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Commercial Arbitration Design Considerations - International Law Office

International Law Office

Arbitration & ADR - Canada

Commercial Arbitration Design Considerations

December 22 2005

Potential Benefits of Arbitration
Preliminary Points
Preconditions to Arbitration
Scope of Disputes to be Arbitrated
Number of Arbitrators
Qualifications of Arbitrator(s)
Procedural Rules
Administered Versus Ad Hoc
Seat of Arbitration
Sample Arbitration Provisions

This update discusses the factors that Canadian companies should consider in designing an arbitration to fit a particular commercial context and to achieve the potential benefits of arbitration.

Potential Benefits of Arbitration

Why would a party consider using arbitration to resolve a commercial dispute? What are the potential benefits of arbitration?

As arbitration can be a much simplified version of litigation, it has the potential to resolve disputes relatively quickly. For the same reason, arbitration also has the potential to be more cost effective than litigation. However, depending on the economics of the dispute, it may be important to remember that in arbitration the parties must pay the arbitration fees directly, as well as the logistical costs of, for example, the required space or reporting agency, rather than having those costs paid by the taxpayers as in litigation.

Generally speaking, rights of appeal from arbitral awards are much more limited than from court decisions. This provides an element of increased finality, which may be desirable.

Because it is generally possible for parties to choose, or at least influence the choice of, an arbitrator, they may be able to ensure the arbitrator possesses the expertise that they consider necessary to resolve the dispute fairly. This expertise may be legal or industry specific. This tends to result in arbitral awards that are more predictable, or at least more acceptable.

Unlike litigation proceedings, which are generally open to the public, arbitration proceedings are generally private and confidential. This may be important to business parties - and may be of particular importance where sensitive financial information, business strategies or trade secrets are involved.

In considering the possibility of arbitration, the parties should consider these potential benefits and decide which are important to them. They should determine whether those benefits warrant an arbitration. If so, they should then consider how to design the arbitration to ensure that those potential benefits are realized.

Preliminary Points

Before addressing design issues, two preliminary points must be considered. First, an agreement to arbitrate a dispute, whether an arbitration clause in an existing contract or a stand-alone submission to arbitration, is itself a contract. It is a separate contract from whatever contract may have given rise to the dispute itself. As a contract, it involves all the usual potential contractual issues of interpretation, performance and breach.

Second, unless the parties agree otherwise, an arbitration will be governed by the law of the province or territory in which it is held. If the parties wish the arbitration to be governed by a different law, they must agree on it.

Preconditions to Arbitration

The parties should first consider whether to require the satisfaction of any conditions-precedent to their arbitration. They may wish to require such conditions. However, they should do so carefully, fully aware of the potential difficulties the conditions may cause.

For example, it is common for arbitration agreements to require tiered dispute resolution procedures, beginning with negotiation, continuing to mediation and culminating in arbitration, if necessary. The benefits of such an approach, principally resolving disputes as consensually and with as little outside intervention as possible, are obvious.

However, there are also drawbacks. The process can establish unintended conditions-precedent to the jurisdiction of an arbitrator (and if an arbitrator exceeds their jurisdiction the award may be set aside by the courts or rendered unenforceable). The process would require the parties to go through the procedures preceding arbitration in the structure before arbitrating. The language creating the tiered process might also refer to the parties acting in good faith or using their best efforts to resolve the dispute by negotiation or mediation.

Conditions-precedent can cause several problems. They can be superfluous. In general, if the parties want to settle, they will, no matter whether they are required by some agreement to negotiate or mediate in good faith. If the parties do not wish to settle, there is no real benefit to requiring them to go through the motions of negotiation or mediation before being entitled to arbitrate.

Such preconditions can give rise to delay and expense, and make the whole arbitration process uncertain. In general, a party claiming that preconditions had not been satisfied would object to the jurisdiction of the arbitrator. Although the arbitrator could make a preliminary ruling concerning their jurisdiction, this ruling could be appealed to the courts. In any event, in practice the issue might not be finally settled until the time came to enforce the arbitral award. Again, this issue would have to be resolved in court. There is considerable jurisprudence dealing with negotiations in good faith and using best efforts. Resolving this type of issue is likely to require considerable time and expense.

In addition, it is not uncommon for a party to an arbitration to require some form of interim relief including:

  • an injunction;

  • a preservation order; or

  • an order prohibiting the disclosure of confidential information or requiring the enforcement of IP rights.

However, if a dispute occurred over the jurisdiction of the arbitrator, the arbitrator would probably not be able to grant interim relief. The arbitrator's jurisdiction would have to be clarified (most likely in court) before they could entertain an application for interim relief - and by then the damage might have been done.

