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Procedural Issues in Arbitration Clauses

William G. Horton

Blake, Cassels & Graydon LLP

Incorporating Specific Rules and Procedures

Given that parties often choose arbitration because they want a procedure which is faster and cheaper than litigation before the courts, it is understandable that they may wish to further that objective by specifying time limits or abbreviated procedures within the arbitration clause itself. Arbitrationallows the parties to craft their own procedures, but there are some legal limits and practical considerations.

It is fundamental to all arbitration that the rules of procedure (whether specified in an arbitration clause or laid down by an arbitral tribunal) must treat all parties to the dispute equally and fairly. Each side must be given an opportunity to present its case. If this standard is not met, the results of the arbitration may be set aside or not enforced, regardless of any agreement between the parties. If this standard is met, the agreement of the parties as to procedures to be followed should be respected by the arbitrator and the courts.

Specifying particular procedures in the arbitration clause, can be extremely useful if the parties have a good idea of the type of dispute which is likely to be arbitrated. In some circumstances, arbitration is not likely to be effective unless customized procedures are agreed upon in advance. For example, if the parties want to provide for the adjudication of disputes which may arise on the closing of a transaction and have the disputes decided before closing this can be better accomplished if arbitration rather than litigation is specified as the method of resolving the disputes.However, the benefits of arbitration will only be realized if stringent limits on timing and on the nature and extent of submissions are incorporated into the clause. It may also be wise to pre-appoint the arbitrator and have the arbitrator briefed on the transaction in advance of any dispute arising. This will avoid problems and delays relating to the appointment and availability of the arbitrator if a dispute does arise. Similarly, if the parties know that the disputes to be arbitrated will involve relatively small amounts of money, they may want to provide that submissions will be made only by way of an exchange of correspondence subject to the over-riding discretion of the arbitrator if additional information is needed. The parties also may wish to appoint an arbitrator who has very specific expertise in the subject matter of the likely disputes so that the need to retain expert witnesses is avoided.

The methods by which arbitration procedures can be adapted to the needs of the parties and the nature of the dispute in terms of its size, complexity or urgency are limited only by the conscientious creativity of the parties and their lawyers. On the other hand, there are dangers in prescribing procedures which are too specific, rigidor restrictive.

Where the nature of the potential disputes can not be determined in advance, restrictive procedures designed for a simple or low value dispute may backfire when a complex or high value dispute erupts. Of course, the parties will be free to change the procedures to suit the dispute which actually arises, but this can only be done by unanimous agreement. Once a dispute has actually arisen, one of the parties may insist on strict adherence to the contractual limitations. In the absence of agreement between the parties, if the arbitrator chooses to vary the agreed procedures, the party who did not favour the variance may argue that the arbitrator lost jurisdiction and that the arbitration should be stayed or the award set aside because the procedure was not in accordance with the agreement of the parties. On the other hand, if the arbitrator does not relax the pre-agreed rules, the rules themselves may be attacked as being unenforceable on the grounds that they operated in such a manner as to make it practically impossible for the complaining party to properly present its case. In a domestic arbitration, the party who favoured the variance may also apply to the court to extend the contractually agreed deadline. This could become a contested application which adds further cost and potential delay.

In other words, the attempt to limit the procedural scope of the arbitration can easily lead to the exact opposite result: uncertainty and protracted litigation in the courts.

There are also practical problems with arbitration clauses which place unrealistic limits on time frame and procedures. Frequently, it takes longer than the parties anticipated to discuss the appointment of a suitable tribunal after the notice to arbitrate has been served. It is also not uncommon for the parties to have difficulty finding an arbitrator who is qualified or has time available to conduct the hearing within the agreed timetable. The problem is exacerbated if the parties have provided for a tribunal of three arbitrators, who may be from different places. All of these factors can cause very short contractually mandated time limits for the conduct of the arbitration to slip by all too quickly, leaving a laughably short period of time in which to do the actual work of resolving the dispute.

In most cases, where an agreement to arbitrate is part of a larger agreement or relationship and will govern future disputes which are as yet unknown, it is preferable to focus not on the procedural rules but on the qualifications and institutional affiliations of prospective arbitrators. As with the selection of legal counsel, focusing on the reputation and track record of the service providerswill often yield more satisfactory results than trying to set precise service standards in advance. It is also sometimes useful if the arbitration clauseaffirms the discretion of the tribunal (possibly with some non-binding guidelines) to fit the procedures to the dispute – to make “the rules fit the ruckus”. In most cases, this discretion is provided by the laws or institutional rules to which the arbitration is subject. However, in some cases it may be necessary or advisable to explicitly give the tribunal some additional flexibility. For example, in Ontario, an arbitrator is required to hold an oral hearing unless the agreement of the parties expressly provides otherwise. In some cases where the monetary value of disputes may not be high relative to legal costs, it might be desireable to provide, right in the arbitration agreement, that the arbitrator is free to dispense with or to limit an oral hearing.Similarly, although it may not be strictly required, it may be wise to expressly empower the arbitrator to limit pre-trial depositions or discoveries of the parties if the arbitration is sited in or subject to the laws of a jurisdiction where unlimited (bordering on abusive) pre-trial discovery is the norm.

