Businesspeople often believe arbitration is a quicker and cheaper way of resolving business disputes. It is therefore common to include clauses in commercial contracts that require disputes to be arbitrated rather than litigated. However, a recent decision of the Supreme Court of Canada underlines the fact that, in certain circumstances, arbitration could well be more protracted and expensive than litigation in the courts.
When a dispute arises, it is very common for one party (particularly a defendant) to refuse to proceed to arbitration, often by claiming that the nature of the dispute falls outside the scope of the arbitration clause. In Dell Computer Corp. v. Union des consommateurs ("Dell"), the Supreme Court of Canada considered such a situation.
When such dispute about the scope of an arbitration clause and the role of the arbitrator arises, the parties must first go to court to determine whether an arbitrator should be appointed. Unless the scope of the arbitration clause can be determined solely as a question of law (without looking at the underlying facts) and it is obvious that the arbitration clause does not apply, the court simply appoints the arbitrator and then lets him decide whether he has jurisdiction to decide the dispute. However, the arbitrator’s decision about his jurisdiction is then appealable back to the civil courts.
Furthermore, the arbitrator is not required to rule on jurisdiction at the beginning of the arbitration. As a result, the arbitration could well proceed right up to the end of the hearing (complete with testimony and legal submissions), at which point the arbitrator might rule that he did not have jurisdiction to decide the dispute. In that case, the parties would have to go back to the civil courts and start a lawsuit from scratch.
In short, the Dell decision shows that when there is dispute about the scope or applicability of the arbitration clause or the jurisdiction of the arbitrator, there could well be three separate hearings in two different forums. First, a court application will be necessary to remit the matter to arbitration. Second, the parties will have to ask the arbitrator to rule on his own jurisdiction, which process might well require detailed evidence to be called. Third, any decision made by the arbitrator concerning jurisdiction is appealable to the civil courts.
In contrast, if there was no arbitration clause, it would be clear that the civil courts had jurisdiction to determine the dispute and only one proceeding (albeit with full appeal rights) would be necessary.
The Dell decision clearly underlines the fact that arbitration clauses may not work as intended because the goodwill between the parties that existed at the time the arbitration clause was agreed to will likely have disappeared by the time a dispute arises. As such, parties who include an arbitration clause in their contract could well find themselves appearing before both an arbitrator and a judge, with the inevitable costs and delays that will result.
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