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Good arbitration clauses require attention to detail

Although it is often true that arbitration clauses in commercial agreements are the last things lawyers address, parties should always aim to draft clauses that work well when they become necessary, Toronto lawyer and arbitrator Earl Cherniak writes in Lawyers Weekly.

As Cherniak, partner with Lerners LLP explains, bad arbitration clauses can cause unnecessary expense, leave the jurisdiction of the arbitrator(s) open to a court challenge or set up procedural barriers to an efficient arbitration.

“Such a clause might require that ‘The Rules of Civil Procedure of [name of province] will apply to any arbitration under this agreement,’ or provide for a panel of three arbitrators for a $500,000 dispute,” explains Cherniak.

On the other hand, he writes, a good arbitration clause has broad wording, such as: “The submission to arbitration applies to all disputes arising out of or in connection with this agreement, including any question as to its existence, validity or interpretation, or the jurisdiction of the arbitrators.”

While the number of arbitrators to use is always a key question, Cherniak says a panel of three should be reserved for disputes involving a significant amount of money and where the resolution of the dispute need not be swift, as there is inherent expense and delay associated with the formation and remuneration of a three-person panel.

An arbitration clause should also specify the applicable governing law and the seat of the arbitration, as well as whether or not there will be a right of appeal and whether the arbitrator will have the power to order costs at their discretion or on a fixed scale.

If confidentiality is required, Cherniak says this should be specified in the clause, because it cannot be assured otherwise.

“Direction can be given as to procedure to be followed, to ensure a timely resolution of the dispute and afford rights of production and discovery appropriate to the nature of potential disputes. Failing the specification of a procedure, the arbitrator or arbitration panel will determine it, subject to the agreement of the parties once a dispute arises,” he writes.

A sophisticated agreement, says Cherniak, could provide a summary process for disputes under a specified dollar value, and a more elaborate process for larger value disputes.

“Commercial lawyers alive to the value of dispute resolution outside the purview of the courts will give consideration to an appropriate, workable clause well in advance of closing, and often take advice during the negotiations from those with arbitration experience and expertise, either inside or outside their firms,” writes Cherniak.

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