Arbitration Clauses in Commercial Contracts

Anticipating disputes and providing a method to resolve them is one of the critical components of a well-drafted commercial contract.  Absent contractual provisions dealing with dispute resolution, disputes or claims that the parties cannot resolve between them usually end up in litigation.  In addition to the obvious problems with litigation, such as the length of time it takes and the cost, if not all of the parties and the subject matter of the contract are in the same legal jurisdiction, there can be differences concerning which court and which laws will be appropriate to decide the case.

Agreeing to refer commercial disputes is a common approach to mitigating the time and cost involved in court litigation.  The parties must agree because an arbitrator only has jurisdiction if the parties agree, otherwise only a court can hear the case.  Agreement can be reached after a contract is signed and a dispute has arisen but this is rare.  More often, the parties will agree in advance and include that agreement in their contract.  Most arbitration clauses deal with the following matters:

• agreement not to sue in court but, instead, refer unresolved disputes to an independent arbitrator
•  identify the place of the arbitration and the number of arbitrators (usually one or three)
• the right to seek interim relief from a court, eg. an injunction, pending the arbitrator's decision is preserved
•  the process to be followed (often specified as the rules of a particular arbitration association)
•  whether the arbitrator has jurisdiction to make awards outside the terms of the contract or to order payment of costs to the prevailing party
• how the initial costs of the arbitration, eg. arbitrator's fee, are to be paid

In the case where the parties are located in different jurisdictions, arbitration clauses are particularly helpful in avoiding disputes over which court is appropriate and which set of laws is to govern the case.  The parties can choose the legal system they wish to have govern their relationship and the arbitrator will respect that decision.  There are a number of institutions world-wide that provide independent and impartial arbitration services, including the BC International Commercial Arbitration Centre, the London Court of International Arbitration and the American Arbitration Association.  Each of those institutions have published rules of procedure for both domestic and international arbitrations that can adopted in whole or in part.

The comments in this article are intended as general information only and are not to be relied on as legal advice or an opinion applicable to your particular situation.   For further information, please contact Bruce Farrend at Farrend Law.