Arbitration and Why you should reconsider Arbitration Clauses in Agreements.

It has become a more common practice in agreements or contracts to insert a provision or clause to the effect that any dispute between the parties to the agreement must be subject to resolution by arbitration (and not by recourse to the Courts).

The Courts have made it clear, if an agreement has such an arbitration provision, that such clause is to be given full effect, such that this ousts the right of a party to commence a lawsuit at Court in respect of the dispute.

Mandatory Nature of Arbitration Clauses

The recent Supreme Court of Canada decision in TELUS Communications Inc. v. Wellman, 2019 SCC 19 (CanLII), which was a class-action lawsuit relating to both consumers and non‑consumers (business customers) involved the allegation that TELUS engaged in an undisclosed practice of rounding up calls to the next minute, such that customers were allegedly overcharged and customers were not provided the number of call minutes to which they were otherwise entitled. The individual contracts with each of the customers had a clause that required any dispute to be arbitrated.

Clearly individual customers would not have the wherewithal to initiate arbitration for such small amounts, and that a class-action would, for many public policy reasons, be the appropriate manner in which such legal issues would be resolved.

Although the lower courts came to another decision, the Supreme Court of Canada determined that, in respect of the business customers, even though they were the same form of agreement as the non-business customers who were protected by other consumer legislation, such business customers were bound by the express arbitration provision contained in the agreements with Telus. This situation, because of the prohibitive cost and inability to “class action” the arbitration, effectively precluded any individual business having any ability to address or take issue with Telus’ undisclosed practice as aforesaid.

The SCC decision in TELUS stands for the legal principle that, if there is an arbitration provision in an agreement, the provision is going to be enforced by the court unless there is some other consumer legislation that would prevent such a clause from being enforced.

While there is seems to be a common view that arbitration might generally be a more flexible and more expedient manner to resolve disputes, in contrast to court proceedings, often this is not the case.

Arbitration Decisions may be Unappealable

I recently was involved in a construction dispute arbitration. Candidly my view was that the decision of the arbitrator was fraught with error, both in application of legal principles and in the determination of facts. Whether or not my view is correct could not be assessed because the arbitrator’s decision was not appealable, insofar as the building construction agreement that my clients had signed with a building contractor (who had drafted the agreement and my client being experienced) provided that any dispute had to be arbitrated and there was no inclusion of a right to appeal in such provision. The arbitration regarding the construction and costing issues, in respect of two house being constructed, took 3 weeks, with additional written submissions, all at significant financial cost (to pay the arbitrator and to pay the lawyers).

Decisions of the Court, in Alberta, and likely in other jurisdictions, have made it clear that, unless the agreement provides for the right of appeal, in effect there is no right of appeal from an arbitrator’s decision, no matter how wrongly decided a party may feel that such arbitrator’s decision may be.

Stated again, it is very hard to appeal an arbitrator’s decision. The law in Alberta is that an appeal may proceed on a matter of “law” only, and only with leave of the Court.

To be clear, if the matter sought to be appealed is “mixed fact and law”, there is no possibility of appeal, unless the provision states clearly it may be appealed. Usually the arbitration provision is silent on any right to appeal. Effectively, since it is extremely rare that any decision is not of “mixed fact and law”, an appeal of an arbitrator’s ruling is effectively precluded.

Stated again, unless the agreement specifically provides for the right of an appeal- and most arbitration provisions have not thought that through — there is no right of appeal in many jurisdictions.

Unfortunately, many lawyers who draft and prepare contracts are not litigation experienced and therefore are not familiar with how arbitration provisions may impact on the rights of parties, when there is a dispute, and do not consider what disputes may need to be resolved and do not consider whether there ought to be a right to appeal in respect of certain disputes.

Arbitration may be Costly

Keep this in mind: Arbitration is expensive. It is unusual for any arbitrator to charge less than $400 an hour; some charge as much is $1,000 an hour.

It is unlikely that any arbitration can be done in under a day or two days, even with respect to minor disputes.

In addition to the arbitrator’s costs are the lawyer’s fees on either side (if lawyers are involved).

As such, even for minor disputes, unless there is a process set out in the written agreement as to how the arbitration is to proceed, the cost of the arbitrator is often prohibitive. Yet, if the agreement says that the resolution of a dispute must be by arbitration, the parties must front in advance the arbitrator’s fees, as well as pay their own legal counsel.

