Toronto Commercial Arbitration Society Conference – Starting Off Right: Drafting Successful Arbitration Clauses and Agreements

Christopher Ludwinski

The Toronto Commercial Arbitration Society Conference was held on the fourth day of CanArbWeek 2021. Moderated by Douglas Harrison (independent arbitrator and TCAS Chair), the event focused on drafting successful arbitration clauses and agreements. The speakers were Luis Sarabia (Partner, Davies Ward Phillips & Vineberg LLP), Benjamin Knowles (Co-Chair International Arbitration Group, Clyde & Co LLP), and Melissa Catalano (SVP Global Corporate Transactions, Great-West Lifeco Inc.).

The speakers began by discussing the circumstances that move parties to draft an arbitration clause in a commercial agreement. Catalano noted that arbitration clauses are often put in commercial contracts because there may be a transaction that gives rise to a need for special qualifications or expertise in coming to a decision, because one or both parties do not trust the neutrality of the other’s home jurisdiction, or because there is a lack of precedent case law. Furthermore, arbitration offers more procedural flexibility and confidentiality.

Next, Sarabia discussed the uptake of arbitration in the mining sector. Sarabia noted that Canadian mining companies that do business in foreign countries want arbitration clauses because they may not want to litigate disputes in foreign jurisdictions due to unfavourable laws and inhospitable courts. Furthermore, companies are more inclined to arbitrate because the courts are inundated with other commercial issues arising from the COVID-19 pandemic, pushing parties towards arbitration to achieve a faster resolution.

The panel then shifted to the circumstances in which a party may be hesitant to agree to arbitration. Catalano noted that the more case law there is in a specific area the more certain the outcomes in court, and the less parties will opt for arbitration. Knowles added that in his experience, financial institutions favour arbitration less, especially because as repeat players in litigation with many versions of the same contracts entered into with different counterparties, they want to set precedents to control a recurring problem or issue.

The next topic was unusual or innovative provisions now being added to arbitration clauses. For example, Knowles discussed clauses that prescribe specific qualifications for the arbitrator, which have been common in insurance disputes. He cautioned against the use of these clauses, however, because they can limit the number of eligible arbitrators to too small a group.

Next the panel discussed the factors parties should consider when choosing between ad hoc and institutionally administered arbitration. Sarabia offered that major commercial parties take comfort in choosing an institution because the arbitration will be more predictable and structured than an ad hoc arbitration. However, Sarabia noted that ad hoc arbitrations are largely successful because they afford a greater degree of customization, freedom, and flexibility for the parties. Knowles commented that it may be better to employ an institution for contracts between a sophisticated party and an unsophisticated party, because the institution is better able to get an arbitration off the ground if one party is attempting to stall or derail the process.  On the other hand, if the dispute involves two sophisticated parties, they may appreciate the greater flexibility and lack of interventions that come with avoiding institutional arbitration.

The panel then discussed the importance of arbitral fairness. Knowles spoke about how in the insurance industry it is common that both parties are familiar with the arbitrator. However, each speaker agreed that arbitrations should follow a parity model whereby each party should not make separate submissions to the arbitrator without the other party present, to preserve the fairness of the dispute resolution process.

The panel shifted to the topic of arbitrators with subject-matter expertise. Catalano observed that expert arbitrators are extremely important in specialized disputes, which call for detailed knowledge of the law and contracting conventions in that area. The panel agreed that arbitrators with subject-matter expertise are becoming ever so in important in specialised disputes because of the niche area of expertise they afford, which in turn gives the parties confidence that the arbitration process will be rightly decided.

Moving to the issue of choosing a seat, Knowles reminded attendees of the difference between the legal seat of an arbitration and the place arbitral proceedings may actually occur. The legal seat is the jurisdictional home of the arbitration, which determines the applicable arbitration law and the courts that has certain supervisory powers over the arbitration. Meanwhile, the actual place of arbitration can be anywhere. Knowles advised that only jurisdictions with a reputation for arbitration-friendliness should be chosen as seats.

Next, the panel discussed clauses that create a limitation period shorter than the applicable statute of limitations. As Catalano pointed out, notice periods are frequently added to arbitration clauses, in order to give parties some but not unlimited time to raise objections, after which the objection is waived. Knowles noted that when lawyers draft these clauses, they need to be careful to specify clearly the interactions between contractual limitations period and time bars that may exist at law.

Finally, the panel discussed asymmetrical arbitration agreements, whereby one party can take a potential dispute to litigation or arbitration, but the other party can only seek arbitration. Knowles noted that in the United Kingdom these clauses are frequent in businesses where there is an imbalance of power, for example in loan agreements, where the party in the stronger position reserves for itself greater flexibility. The prevailing view among the panellists was that these provisions are not in themselves unconscionable.

Harrison concluded by thanking the panelists for their thought-provoking discussion. He announced that TCAS will be making a donation on behalf of its members to the Lawyers Feed the Hungry charity.