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Are All Arbitration Provisions in an Employment Agreement Enforceable?

Whether a particular arbitration clause will be enforceable depends on the way in which the clause is drafted. Generally speaking, if (i) the clause is clear, (ii) arbitration is made mandatory, and (iii) the contract can otherwise be enforced, the arbitration clause will be enforceable.

 

Source

 

Arbitration Provisions

It’s best to start with a brief rundown of what arbitration provisions should include. A basic arbitration clause will be an agreement between the parties to use arbitration instead of the courts in the event of a dispute. The clause should be broad enough to cover all types of disputes and questions of interpretation of the contract. If the clause is not broadly worded, one of the parties could argue that the particular dispute was not within the scope of the arbitration clause.

 

The clause should either specify the following details, or incorporate a set of arbitration rules that provide for such details as:

  • how many arbitrators will be chosen to decide the matter;
  • how an arbitrator is to be chosen (both parties must agree upon someone, and if they are unable to reach a decision within a specified time frame, a mechanism must be in place for the choice of an arbitrator);
  • the rules of the arbitration process (there are many standard sets that can be referenced—for example, see the ADR Institute of Canada’s Arbitration Rules);
  • the seat or location where the arbitration will take place;
  • the language to be used during the arbitration process; and
  • the applicable governing law and jurisdiction.

 

Check out Clausehound.com for sample arbitration clause language!

 

Unenforceable Arbitration Clauses

There are two main reasons why courts have held arbitration clause to be unenforceable – bad drafting and matters of public policy.

Source: Jérome Dessômmes – ÉCRIVAINS CONSULT/Wikipedia

 

Bad drafting

If the arbitration clause creates too many ambiguities, or if arbitration is not clearly mandatory, the  bad drafting of provisions may cause the clause to be unenforceable.

There are a few main areas of concern that have been identified by the courts:

  • The arbitration process and procedure should either be written with great detail to avoid the possibility of either party claiming their obligations were unclear, or reference should be made to a recognised set of arbitration rules which themselves contain this detail.
  • To convey obligation and enforceability, mandatory language should be used in the provisions instead of optional language (for example, using “shall” or “must” instead of “may”).
  • Time periods need to be specified (in the contract or in a set of arbitration rules) for when notice of arbitration should be given, how much time is to be given at each step of the arbitration process, and by when the process should be completed and a decision given.

 

 

Public policy

Sometimes an arbitration clause can run afoul of public policy. This has been especially true in the United States, notably in situations where there is a great inequality of bargaining power between the parties to the contract.

 

One concern expressed by American commentators relates to the cost-effectiveness of arbitration. An examination of case law by Wigdor LLP in New York discussed how arbitration provisions can be invalidated if the costs involved are excessive in a way that “could preclude a litigant from effectively vindicating [his or her] federal statutory rights in the arbitral forum.”

 

Another point of growing concern relates to how arbitration can create, as National magazine puts it, “an alternate system of justice” that more often than not rules in the company’s favor and leaves litigants feeling like they have not rightfully received their day in court.

 

To see standard employment agreements and arbitration provisions, visit our Small Business Law Library!

 

This article was co-authored by Alina Butt.

 

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Elsegood v Cambridge Spring Service Ltd., 2011 ONCA

Discussion: The employee was found by the court to be terminated after 35 weeks of the layoff period had concluded. The employee successfully sued for six months notice of termination as a result of this “constructive dismissal”, with the date of termination deemed to be the first day of the lay-off period. Under s. 56(1) of the Employment Standards Act (ESA), an employer terminates an employee if the employer lays the employee off for 35 weeks in a period of 52 consecutive weeks. Termination under the ESA results in a termination under common law – the ESA and the common law co-exist. Furthermore, a term of an employment agreement that is inconsistent with the ESA is null and void for all purposes (Machtinger).

Therefore, even if the employment agreement contained an implied term allowing the employer to place the employee on indefinite layoff, it would be null and void since it fails to meet the ESA’s minimum standard.