In addition, having to resolve any of these issues in court might well nullify one of the key potential advantages of arbitration: confidentiality.

As a result of these potential drawbacks, if the parties do consider conditions-precedent for arbitration, they should do so very carefully. If they do decide to establish such preconditions, they should draft them carefully in order to avoid these difficulties as far as possible.

Scope of Disputes to be Arbitrated

The next decision to be made is how to define the scope of the disputes to be submitted to arbitration. In the commercial context this issue often arises in terms of whether such disputes are to be limited to claims of breach of a particular contract or extended to all claims (eg, tort claims) arising from a business relationship.

When the parties define the scope of the issues to be arbitrated, they define the jurisdiction of the arbitrator. If they use narrow language, the arbitrator may not have jurisdiction to deal with important aspects of the parties' relationship. The parties may find themselves in the unenviable position of having to arbitrate and litigate different aspects of their situation at the same time. That would largely negate the potential economic advantages of arbitration.

If the parties define the scope of issues to be arbitrated in uncertain language, they invite preliminary objections to the jurisdiction of the arbitrator, which may again have to be resolved in court. That would give rise to delays, expense, uncertainty and breach of confidentiality.

To avoid these difficulties the parties should consider carefully in advance the kinds of dispute that might arise from their relationship and make conscious decisions about which disputes they wish to arbitrate. They should then reflect that decision in appropriate language. There is customary language, tested in court, for this purpose. Some common examples are:

  • any controversy or claim arising out of or in relation to this contract or the breach thereof;

  • all disputes arising out of or in connection with this agreement, or in respect of any legal relationship associated therewith or derived there from; and

  • any dispute, controversy or claim arising under, out of or relating to this contract and any subsequent amendments of this contract, including, without limitation, its formation, validity, binding effect, interpretation, performance, breach or termination, as well as non-contractual claims.

In general, it is preferable to use language that is comprehensive rather than restrictive. The risk and expense of having to arbitrate and litigate a dispute should be avoided. If there is a good reason to limit the scope of disputes to be arbitrated, that limitation should be stated in the clearest possible language.

Number of Arbitrators

Arbitrations are usually adjudicated by a single arbitrator or a panel of three. The applicable arbitration legislation will usually provide a default choice, most often a single arbitrator. Nevertheless, it is always preferable for the parties to state clearly the number of arbitrators they wish to use.

Different factors favour a single arbitrator and a panel of three. Arbitrators must be paid by the parties. Preferably they will be experienced, and therefore in demand. The more people involved in the arbitration, the more difficult it is to schedule hearings. All these factors increase the cost and time, and decrease the efficiency, of an arbitration by a panel of three, and favour the appointment of a single arbitrator.

However, there is some logic to the proposition that three heads are better than one. With a panel of three arbitrators the risk of a fundamentally ill-conceived award is reduced. Where there is a panel, generally each party will appoint one arbitrator each. The two parties or a designated arbitral institution will appoint the third arbitrator as chair. Therefore, each party will directly appoint one of the decision makers. That appointment can reflect the view of that party on the background and experience that are desirable in an arbitrator. A panel of three arbitrators also permits a blend of experience - for example, a chair with legal and arbitral experience alongside two arbitrators with relevant technical or business backgrounds.

Qualifications of Arbitrator(s)

One of the potential advantages of arbitration over litigation is that the parties have at least some input into the choice of the decision maker. To realize this potential advantage the parties should consider what, if anything, should be said in the arbitration agreement about the qualifications of the arbitrator(s).

Generally, arbitrators are required to be independent and impartial. Independence requires that arbitrators do not have a financial, professional or personal connection with any of the parties. Impartiality requires that they have an open mind about the parties and the issues. Such requirements are usually set out by the legislation of the province or territory governing the arbitration or the rules of the relevant arbitral institution. If not, the parties should ensure that they adequately address these issues.

Arbitrators should have legal and arbitral training. Arbitration is an adversarial legal process. Except in extraordinary circumstances, arbitrators are required to adjudicate arbitrations according to the applicable law. They must not adjudicate based on their perceptions of fairness or their own experience or expertise. Their awards must be based on the application of the law to the evidence presented to them. Therefore, arbitrating a dispute requires knowledge and experience in receiving evidence and dealing with objections and other legal procedural matters.

Again, if the parties do not agree on an arbitrator, the applicable arbitration legislation or the rules of the relevant arbitral institution will usually provide for the appointment of an arbitrator. The institutions involved in these processes normally recognize the importance of legal and arbitral experience. However, the parties should consider specifying such qualifications.

