When Should Contracts Include an Arbitration Clause?

Contractual dispute resolution provisions define the process by which the parties to an agreement intend to resolve any disputes arising from that agreement. There are many methods of dispute resolution, but they fall broadly into one of two categories: binding and non-binding.

As far as binding dispute resolution is concerned, arbitration clauses have become increasingly common in commercial contracts. However, there is no one-size-fits-all as to whether a dispute resolution provision in an agreement should provide for arbitration rather than litigation.

This article aims to provide an understanding of the advantages and disadvantages of each approach to assist in deciding whether arbitration would be the right choice for each commercial relationship.

Privacy and confidentiality

Privacy and confidentiality are often cited as one of the main advantages that arbitration has over litigation.

Neither the 1985 UNCITRAL Model Law on International Commercial Arbitration (the “UNCITRAL Model Law”) nor the Arbitration Act, 1991 provide that arbitration is private. However, many institutional arbitration rules do have express privacy provisions. For example, the Arbitration Rules of the ADR Institute of Canada state that arbitration proceedings must take place in private, unless the parties agree otherwise.[1] The ICDR Canada Canadian Arbitration Rules similarly provide that “hearings are private unless the parties agree otherwise or the law provides to the contrary.”[2]

Similarly, while arbitration statutes are generally silent on questions relating to the confidentiality of the arbitration and the information and evidence disclosed therein, institutional rules do provide for confidentiality in arbitral proceedings. The Arbitration Rules of the ADR Institute of Canada provide that the parties and anyone attending the proceedings must keep the existence of an arbitration and the meetings, communications, documents, evidence, awards, and decisions of the Tribunal confidential. Exceptions can be made only for disclosure required by a Court, necessary in connection with a judicial challenge or to enforce, or required by law.[3] The ICDR Canada Canadian Arbitration Rules provide that neither ICDR nor the arbitrator can divulge confidential information disclosed by the parties or any witnesses, and that the tribunal may make orders concerning the confidentiality of the arbitration.[4]

Choice of arbitrator or mediator

Another potential advantage of alternative dispute resolution is the parties’ ability to choose their arbitrator[5] or mediator. By choosing the independent third-party that will assist them in resolving a dispute or render a decision on the dispute, the parties can have a say in appointing the person with the most adjudicative experience regarding the subject-matter at issue. This is particularly interesting where the subject-matter of the agreement or the parties’ businesses is highly technical, as the arbitrator or mediator may have knowledge and experience of the issues at the outset of the matter. Of course, this benefit should be weighed by the requirements for the parties to pay for the arbitrator or mediator’s time.

Choice of process, costs, and timelines

Another consideration in deciding whether to include a dispute resolution clause in an agreement is the ability of the parties to design their own processes and procedures.

As noted, the arbitration legislations provide parties with autonomy to contract out of most of their provisions. The parties can design and control the process and procedures, including the amount of pre-hearing disclosure, by relying on institutional rules in part or in whole. The process can be adapted to fit the parties, the dispute (its size, type, complexity, etc), the parties’ budget, and the time available to them. Similarly, the parties can choose to require mediation or negotiation as a condition precedent to arbitration proceedings, which may assist in resolving disputes at an early stage.

As a result of the parties’ ability to manage the process and procedures, arbitration is generally considered to be faster and less costly. However, this is not guaranteed. The main factor in arbitration’s lower cost is the reduction of pre-trial procedure and associated lawyers’ fees, which can compensate for the costs of an arbitrator, administrative institution (if any) and hearing rooms and court reporters. The speed of arbitration is dependent on the availability of the chosen arbitrator or panel. The parties’ choice of process, procedure and of arbitrator will therefore largely dictate the costs and timelines of arbitrations. The parties may also, through the process, need to resort to the courts for interim relief or other assistance, which may negate any time or costs savings advantages of arbitration.

Finality of award in arbitration

Finally, a potential advantage (or pitfall) of arbitration is its finality. Under the International Commercial Arbitration Act, 2017 (the “ICAA 2017”), the parties do not have a right to appeal an arbitral award. By contrast, under the Arbitration Act, 1991, if the parties agree, an appeal may be brought on a question of law, fact, or mixed fact and law.[6] Absent an agreement otherwise, an appeal may be brought on a question of law with leave of the Superior Court.[7] As a result, the parties have the ability to greatly limit any potential appeal following an arbitration, leading to greater finality than Court proceedings.

[1] ADR Institute of Canada, « ADRIC Arbitration Rules » (December 1, 2016), at art. 4.18.1, accessible online: https://adric.ca/rules-codes/arbrules/

[2] ICDR Canada, “Canadian Dispute Resolution Procedures (Including Mediation and Arbitration Rules)” (January 1, 2015), at art. 23.6, accessible online: https://www.icdr.org/icdrcanada

[3] ADR Institute of Canada, « ADRIC Arbitration Rules » (December 1, 2016), at art. 4.18.2.

[4] ICDR Canada, “Canadian Dispute Resolution Procedures (Including Mediation and Arbitration Rules)” (January 1, 2015), at art. 37.

[5] Commercial Arbitration Act (R.S.C., 1985, c. 17 (2nd Supp.)) at art.10(1), Arbitration Act, 1991, S.O. 1991, c. 17, at art. 10(1); UNCITRAL Model Law on international commercial arbitration, Schedule 2 to the International Commercial Arbitration Act, 2017, S.O. 2017, c. 2, Sched. 5 [UNCITRAL Model Law on international commercial arbitration] at art. 10(1).

[6] Arbitration Act, 1991, S.O. 1991, c. 17, at arts. 45(2) and 45(3).

[7] Arbitration Act, 1991, S.O. 1991, c. 17, at art. 45(1).