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Commercial contracts without an arbitration clause - a very costly risk!

Published: 10 Dec 2014 Average Rating: unrated Print
 
This article appeared in Contracting Excellence magazine on 09 Dec 2014 view edition
 

Author: Lance Soskin, President of eQuibbly

So, you want to leave an arbitration clause out of your commercial contracts? Can you afford to waste hundreds of thousands of dollars, pounds or euros litigating disputes? If your company has money to burn, don't read this article. But if you're looking out for your company's interests, you will want to.

The benefits of even a well-drafted contract cannot be fully realized if the contract cannot be enforced without spending an inordinate amount of time and money. If a dispute arises and the value of what is at stake is below a certain level – whatever that level may be for your company – resolving it via litigation is impractical.

Protracted negotiation to try to settle the matter out of court will, at some point, also prove to be detrimental to your company. There are many other potential costs to consider besides out-of-pocket expenses.  For example, depending on the situation, you may be faced with:

  • Reduced working capital
  • Extraordinary provisions on your company's financial statements
  • Storage costs
  • Wasted personnel-hours spent negotiating
  • General uncertainty as to the outcome of the dispute

There is, however, an effective way to avoid this situation: an arbitration clause.

 What is an arbitration clause?

An arbitration clause is simply a short provision in a contract that requires the contracting parties to resolve any disputes through private arbitration, rather than litigating them in court. These clauses have become popular of late since, litigation is becoming ever more expensive and the process inconvenient and time-consuming. In many countries, litigation can often take between one and three years to conclude.

Binding arbitration is a means of resolving disputes outside the courts, where the parties to a dispute refer it to one or more persons (an "arbitrator") by whose decision they agree to be bound. The neutral third-party arbitrator reviews the evidence presented and issues a decision that is legally binding and enforceable in a court of law (an "award"). Arbitrators are not required to follow the stringent rules and procedures, nor the technical Rules of Evidence used in court. Arbitrators typically follow a set of rules established by the parties to the dispute, or those established by the arbitral institution specified in the contract's arbitration clause.

Benefits of arbitration

It is the aspect of an award being “enforceable in a court of law” that is important. The courts and legislators in many countries realize the commercial importance of being able to resolve disputes in private and in a less formal and less costly way than a public trial. They also realize the importance of being able to enforce the resulting award using the power of the courts – as one would have to do with any court judgment resulting from a trial – should the losing party fail to carry out the resolution imposed by the arbitrator. And, of course, the importance of being able to do this without necessitating a “re-litigation” of the matter post-arbitration, since that would defeat the purpose of opting for arbitration over litigation in the first place.

Although arbitration has become more involved of late, it is still usually less expensive, more convenient, and more expedient than going to court. Many arbitral institutions have simplified rules and streamlined procedures. In addition, an arbitrator has more flexibility to move the process forward and thwart any attempts by one party to use “tricks of the trade” to delay the process and drain the other party of their resources. Another significant benefit of arbitration is its international acceptance and the ability to enforce arbitration awards cross-border, often more easily than enforcing judgments of a foreign court.

Although enforcement of the arbitration award is not necessary in the vast majority of cases, it is legally binding and enforceable in court by virtue of the various similar arbitration Acts enacted in many countries and an international "Convention on the Recognition and Enforcement of Foreign Arbitral Awards" (aka The New York Convention) signed by 149 countries including the US, Canada, the UK, Australia, South Africa, India and China. The convention requires courts in the countries that are signatories to give effect to private agreements to arbitrate and to recognize and enforce arbitration awards made in any of the other contracting countries as if they were judgments of their own court.

Online arbitration

The benefits of arbitration are even more evident when an online arbitration service is used, similar to that provided by my company, eQuibbly.  This is especially true for supplier disputes below a particular monetary value where expediency is paramount. With eQuibbly, the entire process takes place online in a private and secure virtual room, where the parties explain their disagreement, upload and exchange evidence, answer the arbitrator's questions, and receive a legally binding and enforceable arbitration award.

What if there is no arbitration clause?

There is another important reason to include an arbitration clause in your contracts: arbitration is not otherwise compulsory. Without an arbitration clause, both parties to a dispute must consent to the arbitration. Where an arbitration clause exists, however, it is irrelevant whether one of the parties does not want to arbitrate the dispute and refuses to defend itself. The dispute can still be referred to arbitration and the arbitrator can still issue an enforceable award, much like a court would.

In a situation where no arbitration clause exists in an agreement, the contracting parties may still agree to arbitrate a dispute after the fact - although it is usually more difficult to agree on anything after a dispute has arisen. Even after litigation has commenced, a judge will usually consent to the parties' request to defer to arbitration as a means of resolving the dispute.

Arbitration clause example

To avoid the costs of litigation, be prepared and insert an arbitration clause similar to the one below into your commercial contracts – and be sure to name the arbitral institution that you would like to administer the arbitration. As always, seek independent competent legal counsel for any legal advice prior to making any changes to your contracts.

Any controversy or claim arising out of or relating to this contract, or the breach thereof, upon the request of either party, shall be settled by final and binding arbitration. In the event the total amount in dispute is below [$x000,000], it will be administered by [eg] eQuibbly online at www.eQuibbly.com under its arbitration rules, in lieu of litigation, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof for enforcement purposes. In the event the total amount in dispute is [$x000,000] or greater, it will be administered by [name of arbitral institution] under its arbitration rules, in lieu of litigation, and settled by [one, three] arbitrator(s) appointed in accordance with said rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof for enforcement purposes. The place of arbitration shall be [city, country], and proceedings shall be conducted in the [language] language unless otherwise agreed.

ABOUT THE AUTHOR

Lance Soskin is the president of eQuibbly, an arbitration service where arbitrations are conducted entirely online by arbitration attorneys with industry expertise. He completed Law & MBA degrees at Osgoode Hall Law School and Schulich School of Business, was called to the Bar, worked at Osler, Hoskin & Harcourt law firm, and subsequently was an investment banker for Scotia Capital in Toronto and then Merrill Lynch in New York.

 

 

 

 
 
 

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