The Alternative to Litigating

Deciding whether to arbitrate or litigate is not always a simple determination 

Whether to insert an arbitration clause into an international or domestic commercial contract, or what the clause should contain, is often a lengthy and detailed conversation between business executives, in-house counsel and their external lawyers in Canada.

As Robert Deane, a Vancouver-based lawyer says, “arbitration is not a panacea and litigation is not always bad; what’s important is to assess whether given the nature of the parties and the nature of the venture a dispute is likely to be better resolved through commercial arbitration or through litigation.” To some extent, says Deane, a partner and National Leader of Borden Ladner Gervais LLP’s International Trade and Arbitration Group, “this is crystal ball gazing, where you have to pick the right tool for the job, amid the hope you’ll never have a dispute.”

Still, a number of recent developments in commercial arbitration are having an impact on these conversations.

One trend Deane has seen, increasingly so in Canada, is the advent of third-party funders becoming involved in arbitration claims. While currently more common in international arbitration, where the parties are located in different jurisdictions, Deane says funders have also shown an interest in financing domestic arbitration claims. “Third-party funders are extremely sophisticated; they invest in arbitration claims as a business and receive a portion of the return if the claim is successful,” he says. “For companies contemplating bringing an international arbitration claim, the possibility of having a third-party funder onboard is not only attractive, it may be the only, or the most efficient way, to bring a meritorious claim.”

The use of third-party funding in commercial arbitration, says Deane, is particularly prevalent in Europe and the United States, where most of the largest third-party funders are based. Yet, “it’s becoming less unusual in Canada and is an area to watch. Third-party funders we’ve spoken to, and have relationships with, are very interested in the Canadian market because it’s not been saturated in the arbitration space, so Canadian clients are a very attractive prospect.” In return, “Canadian clients have more options to seek funding for arbitration. Funders have indicated they are very interested in pursuing investments in arbitration claims that are purely domestic as well,” he adds.

Robert Wisner, a partner and Co-Chair International Arbitration at McMillan LLP, agrees that third-party funding is a growing trend in international commercial arbitration.

Wisner says third-party funding, “for the most part, has been utilized in the context of foreign investor/state arbitrations where disputes tend to feature very large claims, are very heavily contested, and the company that is a claimant has lost a key asset and therefore will usually be financially distressed.”

However, Wisner, based in Toronto, has increasingly seen third-party funding used in company-to-company arbitrations. “It would be a mistake to assume these users are necessarily insolvent or cash-constrained entities. I think businesses recognize that a large-scale dispute can be a substantial drain on their finances and they may want to spend the money elsewhere without giving up valuable legal rights.”

The caveat is that it does require a shift in mindset; as “in the Canadian marketplace, third-party funding has traditionally been associated with plaintiff’s side class-action lawyers who get third-party funding to pay for disbursements or to get a cost indemnity in class actions,” he says. “As a result, it is perceived as more of a threat to businesses rather than an opportunity to manage costs.”

Wisner points out that “there’s a number of features of commercial arbitrations that are very attractive for funders and not necessarily limited to the special class of very unique investor-state disputes. First, arbitration is usually faster than litigation in reaching a final result, especially in international cases where there is no right of appeal. This is important to funders looking at the length of time for a return on their investment. Second, commercial disputes often turn on the meaning of words in a contract and therefore can be more predictable than cases that turn on the credibility of a witness.”

The advent of third-party funding may give rise to issues concerning confidentiality and legal privilege. Deane says third-party funding in commercial arbitration “is sometimes controversial in some areas of the world; it may raise issues, for example, of how to preserve privilege and identifying who has control of the litigation. However, these issues are being worked through by parties, counsel and tribunals, and any such issues are not intractable.”

The issue of confidentiality in arbitrations “is a pretty hot topic and particularly important for clients, for example, companies that may have serial arbitrations on the same issue with a contractual counter party,” says Clarke Hunter, a senior litigation partner with Norton Rose Fulbright Canada LLP in Calgary.

“One of the reasons a company might choose arbitration in the first place is confidentiality, so that your fight is in private rather than in the glare of the public eye,” says Hunter. “Yet another principle is that you’d like to have the same fight only once; rather than paying lawyers and arbitrators to decide the same issue on multiple occasions.”