The discussion so far has addressed the need to avoid specifying unrealistically abbreviated procedures. The opposite point can also be made. While it is perfectly possible to specify in an arbitration agreement that the proceedings will be conducted virtually like a lawsuit, this approach is also likely to deprive the parties of some of the main benefits of arbitration – notably the ability to adapt the procedures to the dispute. However, in arbitration one should never rule out any possibility. It is conceivable that one of the parties may wish to obtain certain benefits of arbitration (e.g. a neutral forum or some measure of confidentiality) while preserving all rights to conduct the proceeding as if it were a lawsuit. The only obstacle to achieving that result, if it is desired, is securing the agreement of the other party.

Pre-trial Production of Documents and Examinations for Discovery

The extent and scope of pre-trial production of documents and examinationsfor discovery are within the discretion of the arbitral tribunal subject to the overriding standards of equal treatment and opportunity to present one’s case. In arbitrations which involve parties from the same jurisdiction, the expectations of the parties are likely to be similar, i.e. that procedures like those available in local litigation will be available in the arbitration, subject to some discretionary tailoring by the arbitrator to make the procedures more effective, efficient and expeditious.

However in arbitrations involving parties from different jurisdictions and legal cultures, the expectations of the parties with respect to pre-trial disclosure can be very different. Sweeping pre-trial depositions of non-party witnesses which are considered essential to U.S. litigation are dispensed with, for the most part, in Canada. While England has similar pre-trial documentary production rules to Canada, examinations for discovery of the parties is not available and the exchange of witness statements before trial is a relatively recent innovation. Civilized, highly industrial societies such as France and Germany have none of this in their litigation systems, although judges may order specific documents to be produced.

In international arbitration, only limited pre-trial discovery is likely to be available. As a general rule, in order to ensure that one will get pre-trial production of documents and examinations for discovery in an international arbitration one needs to:

a)specify such procedures in the arbitration clause (if the other side will agree) or

b) try to ensure that one or more members of the tribunal comes from a common law background and will be sympathetic to the needs of litigants to have production and discovery as a means of getting at the truth.

Seating the arbitration in a jurisdiction where production and discovery is commonly available in litigation will also provide the party who desires such procedures with additional arguments in their favour. This is not(at least not usually) because the law of the seat of the arbitration will incorporate local litigation procedures into the arbitration. Indeed, if the arbitration is sited in any jurisdiction with a modern arbitration statute, local litigation procedures will not be directly relevant since the local statute is very likely to provide that the procedure should be as agreed by the parties or determined by the tribunal. However, since, the local court where the arbitration is seated is the one which will apply the standards of procedural fairness on any application to set aside the ultimate award, an arbitrator must have an eye to local standards in exercising his or her discretion on procedural matters.

Appeal

In international arbitrations to which the UNCITRAL Model Law applies, no appeal is possible from an arbitration award. However, an application may be made to the courts of the jurisdiction in which the arbitration was held to set the award aside, or to set aside a determination by the arbitrator that he or she has jurisdiction if that decision is made in a separate ruling. Also, the issue of the validity or enforceability of the award may arise on any application to enforce the award.

Generally, the grounds for setting aside an award are the same as the grounds for refusing to enforce an award and, in very general terms , may be summarized as follows:

1)Lack of jurisdiction

2)Serious procedural unfairness

3)The dispute was not arbitrable or the award was against public policy,in the place where the arbitration occurred.

The basis of all arbitral jurisdiction is the agreement of the parties, therefore anything which shows lack of agreement or deviation from the agreement (lack of capacity, agreement not binding, dispute not within scope of the agreement, procedure not as agreed by the parties) will vitiate an award. Even though an arbitrator may, in the first instance, decide whether or not he or she has jurisdiction, the court must eventually agree with any determination that jurisdiction exists. Otherwise, the court will set aside or refuse to enforce the award.

It is rare for awards to be set aside on grounds of procedural unfairness (lack of notice or inability to present one’s case) or public policy.

In domestic arbitration, similar grounds exist to seek to set aside or resist enforcement of an arbitration award. In addition, appeals from the tribunal’s determinations of fact and law are possible in most domestic arbitrations, unless they are excluded by agreement. In the absence of an exclusionary agreement, such appeals often, as in Ontario, require leave of the court. The party seeking leave usually has to satisfy the court as to the materiality of the alleged error and/or the importance to the parties of the matter in dispute.