The employee is therefore permitted to claim constructive dismissal at common law whenever a layoff exceeds 35 weeks in 52. Background:

  • Under s. 56(1) of the Employment Standards Act (ESA), an employer terminates an employee if the employer lays the employee off for 35 weeks in a period of 52 consecutive weeks.
  • The plaintiff employee had worked for the employer for seven years and was laid off twice in 2009, the total of which surpassed the allowable limit under the ESA.
  • The plaintiff bought an action for common law damages for wrongful dismissal. The action was allowed. The defendant employer appealed arguing that the ESA and common law are separate legal regimes and a dismissed employee should not benefit from both. The employer also argues that the termination was “deemed” by the ESA and not brought about by the employer, which should preclude any common law entitlement. Lastly, the employer asserts that the unemployment agreement contained an implied term that allowed the employee to be placed on an indefinite layoff.

Issue:

  • Whether the operation of s. 56(1) of the Employment Standards Act can support an employee’s claim for common law damages.

Rule:

  • The ESA does not specifically deem a termination, but rather it deems the date of the termination.
  • Termination under the ESA results in a termination under common law – the ESA and the common law co-exist.
  • A term of an employment agreement that is inconsistent with the ESA is null and void for all purposes (Machtinger).

Analysis:

  • Even if the employment agreement contained an implied term allowing the employer to place the employee on indefinite layoff, it would be null and void since it fails to meet the ESA’s minimum standard. The employee is therefore permitted to claim constructive dismissal at common law whenever a layoff exceeds 35 weeks in 52.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Arbitration: How to Prepare for War – Legal War That Is

Going to court or going to war? For most people, the two words refer to the same thing when it comes to legal disputes. To avoid ‘going to war’, dispute resolution methods such as arbitration are becoming the weapon of choice.

Why would anyone want to implement arbitration over the traditional litigation proceedings?

  • It is cost-efficient and much faster than resolution through the judicial system
  • It preserves the relationship between the parties
  • It can be more informal and less court-like

Arbitration is being used to solve a wide range of issues. In a recent case, 14 Senators took to arbitration to resolve a  dispute regarding expenses claimed in millions of dollars!

committee-room-1022791_640

To trigger this process, arbitration clauses are added to agreements between parties so that the disputants may opt out of the legal system. Sounds great right? With every new solution to an aged process comes a list of problems:

  • The desire to resolve a dispute through arbitration can vary significantly depending on the seriousness of the dispute and the types of remedies sought by the parties.
  • One-sided agreements may leave you with very few options for a fair outcome
  • Courts cannot always intervene, and you may find yourself stuck in an arbitration process that may not be appropriate for you

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Here are four key items to look out for when you determining whether to include an arbitration provision.

 

1. What is the scope of disputes that may fall under arbitration?

Certain arbitration clauses may only cover certain types of disputes (for example, non-payment), which may result in too narrow of a scope for arbitration.

However, if you are looking for a specific remedy (for example, injunctive relief), that may not be guaranteed through arbitration, you may prefer a narrow scope of arbitration, since a broad arbitration provision would then obligate you to proceed with arbitration first.

In  Pietrasz v Eminata Group, Mr. Pietrasz encountered a similar problem after he was terminated from his position. When Mr. Pietrasz initiated a wrongful dismissal claim, the court refused to resolve the complaint. Instead, he was directed to the arbitration proceeding as outlined in his employment contract.

2. What to consider when selecting an arbitrator?

Know how your arbitrator is selected! An arbitrator may already be decided for you, but if your contract gives you the option to select one (or more), there are certain characteristics that you need to be aware of:

  • Expertise – Consider whether the arbitrator has expert knowledge in the issue being disputed.

  • Impartiality – Research your prospects to ensure that the arbitrator is not affiliated with the opposing party or does not hold bias views on issues at dispute.