Hunter cites, as an example, a company with a pricing arrangement where the contract provides for a three-year term for a particular price formula and, after that time period, has to be revisited. “There can be some real tension between those two principles if somebody argues that a second arbitration panel can’t know what the first arbitration panel decided on this issue three years ago and of course the losing party doesn’t want them to know the result, but the winning party does.”

The bottom line for Canadian companies, he says, is this: “the law is a bit unsettled, and it remains to be seen how confidential arbitrations are to be treated as precedents in Canadian law. That is an issue of particular relevance in this circumstance of serial arbitrations between counterparties to a single contract.”

In fact, not fighting the fight over and over again is one of the reasons Canadian companies choose commercial arbitration in either domestic or international situations, as opposed to litigation. That’s why, when arbitration clauses are being drawn up, whether or not to preserve the right to appeal an arbitral decision through the courts is often a topic for extended discussion, according to Joel Richler, a senior partner with Blake, Cassels & Graydon LLP in Toronto in the Dispute Resolution Group.

Richler suggests to clients if they’re opting for arbitration “it’s because you want to have your dispute resolved efficiently and quickly; on the other hand, if you provide for appeal what you’re really doing is creating a court process which has arbitration as a first step.”

He says the discussion with clients about whether or not to provide for right of appeal in arbitration clauses “has become much more focused since the Supreme Court of Canada’s decision in Sattva Capital Corp. v. Creston Moly Corp (Sattva) last year, which determined the British Columbia Court of Appeal erred in granting leave to appeal the commercial arbitration award.

“Many existing arbitration clauses don’t exclude the right of appeal, and the Ontario arbitration statute, as most others in Canada, provides that a party can apply for leave to appeal from an arbitration award on a question of law. [But] there’s been a lot of case law trying to determine what actually is a question of law, as opposed to a mixed question of law and fact,” says Richler. “What Sattva does is really limit what a question of law is and does it so rigidly so that it effectively excludes rights of appeal. The Supreme Court of Canada said unless it’s pure law, and has nothing to do with the facts… then there’s no right of appeal under those statutes.”

The effect of the Sattva decision on Canadian companies will take some time to work through the system, given the length of many commercial contracts. “Contracts made prior to Sattva that say you can appeal an arbitration decision can still be appealed,” says Richler, “as Sattva only applies where the contract says nothing about appeal rights, or where a provincial arbitration act allows parties to apply for permission to appeal on a question of law. But the Sattva decision, of course, says what’s a question of law is very, very narrow.” 

According to Tina Cicchetti, a partner with Fasken Martineau DuMoulin LLP in Vancouver, “over the years, there has been an increase in applications for leave to appeal from awards, but Sattva has effectively closed the door on a number of those applications. Going forward, businesses need to keep this in mind when deciding between arbitration and litigation in their agreements.”

In another development, says Cicchetti, a member of Fasken Martineau’s Litigation and Dispute Resolution Group, lawyers are increasingly specializing in alternative dispute resolution (ADR). “We’re seeing this specialization not only among counsel, but also with individuals whose practices are primarily as arbitrators. Canadian businesses benefit from a wider pool of experienced potential arbitrators as a result. For international disputes, this collective experience means that Canadian counsel and arbitrators are among the best in the business.”

Further, says Cicchetti, “international arbitration has become a very specialized field and some of the approaches used there are finding their way into domestic arbitrations in Canada. These include simplified procedures tailored to the resolution of a particular dispute resulting in faster, more effective decision making, which is the intended goal of arbitration as an alternative to litigation.”

For example, she says, “we’re seeing arbitration procedures focused on detailed written submissions with the early provision of reliance documents and witness statements rather than the traditional litigation-style short-form pleading followed by extensive document and witness discovery. This avoids the slow-moving, lazy river pace of dispute resolution that often occurs in the courts.”

Cicchetti says for Canadian companies unfamiliar with international arbitration, this practice may seem unusual. “However, the early development of a claimant’s case allows the parties to focus on the actual issues in dispute and results in a much shorter hearing if the parties do not resolve their dispute amicably. This works particularly well for breach of contract claims, which happen to form the majority of commercial disputes.”