitration agreement could be found to be inoperative.
Arbitrator Nominations
Choosing the number, qualifications and process for the appointment of the arbitral tribunal will depend on the nature, complexity and value of potential disputes. Ensuring that the arbitration agreement is clear about these issues can prevent an unnecessary visit to court to determine who should be appointed. Being too prescriptive about the required qualifications for arbitrators in advance, however, may limit the parties’ options for acceptable, available and non-conflicted arbitrators in the event of a dispute. Accordingly, one approach is to incorporate institutional rules of an organization that can be trusted to make appropriate appointments.
In Flatiron Constructors Canada Ltd. v. Saskatoon (City), for example, the arbitration agreement specified that parties would select an arbitrator who was “qualified by occupation” but did not specify what kind of occupation would qualify. The applicants nominated legal practitioners with specialist construction experience. The respondents nominated two retired justices from the Saskatchewan courts. They could not agree and applied to the Court. The Court modified the guidance provided in the agreement to require it to select the arbitrator who was best qualified to decide the matter in dispute from those already nominated by the parties. The Court selected the arbitrators nominated by the applicant, preferring their exposure to the specific type of design-build contracts at issue over the multi-disciplinary experience of a former judge.
Multi-Tiered Dispute Resolution Clauses
Multi-tiered dispute resolution clauses that require parties to take steps to avoid formal dispute resolution proceedings are commonly featured in parties’ agreements. Any mandatory prerequisites to arbitration through multi-tiered dispute resolution procedures must be carefully tailored to clearly specify the compulsory nature of the steps.
For example, in J.P. Thomson Architects Ltd. v. Greater Essex County District School Board, the agreement contained a multi-tiered dispute resolution clause that required the parties to refer any disputes that could not be resolved within 30 days to mediation first. The trial judge ruled this timeline was a strict precondition and the consequence for failure to seek mediation within 30 days of the occurrence of a dispute foreclosed the possibility of subsequent arbitration. The Court of Appeal preferred an interpretation that mandated the parties engage in mediation for a minimum 30-day period over an interpretation of a 30-day deadline to refer a dispute to mediation. As a result, the parties were still required to refer disputes to mediation as a precondition to arbitration, but they were not required to do so within 30 days of the occurrence of a dispute.
Given the potential uncertainty and timing issues created by multi-tiered dispute resolution clauses, there should be a strong rationale for including such a provision in an agreement, keeping in mind that the parties can always elect to negotiate or mediate at any stage of the process. Often, it is simply too early in the parties’ understanding of their respective cases for an effective mediation to occur prior to arbitration being commenced.
Conclusion
To avoid unintended bargains, parties are advised to carefully consider the drafting of arbitration agreements, with a view to mitigating uncertainty and providing clear answers to foreseeable issues.
For more information, please contact the authors or any other member of our Arbitration group.