Parties often believe it is essential that arbitrators have specific commercial, technical or scientific background relevant to the subject matter of the arbitration - but this belief is fundamentally misconceived.

Again, arbitrators must normally decide arbitrations by applying the relevant law to the evidence introduced before them. No matter what expertise they have, they cannot decide the arbitration according to their own experience, knowledge or opinions. To do so would be to decide the arbitration based on evidence that was not before them; this would make the award liable to be set aside. Rather than choosing an arbitrator with relevant business, technical or scientific experience, the parties should prove these facts through the opinion evidence of qualified experts.

The parties should also bear in mind that many arbitration rules permit arbitrators to appoint independent experts to advise them, if necessary. This may be particularly useful in technology-related disputes.

Procedural Rules

The parties must choose a set of procedural rules to govern the arbitration - there are numerous sets of rules drafted by Canadian and international arbitral institutions. The parties are also free to modify any of these sets of rules by agreement or to draft their own rules from scratch. Usually, the best way to proceed is to adopt a tested set of procedural rules from an arbitral institution and to agree on any modifications required by the particular nature of the dispute.

It is in this area - designing the procedural rules for the arbitration - that many of the potential cost, time and efficiency benefits of arbitration can be realized. The parties should consider the following issues:

  • Do they require the equivalent of litigation pleadings and, if so, how minimal or elaborate should they be?

  • What should be the scope of any required disclosure of documents?

  • Should there be any form of pre-hearing examination for discovery?

  • What should be the timeframes for the procedural steps leading to the hearing?

  • Should the witness evidence at the hearing be given by written statement or affidavit and cross-examination, rather than by viva voce testimony?

  • Should the arbitrator be required to deliver the award within a specified time (eg, 60 days after the hearing)?

  • What limits should be placed on the parties' rights to seek judicial intervention in the arbitration and to appeal the award?

It is obvious from this list that arbitral procedure can differ significantly from civil litigation procedure. That is precisely the point. In arbitration the parties have the freedom to design a process that incorporates only what is essential to resolve their particular dispute fairly, and so to realize the potential benefits of arbitration as discussed above.

It should also be obvious that realizing many of those potential benefits will depend on the willingness of the parties (and the arbitrator) to make themselves available to deal intensively with resolving the dispute, and to focus on what is essential to achieve this.

The parties should consider choosing the Alternative Dispute Resolution Institute of Canada's (ADRIC) National Arbitration Rules. They have several advantages over other possible choices, as follows:

  • The ADRIC has been established for over 30 years (under various names) and appears to be on a sound financial footing;

  • The ADRIC rules were drafted, vetted and commented on by nationally representative groups. They should be acceptable to lawyers and clients across Canada;

  • The ADRIC rules automatically adapt themselves to the legislative framework of the province where the arbitration takes place, taking into account differences in provincial arbitration legislation; and

  • The ADRIC pool of arbitrators is large.

Administered Versus Ad Hoc

Another choice the parties must make is whether the arbitration is to be administered by an arbitral institution or ad hoc. Arbitral institutions offer administrative services for a fee. Usually their procedural rules assume their administrative services will be used. Those services usually include:

  • acting as a registry for the filing of pleadings;

  • assisting in the appointment of arbitrators if necessary;

  • preliminary consideration of challenges to the independence or impartiality of arbitrators;

  • arranging for the deposit of money to secure the payment of the arbitrator's fees; and

  • receiving and formally issuing the arbitrator's award.

Some arbitral institutions require that all communications between the parties and the arbitrator flow through them.

The parties will have to consider whether theses services are worth their cost - for a factually or legally complex dispute, or one involving large amounts of money, they may well be, but for simpler disputes, they may not. The economics of a dispute involving a relatively small amount of money may simply make the services unaffordable. However, the parties should also remember that if the arbitration is to be ad hoc, the arbitrator (whom they must pay) will have to do whatever administrative work is necessary themselves. The parties should also remember that, even if their arbitration is to be ad hoc, they must still specify a set of procedural rules - there are sets of arbitration rules suitable to ad hoc arbitrations. Another option is to amend the rules of an arbitral institution to dispense with references to the institution administering the arbitration.

If the arbitration is to administered, the arbitration agreement should identify the administering institution and clearly state that it will have that responsibility.


If preservation of the parties' confidentiality is an important potential benefit of the arbitration, the parties should carefully consider how to realize that benefit. The applicable arbitral legislation and rules may deal with confidentiality to some extent. The parties should consider whether their arbitration agreement should incorporate a confidentiality agreement to deal with the issue further.

