Why Sexy Arbitration Clauses in Commercial, Family & Employment Contracts Aren't So Sexy: What Every Businessperson, Consumer, Spouse & Employee Needs to Know
/That going to court is expensive, takes a long time, and can lead to unfair outcomes seems agreed upon by most who have had to go to a court to resolve some kind of civil dispute, be it of a commercial, family or employment nature. These vexing problems with courts have persisted for centuries. The result of court outcomes that no one could afford, or wait for, or was happy with, naturally led to a search for alternatives.
Why Did Arbitration Become So Sexy?
Like many longstanding problems that people are desperate to solve, it’s not surprising that a theoretically sexy and exciting solution - alternative dispute resolution (ADR) - was seized upon as a “cure all” to clogged costly courts, starting slowly in the early 20th century, then picking up steam in the 1980s and 90s. What you need to understand, however, is that there’s a big difference between voluntary and binding forms of ADR, and that statistics show binding ADR is not necessarily cheaper, quicker or fairer than the courts.
What’s the Difference Between Voluntary & Binding ADR?
Voluntary ADR usually takes the form of mediation. Even if that mediation is forced upon you (like for larger civil disputes in Toronto, Ottawa and Windsor), it remains voluntary in not forcing you to accept the result. It just facilitates talking among the parties. The worst outcome of voluntary ADR like mediation is that you spend some time and money talking through a problem - often leading to naming settlement numbers - and get nowhere.
Binding ADR - usually in the form of arbitration - is totally different, in that you’re supposedly stuck with the result, even if you don’t agree with it. Arbitration is often the result of some clause of an agreement you signed in the past - perhaps quite knowingly in a domestic co-habitation contract, or perhaps unwittingly in the smallest of print of online terms and conditions you clicked okay to - which forces you out of the local court system for disagreements.
And so what’s so bad about that, you might be thinking? Isn’t arbitration always cheaper, quicker, and fairer? Unfortunately the reality can be exactly the opposite of the theory.
Why is Arbitration Not All it’s Cracked Up to Be?
The downsides of arbitration compared to the courts can be:
Higher Costs Because You’re Paying for More than Just Lawyers - While everyone understandably complains about court litigation costs, really the only thing they’re complaining about is the cost of their own lawyers. Court fees (at least in Canada) are extremely modest. So you’re not really paying for the judge, or the courtroom, or the court staff. In arbitration, you’re paying for everything: arbitrator(s), hearing location, document filing systems, plus you’re still paying for the lawyer(s).
Might a quick single arbitrator hearing based on narrow issues that everyone agrees upon, where no one challenges the arbitrator’s jurisdiction, or result, and everyone voluntarily complies with enforcement, possibly be cheaper than a court-based process? Maybe. But that’s still questionable, since while you might (just maybe) save on lawyer fees, you’ll still be paying arbitration fees, and in such a case where everyone agrees on most of the issues, and no high conflict is involved, even lawyer court fees could be quite manageable as the parties could agree to an expedited court hearing on limited evidence and issues.
Longer Timelines Due to Collateral Attacks on the Arbitration - Yes, I know this is heresy to say arbitration can take longer than the courts, but I read a lot of cases, and continually see parties engaging in pitched court battles over the arbitration process itself, rather than at least having those court battles on the substantive issues they want someone to settle for them. Thus imagine fighting in court for years over whether an arbitration will even be held, or over the justness of the outcome of the arbitration?
Don’t believe me? How about a pitched commercial battle where a contractual clause said each party to a dispute would appoint one arbitrator, and then those two arbitrators would appoint a third arbitrator, but one of the parties simply refused to appoint an arbitrator, frustrating the entire process, then dragging out over several years through superior and appellate courts: TransAlta Generation Partnership v Balancing Pool, 2019 ABCA 318.
Or perhaps you’d prefer a family law example, where an arbitrator settled all the issues between the parties, but then one of the parties launched a superior court appeal, and the parties each brought motions for fresh evidence, essentially trying to pointlessly relitigate all the arbitrator issues, but where the superior court judge ultimately upheld the decision of the arbitrator on all points: Veneris v. Koh Veneris, 2018 ONSC 4164.
Or an example from the employment law context, where an employee was bound by an arbitration clause, then challenged the clause in superior court, and then further challenged the clause in an appellate court, losing both times but expending considerable time and money in doing so: Ferrari v. University of British Columbia, 2014 BCCA 18.
