Mandatory arbitration clauses have become a standard feature of contracts used in a variety of industries across Canada. These clauses, which require the contracting parties to resolve disputes between them via arbitration rather than the courts, can facilitate a resolution that is faster and less expensive than the conventional litigation process. However, binding oneself to an expedited dispute resolution process is not without risk. When considering whether or not to include a mandatory arbitration clause in a given contract, it is important to understand not just the rights one will gain thereby, but also the rights one may be giving up.
Advantage and disadvantages of an expedited process
One of the primary advantages of arbitration over conventional litigation is that an arbitration process is likely to be faster and less expensive. Where a dispute is not factually complex, concerns a moderate sum of money, and/or requires a swift resolution so that the parties can resume collaboration, this can be highly beneficial. However, this expediency is often achieved by removing procedural steps that would otherwise be required as part of litigation before the courts.
For example, parties to an arbitration will generally not be subject to the extensive document production obligations imposed by the rules governing civil litigation, and may therefore struggle to successfully demand production of important documentary evidence from the other side. An arbitrator, faced with an application from one party for the production of documents by the other, may well disallow the application in order to keep the proceedings fast and inexpensive – even where the documents in question would be producible under the rules governing civil litigation. Where a dispute is likely to be factually complex and documents a significant source of evidence, a mandatory arbitration may do more harm than good.
Appeal is another area in which mandatory arbitration clauses impose significant limitation on the parties’ rights. While the rules governing civil litigation allows for court decisions to be appealed and reviewed in a myriad of circumstances, such rights are almost entirely removed from arbitration proceedings. For example, parties generally cannot appeal interlocutory decisions – such as decisions made on document production – and must simply accept such decisions, even where they have significant consequences for a party’s ability to develop their case.
Further, the ultimate decision of an arbitrator is only appealable in narrow circumstances, namely on issues concerning only the arbitrator’s application of law. Where the arbitrator misunderstood or misapplied the law, an appeal may be possible. However, where an arbitrator misunderstands the facts, or reaches a factual conclusion not supported by the evidence, the parties will usually be unable to appeal. Because most issues in an appeal decision is likely to be considered an “issue of fact” or an “issue of mixed fact and law” rather than a pure “issue of law”, there is most often no prospect of appealing an arbitration decision. This can be beneficial in circumstances where the parties’ primary objective is reaching a binding resolution in an expedient manner, but may pose a significant risk where is amount at issue is so significant that the parties would normally want to exhaust all of their procedural remedies to ensure that the right decision was made.
Enforceability
The need to carefully consider the advantages and disadvantages of an arbitration clause is heightened by the fact that, once entered into, such a clause will most likely be binding on the parties. Only in rare circumstances have the courts held that an arbitration clause is unenforceable. In 2020, the Supreme Court of Canada in Uber Technologies Inc. v. Heller, 2020 SCC 16 held that the arbitration clause in Uber’s contract of adhesion was invalid on the basis of unconscionability and was against public policy. As such, the Plaintiff’s class action lawsuit was allowed to proceed. In determining that Uber’s arbitration clause was unconscionable, the Supreme Court of Canada held that the inequality of bargaining power between the two parties resulted in an “improvident bargain” because:
These factors are unlikely to arise as between two commercial entities of equal bargaining power.
Further, the Court of Appeal of British Columbia recently distinguished Heller in Williams v. Amazon.com, 2023 BCCA 314. This case also involved a standard form contract of adhesion and an inequality of bargaining power between the parties; however, the Court of Appeal held that these factors alone do not establish an improvident bargain. The arbitration agreement did not unduly advantage Amazon, or unduly disadvantage the Plaintiff. Amazon’s arbitration clause was tailored to the consumer context, and unlike the Plaintiff in Heller, this Plaintiff was not similarly vulnerable. While some Canadian provinces do preclude mandatory arbitration clauses in the consumer context, British Columbia is not one of them. Consequently, the arbitration clause was held to be binding.
Key Take Aways
The primary advantages of arbitration – speed and cost-efficiency – can come at the price of a significant reduction in the parties’ procedural rights. For example, document discovery and appeals are highly truncated, if not entirely unavailable, in an arbitration proceeding. In order to ensure that an arbitration clause is an appropriate inclusion in a given contract, it is important to consider the relationship between the parties, the nature of the anticipated dispute, the monetary amount that may be at issue, among numerous other factors. While arbitration clauses can be enormously beneficial in facilitating a timely resolution of disputes, they are not one-size-fits-all. Both the decision to include such a clause and its contractual language should be carefully considered.
To discuss arbitration clauses and their enforceability, please contact Lauren B. Morris and Fred Troen.