Top 15 pitfalls in arbitration clauses

By Staff

The legal environment has never been more favourable to parties who wish to settle their disputes by arbitration, Toronto litigator and commercial arbitrator Marvin Huberman tells

“An arbitration clause is a tremendously powerful tool for parties to control their dispute resolution process and courts have given great deference to them,” says Huberman, the editor of A Practitioner’s Guide to Commercial Arbitration.

He says that deference is derived from two main sources. First, from the foundational common law principles of the freedom and sanctity of contract, and second, from legislative attitudes, which have proved “very much in favour of enforcement,” according to Huberman.

He points to the incorporation of model laws on international arbitration by legislatures in jurisdictions across the country.

And yet, some arbitration clauses remain “ineffective,” says Huberman.

To help parties maximize the chances of enforcement, he has drawn up a list of the top 15 pitfalls when drafting arbitration clauses.

“If these items are properly considered and addressed, it gives you the best chance of an effective, durable and enforceable arbitration clause,” Huberman says.

1. Is arbitration suitable?

“Parties sometimes enter into an agreement without applying their mind to whether this particular dispute would be settled faster, cheaper and better by arbitration than traditional litigation,” Huberman says. “There are advantages and disadvantages to arbitration that must be considered.”

2. The scope of the arbitration clause

“What kinds of disputes are covered by the clause? And, just as important, what isn’t?” Huberman says. “You may want to narrowly or broadly define the kinds of disputes and if you want carve-outs that allow you to go to court for certain matters, such as injunctive relief, then it needs to be mentioned in the clause.”

3. Which rules govern?

“You have to consider which rules govern the arbitration — which means every aspect of the proceeding including whether the court has jurisdiction on any part — and whether the dispute is arbitrable,” he says.

4. Which arbitral body will administer the arbitration?

“Decide under whose rules will you arbitrate the dispute,” Huberman says, noting that there are any number of institutional options, including ADR Chambers, the International Chamber of Commerce, JAMS, Arbitration Place, and many others.

5. The seat of arbitration

“The clause should name the country and city where the hearing will be held,” he says. The choice will depend on a number of factors. “Think about the convenience, neutrality, travel cost and quality of arbitrators associated with each location, as well as whether the local court is likely to interfere.”

6. The language of arbitration

English is the default language for many arbitrations, Huberman explains, but not exclusively. “If it’s going to be in another language, then you may need translation services which creates costs and complicates logistics.”

7. The number of arbitrators

Arbitrations generally use a panel of one to three arbitrators. “Decide how many you want and whether they should have special skills, qualifications or particular language fluency,” Huberman says.

8. Time frames

“You want tight time frames that are realistic in arbitration,” he says. “Typically, it will take a year from start to finish, but you will want to stipulate a deadline to select the panel, when it should be heard and when a decision should be issued.”

9. Confidentiality

“Confidentiality is one of the hallmarks of commercial and other arbitration proceedings, including the documents, testimony, outcome and final decision,” Huberman says. “One thing people tend to overlook is providing for a remedy in case the requirements are violated by one party. Will there be injunctive relief, damages or annulment of the final award? That’s important to keep everyone on the same page.”

10. Governing law

“It’s best to pick which law governs and put it in the arbitration agreement, including the scope of the arbitrator’s power and how or whether a court can interfere,” he says.

11. Discovery scope and rules of evidence.

“You may want to be flexible by limiting the number of expert witnesses, oral examinations and documentary exchange,” Huberman says. “Many clauses say that strict rules of evidence will not apply without stipulating what does apply.”

12. Pre-hearing motions

“The parties need to address whether they are able to bring dispositive motions. For example, for dismissal on summary judgment or injunctive relief,” he says.

13. Damages and costs

“The clause should address the arbitration tribunal’s ability to award punitive damages, as well as pre- and post-award interest,” Huberman says. “When it comes to costs, items to consider include the availability of legal fees and disbursements and expert witness fees and disbursements."

14. Multistep dispute resolution

“Some clauses will stipulate certain steps that must occur before the parties are able to move forward with an arbitral proceeding, such as mediation or negotiation between senior managers at the parties,” he says.

“My experience is that when the parties engage in these kinds of steps, it often results in settlements at an earlier stage, avoiding the need for a costly and time-consuming arbitration.”

15. Appeal rights

“If you want your agreement to be enforced outside the domestic arena, you need to consider whether you want the award to be final and binding or if there should be appeal rights. If so, how limited should those rights be?” says Huberman.

“Some legislation stipulates narrow grounds for an appeal. Or the parties can agree that there are no appeal rights under any circumstances.”

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