Understanding arbitration agreements

Arbitration agreements have become increasingly common in commercial contracts as parties strive for certainty and control in all aspects of their business relationships. These agreements, which often consist of a single clause in a larger contract, represent a decision to resolve issues privately rather than through the courts. This allows parties to tailor the dispute resolution process to suit their preferences.

Understanding the effect of arbitration agreements on your legal rights is critical for any person or business entering into a commercial contract. These agreements dictate how certain disputes can be resolved and may prohibit recourse to the courts.

PURPOSE AND SCOPE

Commercial parties may favour private dispute resolution over formal court proceedings for a number of reasons, including increased autonomy, perceived efficiencies in the resolution of issues and the confidentiality of proceedings. Like any term in a contract, arbitration agreements can be negotiated and drafted to suit the needs of the parties. For example, time limits may be set for starting a claim or mandatory negotiation. Mediation can also be included as a precondition to arbitration and the procedural rules that will govern disputes can be dictated.

The scope of an arbitration agreement is defined by its terms. Parties may choose to submit all disputes related to the contract to arbitration, or they may specify that only a subset of disputes be subject to the arbitration agreement. Whether or not a specific dispute falls within the scope of an arbitration agreement should be decided by the arbitrator.

In some situations, a party may try to begin a court action notwithstanding the fact that the dispute in question falls within the scope of an arbitration agreement. When a court action is launched despite the existence of an arbitration agreement, the opposing party can apply to court to stay the court proceedings so the matter can be determined by arbitration.

JUDICIAL ENFORCEMENT

In Canada, there are different legislative regimes for granting and refusing a stay of proceedings in favour of arbitration. For example, in Ontario and Alberta, a court may refuse to stay proceedings for a number of reasons, including where the application was brought with undue delay, or the matter in dispute can be properly determined by default or summary judgment. A court in these jurisdictions may also refuse a stay where a party entered into the agreement while under legal incapacity or because the arbitration agreement is invalid. For example, because it was induced by fraud or is an unconscionable bargain.

In British Columbia, a stay will be refused if the arbitration agreement is found to be void, inoperative or incapable of being performed. Incapacity or lack of consent may render an arbitration agreement void, but procedural irregularities should not. An arbitration agreement is inoperative if the contract no longer has effect, such as when it is revoked or it is unenforceable. The Court of Appeal for British Columbia has made it clear that an arbitration agreement will not be inoperative merely because it will cause a multiplicity of proceedings or overlap with issues in a court action. Lastly, an arbitration agreement is “incapable of being performed” if an obstacle beyond the parties’ control prevents performance, including where the arbitration agreement is vague or ambiguous.

BEST PRACTICES

Canadian courts have limited jurisdiction to refuse to grant a stay in the face of an arbitration agreement. This protects the need for predictability in commercial disputes and ensures parties are held to their contractual obligations. Given this, arbitration agreements should be drafted thoughtfully and carefully, with due consideration being given to the scope of the agreement and its impact on the ability of the parties to seek recourse from the courts. It is imperative that parties seek legal advice to ensure respective arbitration agreements are tailored to meet the preferences of the parties.