Generally, it is incompatible with the objectives of arbitration (flexibility, expedition, confidentiality) to allow the parties to maintain any right of appeal. Therefore, it is usually advisable to contractually eliminate any right of appeal to or review of an award by the court.

A desire to take additional measures to ensure the quality of the final decision may be better addressed by providing for a panel of three arbitrators and/or to by specifying a mixture of qualifications which will be particularly suitable to the dispute. A panel of three may provide a greater assurance against a serious matter being decided on the basis of the personal reactions of a single individual. The panel may be required to consist of a mixture of people with legal and non-legal qualifications to ensure that complex technical evidence will be understood. Alternatively, a panel may consist of a retired trial judge nominated by each of the twosides with the two trial judges selecting a retired appeal judge to chair he panel. In some cases, with a very high dollar value, parties have been known to duplicate the entire appeal process within a private arbitration. Needless to say, a tribunal that consists of a panel of three arbitrators should only be used in cases which warrant that expense.

Confidentiality

As has already been noted, the choice of arbitration as a dispute resolution mechanism never eliminates completely the possibility of the court proceedings. Indeed, court proceedings may arise at various stages of any arbitration. Thus, court proceedings about the arbitration, or about the same or related disputes, are the greatest threat to the confidentiality of arbitration.

It must be remembered that the entire basis of arbitration is contractual. If it is important to the parties that the arbitration proceedings be confidential, it is advisable that they explicitly so provide, just as they would in any other agreement where confidentiality is required. Although, some arbitration rules and statues also provide that arbitration is intended to be a confidential dispute resolution mechanism, it is suggested that normal court protections that exist for other forms of contractually mandated confidentiality are most effectively triggered by an explicit contractual provision to that effect. The presence of such a clause, along with any references to confidentiality in the applicable rules or statutes, will help the court to use its powers to limit disclosure to what is necessary for the determination of the issues which are submitted to the court. Of course, some applications to the court for specific relief (such as the redaction or sealing of court materials) may be necessary.

The use of an institution to supervise an arbitration is also a very valuable aid in promoting confidentiality in fact (as opposed to confidentiality in theory) in arbitration. Use of an institution will not prevent abusive applications to the court. On the other hand, abusive applications can come at a high cost to the party who is engaging in such tactics. Institutional arbitration forces a party who wishes to engage in strategic non-cooperation with the tribunal to cross a more clearly demarcated boundary in order to do so.

An institution (or appointing authority) can privately and expeditiously handle most of the front end procedural issues which can arise with respect to the delicate but vital initial stages of an arbitration.

Elimination of the right of appeal provides another means of limiting public exposure of the dispute. However, the value of eliminating the right of appeal is lost to a degree, from a confidentiality perspective, if court proceedings become necessary to enforce he award.

It may seem from the above discussion that confidentiality should be removed from the list of significant reasons to arbitrate, as opposed to litigate, commercial disputes. This is a rational, but not an entirely fair conclusion. The vast majority of arbitrations do take place entirely in private. Even when application is made to the court to deal with specific aspects of the arbitration, it is not usual for the disclosure to be as broad, as public or as personal as would be the case with evidence given at trial in open court.

Interest and Costs

There is no single international standard with respect to payment of interest and costs. Once again, if there is a clear agreement of the parties on these issues, it will govern – subject to arguments based on public policy (with respect to interest) in certain Islamic states.

Most modern arbitration statutes and institutional rules provide that interest and costs are within the discretion of the arbitrator.

The right to interest may be viewed as either a substantive right, which is governed by the law applicable to the contract or to the relationship between the parties, or as an aspect of available relief, which is governed by the law or rules applicable to the arbitration. Interest may be viewed by one legal system as a damage claim requiring separate proof and by another as an automatic right when money is withheld. The right to costs on the other hand is almost always viewed as a procedural matter and is therefore governed by the law applicable to the arbitration, or the law of the seat of the arbitration, if no other applicable law has been specified.

In most cases, where the seat of arbitration has a modern arbitration statute, the matter of both interest and costs will simply be stated to be within the discretion of the arbitrator. However, as with pre-trial discovery, the exercise of this discretion by the arbitrator is likely to be heavily influenced by his or her own legal background and/or the litigation practice of the place where the arbitration is conducted.

As the practice with respect to the awarding of both interest and costs are subject to local variations (e.g. the loser does not normally pay the legal costs of the winner in U.S. litigation), it may be advisable for the parties to specify in the arbitration clause the manner in which interest and costs are to be dealt with by the tribunal if they do not wish to leave these matters to the discretion of the arbitrator.