However, see exactly the opposite result in the very important decision of the Court of Appeal for Ontario in Heller v. Uber Technologies Inc., 2019 ONCA 1 where all Uber drivers in Canada had supposedly agreed to arbitration of all disputes with Uber under the law of the Netherlands by one arbitrator sitting in the Netherlands (!). The court calculated the demanded upfront administrative fee component of that process (according to the contract imposed on the drivers) as $14,500 US, not including lawyer, mediator and arbitrator fees, and noted the applicant before the court earned a gross income of about $20,000 to $30,000/year. The court struck down the mandatory arbitration clause as "unconscionable and therefore invalid.”
Less Not More Acceptance of Fairness of Results - While one of the advantages of arbitration is often touted as letting the parties choose their dispute settlement decision maker (as opposed to some random draw of a judge), even where the parties picked a very specific means of arbitration by very particular people consistent with their mutual preferences, there are numerous examples of the system breaking quickly breaking down and everyone yet again winding up in court fighting over process rather than substance of the core issues at dispute. In Gerstel and 2102503 Ontario Inc. (Harold the Jewellery Buyer) v Kelman and Mortgage Maven Inc., 2017 ONSC 214 one of the parties to an arbitration agreement to refer a dispute to a rabbinical court made up of three Rabbis “became unhappy with the means and manner” of the arbitration, and sought to remove the arbitrators and return the matter for decision to the court. The court refused that relief, but still cautioned:
There is nothing in what I have said that allows the Beis Din to do whatever it wants. In particular, in this case the arbitration agreement imposes real limitations on the Beis Din. The agreement that there cannot be and has not been any contracting out of the requirement that it abide by section 19(1) of the Arbitration Act, 1991 (the parties be treated equally and fairly) is one. Presumably there is some flexibility in what this may mean in any particular case. Having said this I point out that if the process adopted by the Beis Din ignores or fails to respect these limitations it does so at the risk that this matter will be returned to the Court.
Does Arbitration Work Better for Transnational Disputes?
Now don’t get me wrong. I’m not suggesting arbitration can never work, or be cheaper, or be quicker, or be fairer. Especially for transnational disputes, where there are a mess of competing national laws, and all sorts of enforcement for foreign judgment problems even if a party manages to get a judgment under one legal system but then needs to enforce it in another legal system, everyone picking a arbitration process in one spot, using a single legal system, will usually have huge advantages over competing court-based litigation.
Nation states have a long history of successfully resolving their transboundary disputes through agreed upon arbitration, where a lot of riding on results, and thus cost of the process is of little concern. But because of the costs of these transnational arbitration processes, they won’t always be appropriate for lower value disputes - as confirmed by the Ontario Court of Appeal in the Uber case. Though international arbitration could be worth exploring even in family law cases, where the international stakes are high. and litigating in one country rarely gets ideal easily enforceable results in other countries.
How Do I Avoid the Problems with Arbitration?
In order to avoid getting trapped into arbitral processes that could be more expensive, take longer, and lead to less accepted results than court processes:
Consider the Pros and Cons of Arbitration Prior to Agreeing to or Commencing Arbitration - if there’s no obvious advantage to arbitration as compared to court resolution, you should be asking why you are going to participate in it. If you’ve already contractually agreed to it, there’s no reason you couldn’t approach the other party to voluntarily agree to get out of it, as you might not be the only one with concerns.
Get Legal Advice Before Agreeing to an Arbitration Clause - while I know this isn’t practical for a $100 software licence agreement, it’s imperative for contracts as important as family law co-habitation or separation agreements, or complex commercial joint venture or purchase agreements. Contractual arbitration clauses might on their face look all warm and fuzzy, until those clauses actually gets triggered and you find out you’re locked out of a court process and trapped in unknown costly arbitration territory.
Get Legal Advice Before Commencing and During an Arbitration - lawyers are just as useful in an arbitration as they are in court. The Gerstel case above makes clear that courts will intervene in unfair arbitral processes, but you’re going to need a lawyer to help you assess how fair the process is, and how you escape from it if you do have concerns.
Gordon Scott Campbell assists clients with domestic and international arbitrations and court-based litigation of civil disputes, including family disputes. He has served as a professional negotiator of high value claims, litigated commercial and family claims before the Ontario Superior Court of Justice, the Divisional Court, and Court of Appeal, and represented Canada internationally with UN, OECD, APEC and WTO bodies. Learn more at www.acmlawfirm.ca and www.nofearfamilylaw.com.