Seat of Arbitration

In the commercial context choosing the place or 'seat' of arbitration is important, because, if it is necessary for the parties to seek recourse to the courts during the arbitration, then they will almost certainly have to do so in the courts of that place and the laws of that province or territory will govern the arbitration. Issues such as the circumstances under which the parties can go to court and the procedures for doing so will be governed by the law of that province or territory. Depending on where the parties' counsel are authorized to practice, they may have to retain local counsel to exercise those rights.

Sample Arbitration Provisions

It is possible to address all these design considerations in relatively few carefully chosen words. Here is an example of an arbitration clause:

"All disputes arising out of, or in connection with, this agreement, or in respect of any legal relationship associated with it or derived from it, shall be finally resolved by arbitration administered by the Alternative Dispute Resolution Institute of Canada Inc. pursuant to its National Arbitration Rules. The place of arbitration shall be Vancouver, British Columbia, Canada. The language of the arbitration shall be English [or French]."

This clause deals with all the design issues discussed above:

  • scope - broad language;

  • number of arbitrators - the ADRIC's National Arbitration Rules provide for the default of a single arbitrator;

  • qualifications - the rules require that arbitrators be independent and impartial. No further qualifications are required in this case;

  • procedural rules - the ADRIC National Arbitration Rules are specified;

  • administered versus ad hoc - the arbitration will be administered by the ADRIC;

  • confidentiality - the rules require confidentiality; and

  • seat of arbitration - Vancouver is specified.

Here are some real examples of more problematic arbitration clauses. The first, from a closely held manufacturing company's shareholders' agreement, is a classic example of a tiered dispute resolution process:

"9.01 Each of the individuals and principals confirm the high value they place on their friendship and their business relationship and the desire to deal with issues in their business relationship, as they arise, in a prompt and consensual manner, to the fullest extent possible. To that end, each of the principals hereby agree to advise the other of any concerns, issues or problems that he may have with the other at the earliest possible opportunity and to utilize the process set forth in this article to resolve such concerns, issues or problems. In any event, each of the families agrees not to commence any action before any court or other tribunal against the other family or either member of the family in connection with this agreement or the ownership or business of the company without following the dispute resolution process found in this article.

9.02 Upon being notified of a concern, issue or problem that one or more of the individuals may have regarding any other individual(s) in connection with the ownership and business of the company, the individuals involved agree to meet together with [sic] 10 days of such notification and to attempt to address the concern, issue or problem to the mutual satisfaction of the individuals.

9.03 If the discussions contemplated pursuant to Section 9.02 are not successful in resolving any concern, issue or problem raised by one or both of the principals, or at any time after the expiry of the 10-day notice pursuant to Section 9.02, one of the principals may give written notice (the dispute notice) to the other principals describing the subject matter of the issue(s) to be resolved. Upon receipt of a dispute notice, the principals shall engage the services of a mediator to assist them in resolving the issue(s) described in the dispute notice. The principals shall attempt to reach agreement on the mediator and the timing of mediation (which, in any event, shall occur within 60 days of a dispute notice); in the absence of agreement, the parties shall ask the British Columbia International Commercial Arbitration Centre (BCICAC) to appoint a mediator. At any mediation, the rules of the BCICAC shall apply. The principals agree to use their best efforts to seek resolution of any dispute in mediation.

9.04 If the mediation contemplated in Section 9.03 fails to occur within the timeframe set out in Section 9.03 or fails to resolve the matters in dispute between the principals, the principals agree to submit the dispute to arbitration on the following terms and conditions:

  • the mediator appointed pursuant to Section 9.03 shall select a single arbitrator from the roster of arbitrators of the BCICAC to act as arbitrator for the principals;

  • the arbitration shall take place within 60 days from the date of the failed mediation; and

  • the arbitration rules of the BCICAC shall apply to the arbitration."

Other real examples raising different problems are as follows:

"Disputes hereunder shall be referred to arbitration, to be carried out by arbitrators named by the International Chamber of Commerce in Geneva in accordance with the arbitration provisions set forth in the Civil Code of Venezuela and in the Civil Code of France, with due regard for the law of the place of arbitration."

"In case of discrepancies between the partners, it is agreed to request arbitration according to international laws of arbitration."

"In the event of any unresolved dispute, the matter will be referred to the International Chamber of Commerce."

"Arbitration - all disputes will be settled amicably."


The commercial litigation experience in Canada has been that arbitration can indeed be an effective alternative to litigation if proper care is taken to design and implement an arbitration process which is more than just compressed litigation.

For further information on this topic please contact Stephen Antle at Borden Ladner Gervais LLP by telephone (+1 604 687 5744) or by fax (+1 604 687 1415) or by email (santle@blgcanada.com).

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