Many commercial agreements contain dispute resolution mechanisms, such as mandatory mediation or binding arbitration. These types of provisions appear with increasing frequency as an alternative to the traditional litigation process for settling business disputes. While these types of mechanisms can be useful tools, they can have limitations and there are a number of implications that should be considered before agreeing to any alternative dispute mechanism.
The most common type of alternative dispute resolution is arbitration. This is essentially a private dispute resolution process where the parties agree to submit their dispute to a neutral decision-maker. The main advantage that arbitration offers over the traditional litigation process is speed – disputes can generally be resolved more quickly as the parties do not need to work within the court’s schedule and there are typically fewer procedural steps involved.
While arbitration can also be more cost-effective than traditional litigation, in some cases arbitration can be just as expensive as traditional litigation, particularly where the parties have not placed any limits on how the arbitration is to be conducted in their dispute resolution clause, for example by limiting or eliminating pre-hearing discoveries. Most dispute resolution clauses simply default to the rules of the British Columbia International Commercial Arbitration Centre as the procedural rules which will govern the arbitration, however these rules are quite permissive and give the arbitrator considerable power to determine the appropriate procedure. Parties wishing to ensure a more streamlined process should give consideration to placing procedural limitations in the dispute resolution clause itself.
Another consideration is whether the dispute resolution clause in the agreement makes arbitration mandatory or permissive, as well as the scope of disputes that can be submitted to arbitration. In cases where the parties have agreed that they “shall” submit all disputes relating to or arising out of the agreement or its performance to binding arbitration, any litigation commenced in the civil courts may be stayed in favour of litigation. Whether the litigation will be stayed often depends on how broad the arbitration clause in the agreement is drafted – if the dispute can be said to be outside the scope of the arbitration clause, the Court may decline to stay the action.
Parties seeking to craft an alternative dispute resolution clause should also give consideration to practical matters such as the location of any mandatory mediation or arbitration proceedings, how mediators or arbitrators are to be appointed, the number of mediators or arbitrators, and whether the mediator or arbitrator must have some particular qualifications. Occasionally parties to an alternative dispute resolution clause will agree to a pre-determined list of acceptable mediators or arbitrators.
Lastly, one of the more important considerations in adopting an alternative dispute resolution mechanism is rights of appeal. Parties generally have wide latitude to specify whether the arbitrator’s decision will be final and binding, or whether there are rights of appeal – and if so, any limitations on that right and to whom appeals should be made. In general, the courts will give considerable deference to an arbitrator’s decision on the facts, but less deference to decisions on points of law. Accordingly, parties should give careful consideration to any appeal clauses. If appeal rights are to be limited in any way, parties must be prepared to accept the risk that the arbitrator will render a decision that they will be unable to challenge.
While alternative dispute resolution clauses can be a useful tool for resolving business disputes, careful consideration should be given when drafting them to ensure that they have the intended effect.