Credentials of Arbitrators

A critical impediment to arbitration proceeding in a timely way, is the issue of selecting an appropriate person to arbitrate.

Arbitrators are simply self-defined: Persons hold themselves out: “I am an arbitrator”. There is minimal regulation in respect of arbitrators. Generally arbitrators are selected by reputation.

However, because most arbitration decisions are not published and are confidential, it is difficult to review and assess whether a proposed arbitrator is “any good”.

It is very difficult to review how an arbitrator has previously ruled, to determine whether such arbitrator’s reasoning in past decisions has been sound or not.

If an arbitration clause is to be involved, it is useful at the outset to try to agree on who, or provide a clear manner in determining, shall be the arbitrator.

More Expansive Arbitration Clauses

In this context, a party should question at the outset what disputes may arise? What breaches or defaults may occur by the parties? Consider that there may be need to enforce the contractual terms. Consider that, if there may be a dispute, can a party afford to pay an Arbitrator to resolve such dispute?

Stated again: Are there some matters that should be resolved by the court?

Should the clause provide for a right of appeal on errors in factual findings, or mixed findings of fact and law, or only in respect of legal rulings?

Many arbitrations ought to have proceeded in the Small Claims Court, which Small Claims procedures avoid pretrial questioning, normally have limited document production, and may be a much more expedient court resolution for lesser monetary matters, albeit a Small Claims action may still take a year or so to conclude , if trial is required. The Small Claims Court resolution process for small matters may be preferable to arbitration.

If you agree to the arbitration provision, consider a schedule to the agreement that would clarify what may be arbitrated, and which would set out various aspects of the arbitration process. The expanded terms:

• May set out a shortened mechanism to resolve a dispute that is of minimal amount of money.

• contain a more intensive procedure for disputes of large financial consequences.

• consider what disputes may be appealed and on what grounds.

• May detail certain categories of issues that should be arbitrated, and certain issues that should not arbitrated, but must be dealt with by Court process.

Limitations of Actions — Commencing Action in Time

The Courts in Alberta have held that the Limitations Act, which provides that a Court Action must be commenced within two years of knowing whether a person has a cause of action (generally speaking) applies to arbitration clauses.

Some lawyers have made the mistake of ignoring the arbitration clause and have mistakenly commenced legal proceedings by Statement of Claim at Court, and thereby erroneously have missed the two-year limitation period in respect of which an arbitration had to be commenced under the agreement.

Notice to Arbitrate

If there is an arbitration clause in your agreement in issue, in Alberta your “Notice to Arbitrate” a dispute must be served upon the other party, in writing, within two years of your knowing that you have a dispute to arbitrate, stating very carefully what the dispute is that you require to be arbitrated. Other jurisdictions may have other timelines.

There is no set “proper Notice to Arbitrate”. To be careful, such a notice might need to be similar in nature to a court- style statement of claim normally issued in court legal proceedings.

However, the Notice to Arbitrate is not filed at court. There is no registration, nor filing of, a “Notice to Arbitrate” in any government institution, so there may be issues, for example, as to whether an ordinary “letter” in context “asking to arbitrate” is the same thing as giving “notice to arbitrate”. This uncertainty becomes a serious arbitration potential pitfall, when the opposing party resists the arbitration, perhaps on the grounds it is “out of time”.

Mediation

In all of this discussion regarding arbitration, one must be clear: this is not a discussion about Mediation. Mediation is a different process entirely and requires a separate discussion. Some agreements say that there must be a mandatory mediation before any legal proceedings are commenced. That may be worthwhile in some instances. Indeed for family law matters, an immediate mandatory mediation at the outset of a family law file might be the better way to proceed.

Summary

As seen above, arbitration clauses in agreements may be problematic.

“Standard form” arbitration clauses are often inadequate and many have not been thought through carefully in the context of what foreseeable disputes may be.

Often Lawyers who prepare agreements have little litigation or dispute resolution experience. Without a background in commercial disputes, some lawyers are simply too inexperienced to consider the contracting parties’ needs. Unfortunately, without the practical experience in dealing with breaches of contracts, and other court or arbitration dispute resolution proceedings, these “contract preparing” lawyers simply are unable to grasp or foresee the potential problems that arise if every dispute has to be resolved by arbitration.

So: Before you sign a written agreement that contains an arbitration provision, think carefully how the to be arbitrated dispute is going to proceed if you do have a dispute. Keep the Telus decision in mind.

Then query your lawyer: should all potential disputes be subject to this mandatory arbitration clause?