A recent article published by The Wall Street Journal discussed a growing trend by American employers to include arbitration clauses in their employment agreements, in part encouraged by a 2011 decision by the United States Supreme Court which upheld a contractual provision requiring telecom customers to waive their right to bring certain lawsuits. There have been similar decisions in Canada, where courts have generally taken a deferential approach to decisions by arbitrators. But what exactly does arbitration entail? And should your company include arbitration clauses in its employment contracts? What are the costs and benefits of arbitration?

What is arbitration and when is it available?

Arbitration is a method of dispute resolution where parties to a contract agree to settle disputes through adjudication by a private arbitrator or panel of arbitrators instead of in court. This is still an adversarial process, where the third party arbitrator hears the evidence of both sides and renders a decision. Employers with unionized employees are likely already familiar with the concept of arbitration, as this process of dispute resolution is generally mandatory under labour relations legislation.

In order to resort to arbitration, parties must have an arbitration agreement in place. This agreement can be a stand-alone document or may be incorporated into another contract between the parties, such as an arbitration clause in an employment agreement. The agreement should state that all or certain disputes between the parties in relation to the contract will be resolved by binding private arbitration. The agreement may then go on to specify particular procedures, including timelines, rules for choosing the arbitrator and payment of arbitrators’ fees, and avenues for appeal. We will discuss the content of arbitration clauses in a future blog post.

Each Canadian province and territory has separate legislation setting out a basic procedural framework for arbitration. Although parties can choose to craft their own procedures for the arbitration, the provincial arbitration laws can also be relied on in its totality or to fill in any gaps. The legislation also specifies when arbitration clauses should be enforced and when arbitration decisions can be reviewed by a judge. These provisions become important where a party, such as an employee, believes that his or her issue should be decided in court, even after agreeing to arbitration.

Why (or why not) arbitrate?

There are a number of reasons why employers may wish to pursue arbitration rather than traditional litigation. First, parties can specify their desired arbitration procedures, which can lead to a more expeditious and less expensive resolution. Second, parties may select arbitrators with particular expertise, which is useful where the dispute is complicated or specialized. Third, unlike trials or other court proceedings, arbitration hearings are generally held privately, keeping such disputes confidential to the extent the agreed-upon process provides for confidentiality. Finally, because courts often pay deference to arbitrators’ decisions, particularly in specialized disputes, it can be difficult to appeal arbitration decisions, which gives parties a greater sense of certainty and finality once the dispute is resolved.

Although arbitration can provide these general benefits, employers should also be aware of the potential risks. Where a matter is complex or requires multiple arbitrators, the time and money saved by proceeding by way of arbitration may be significantly diminished, as arbitrators’ fees and other costs associated with the arbitration must be paid directly by the parties. In addition, the limited right to appeal associated with arbitration can be a double-edged sword for employers who believe that an arbitrator’s decision contains serious errors of fact or law. Finally, because arbitration is a private and confidential process, a favourable decision may not be available to parties or be given much weight in future cases, despite similarities in the facts.

In the next part of this series, we will discuss enforceability of arbitration clauses and how they may be challenged.