Recent court decisions are useful reminders of some basic considerations to keep in mind when deciding whether to arbitrate and, if so, how to conduct the arbitration.
Is the dispute arbitrable? In an Ontario case, an executive sued his former employer for wrongful dismissal and negligent misrepresentation about the value of shares which were part of his compensation. The employer sought a stay of the lawsuit because the shareholders’ agreement the executive had signed included an arbitration agreement.
The court refused to stay the lawsuit, because the disputes were not “commercial”. While “commercial” is interpreted broadly, it does not include labour and employment, or ordinary consumer, disputes, despite their relation to business. Moreover, these disputes did not arise out of a transaction contemplated by the shareholders’ agreement. The disputes therefore fell outside the scope of the arbitration clause and could not be resolved by arbitration.
Reminder - You must always carefully consider the kinds of disputes that might arise in a business relationship and draft an arbitration agreement whose scope captures those you will want to arbitrate. You must also scrutinize the nature of the disputes that do arise to determine whether they fall within the scope of that agreement.
An arbitration agreement can be assigned - In a Quebec case, a dispute arose after the bankruptcy of a film production company about the distribution rights to the film it was producing. The distribution contract contained a clause requiring all disputes to be settled by arbitration. A secured creditor of the production company tried to claim the distribution proceeds from the production company’s partners. The court held that, as the assignee of the production company’s rights, the secured creditor was bound by the arbitration clause in the distribution contract to resolve any disputes by arbitration.
Reminder - When you are considering taking an assignment of a contract, be mindful whether it includes an arbitration clause by which you would then become bound.
Arbitration agreements generally do not bind nonparties - In an Alberta case, a plaintiff sued a corporation and some of its officers. The dispute between the plaintiff and the corporation was governed by an arbitration agreement. But the officers were not parties to that agreement. The corporation and the officers applied for a stay of the lawsuit so the dispute could be arbitrated. The court only stayed the lawsuit against the corporation. It refused to stay the lawsuit against the officers, because they were not parties to the arbitration agreement.
Similarly, in a British Columbia case, a security company had a contract with a public authority to provide security escorts at its operation. The authority entered into another contract with a construction company, which included an arbitration agreement. The construction company then entered into a contract with the security company to provide its workers with escorts. The construction company did not pay the security company in full. The authority paid the security company the balance and advised the construction company it would deduct that amount from what was due under the construction contract.
The construction company sued the security company, claiming it didn’t provide the necessary escorts, which prejudiced its ability to meet its obligations to the authority. The security company counterclaimed and sought summary judgment. The court noted that unless the security company agreed to arbitrate these disputes, they would have to be resolved by litigation, because the security company was not bound by the arbitration agreement in the construction contract.
Reminder - When not all parties to a business relationship are parties to an arbitration agreement, part of disputes which arise among them may have to be resolved by litigation and part by arbitration. This can increase costs and lead to inconsistent results, neither of which are desirable. When you are contemplating entering into an arbitration agreement, be mindful of possible claims involving entities who are not parties to it. If arbitration is the appropriate dispute resolution mechanism, try to ensure those entities become parties to the arbitration agreement.
Third parties can be compelled to give evidence before an arbitral tribunal - In another B.C. case, an insurer had terminated its agency agreement with a broker because the broker had provided confidential information to a competitor. In the resulting arbitration, the insurer obtained subpoenas from the arbitral tribunal compelling representatives of the competitor to testify at the arbitration hearing. The witnesses refused to testify. They insisted on court-issued subpoenas. The insurer was able to obtain a B.C. court order compelling them to testify at the arbitration.
Reminder – While the parties to an arbitration agreement have opted out of litigation to resolve their disputes, the courts continue to serve an important role, by being available, in appropriate circumstances, to enforce the parties’ procedural rights in an arbitration.
You cannot avoid paying the arbitral tribunal’s fees - In an Ontario case, the arbitral tribunal requested the parties to deposit amounts to secure its fees (a common practice). One party refused, because it had made a preliminary objection to the arbitration.
The court held it would undermine the authority of the arbitral tribunal to determine its own process, and put it at risk of non-payment of fees, if it could not require the parties to make such deposits until it had resolved those issues. The court ordered the party to deposit the amount requested.
Reminder - When you agree to arbitrate, you undertake to pay the fees of the arbitral tribunal.