Should I include an arbitration agreement in my contract?
Frequently, commercial Parties will include arbitration agreements in a contract without much thought as to whether it is necessary or even a good idea. There are many things to consider before including an arbitration agreement in your contract.
An arbitration agreement is simply that – an agreement to submit a future dispute to arbitration. Generally speaking, this means that if a party has breached the contract, then the parties must go to an arbitrator (as opposed to a judge) to decide their case.
The pros of an arbitration agreement
- Ability to control the process
When you agree to arbitrate, the parties control the process. You get to choose where it will be held, get to pick who will be your decision maker, you get to choose what rules of evidence you will use, and what the procedure will look like.
Arbitration is usually faster than court proceedings, especially with the court backlog caused by the COVID-19 pandemic. Because of this, arbitration has become a more attractive option for parties who are trying to avoid their matter being dragged out in the Courts.
Arbitration also eliminates a lot of waiting that accompanies litigation; whether it is waiting for a court date, waiting for a judge to release a decision (judges often reserve for lengthy periods of time whereas arbitrators generally do not), or waiting in court for a judge to hear your matter. The latter particularly can waste time as sometimes you will wait in court all day for your motion to be heard just for the judge not to get to your matter. Arbitration eliminates this waiting time which translates into legal fee savings.
- Privacy and Confidentiality
Although not necessarily the default, frequently arbitration is both private and confidential. While courts are public forums and documents accessible, arbitration is usually private (so only those who are directly involved can attend) and confidential (everything that is disclosed at the arbitration cannot be disseminated). This is a major consideration for some parties.
- Specialty areas of law
Judges are not all well versed in every area of law. Some may have a family law background, while others a construction law background – and you cannot choose which judge hears your case. But in arbitration, you can choose a specialist who is extremely well versed in the area of law that pertains to your contract, ensuring the matter is dealt with efficiently and effectively.
- International parties
If you have a contract with a party who is not in Canada, then arbitration can offer an even playing field, but you will want to know if an arbitration award is indeed enforceable in another country.
The cons of an arbitration agreement
- You are bound to that agreement
Just like any other contractual agreement, you are bound by that agreement. So, if you agree to arbitrate any future disputes, and a dispute comes up, then you must proceed to arbitration even if you would prefer to go to court. Both parties can agree to opt out of arbitration and proceed through the normal court process, but I would never count on the party that you are suing (or that is suing you) to agree on anything at that point. The inverse also applies, if there is no arbitration agreement and a dispute comes up, then both parties can still agree after to proceed to arbitration to settle their disputes. (This is called a submission agreement).
Because arbitration is private, the parties have to pay the arbitrator (or arbitrators, depending on what you pick). This can be costly. Is your $50,000 dispute worth $20,000 in arbitrator fees? Probably not. But if you agreed to binding arbitration, again, you might not have a choice. And maybe the speed of arbitration is worth that cost.
In this same vein, parties can decide what happens with a cost award, if the loser will pay for the total costs, if it will be split 50/50, or if one party will cover the whole thing regardless of the outcome. This may be a “pro”, but if the arbitration agreement states that one party will pay for arbitration, it can handcuff that party in paying for arbitration even if that party deems the matter meritless.
How we can help
If you are given a contract with an arbitration agreement to sign or drafting a contract including an arbitration agreement, it is wise to speak to a lawyer first. Our litigation lawyers can help you understand what is required in the contract and review the pros and cons of signing one. Contact the Litigation Team at Merovitz Potechin LLP.
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