3. How to initiate the arbitration process?

An arbitration provision will generally state the seat of arbitration (for example, the International Chamber of Commerce (ICC)). The seat for arbitration will generally be helpful with:

  • Rules – The rules of a seat will outline the procedure that the seat follows for their arbitration proceedings.
  • Forms – The seat will also have their own procedural forms that must be completed to initiate arbitration and to provide a defense to an arbitration claim.

4. Is the decision final and binding?

Don’t underestimate the power to contract – decisions may be final and binding in a contract, so the court cannot intervene by way of appeal.

You may decide to allow an appeal process in your contract. While courts may play a role in ensuring that the arbitration process is fair and that the award (remedy) is enforced, courts have little power in changing the award offered in arbitration.

Conclusion

 Arbitration can be a very useful tool but make sure that you know the details before committing. It is important to know the ins and outs of your arbitration clause – starting with these four points – to keep yourself informed and prepared. Because, you wouldn’t go to war without your weapons!

Take-Aways

  • Arbitration is a go-to dispute resolution mechanism for its cost-effectiveness and efficiency
  • Arbitration should be contracted in the parties’ respective contract, and should include important provisions such as: scope of arbitration; choice of arbitrator; choice of seat; etc.
  • Arbitration may not be appropriate in all circumstances, so everyone should weigh its benefits against its drawbacks when including in a contract

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Legal Tips and Tricks: Deal Negotiations Using an LOI/MOU

Often, companies will try to secure a Letter of Intent or Memorandum of Understanding (“LOI/MOU”; the two expressions are used interchangeably) from a potential contracting counterparty, for the purpose of outlining the high-level terms of a contractual relationship and to help demonstrate the viability of a project. An LOI/MOU can be used for many purposes, including outlining broad terms of an asset purchase or acquisition agreement.

 

Such high-level outlining is helpful in many circumstances:

1. When securing financing:  it is useful to demonstrate to potential financiers your potential for orders.  Programs like Kickstarter are ideal for that purpose, as, not only are you able to demonstrate orders, paying customers are waiting to receive the finished product.  Use an LOI/MOU to build an order pipeline.

2.  When entering into merger/acquisition discussions:  to set the terms of the future agreement in advance before opening the financial and legal books and records of the company – so that, at a high level, the merger/acquisition value and terms are negotiated in advance.

After the LOI/MOU is settled and the formal agreement is being entered into, certain closing conditions are usually set out, including the statement that nothing has adversely affected the business in a material way since the time of the initial deal negotiation (this is referred to as a “MAC” or Material Adverse Clause).  This is important, to ensure that you are getting what you paid for.

 

3.  When developing the framework for any future agreement: an LOI/MOU can set “guiding principles”, to further the negotiations and discussion to ensure that the parties agree with the spirit of the proposed agreement.

 

Binding vs. Non-Binding Nature of the LOI/MOU

An LOI/MOU is often structured as an “agreement to agree” and not binding.  However, it is useful to include certain binding provisions.  Some consideration must be given to make the LOI/MOU binding, and perhaps this is the opportunity to explore a future business relationship, or something more tangible, such as $500 in cash.

Typically, the binding provisions to include in an LOI/MOU are:

  • Confidentiality: of the deal negotiations, and of information shared between the parties.
  • No-shop“: an agreement not to shop the proposed deal around to other suitors, which adversely affects the party that is disbursing, oftentimes, significant resources into legal and financial due diligence.
  • A “break-fee“: a dollar value penalty, often used to cover legal fees, in the event that a deal – usually an M&A deal – fails for any reason.
  • Termination date: this is useful to prevent the other party from taking the potential deal off the table from other buyers indefinitely.  A “time is of the essence clause” is good to include as well, for this reason.
  • Dispute Resolution provisions:  To plan for the worst, a good dispute resolution process sets out the forum (location) and rules for litigating/arbitrating the LOI/MOU.
  • Duty of good faith:  This places a general duty on the other party to ensure that they are not wasting your time and money through the exploratory process, which is useful to establish if you are forced to go to court to make a claim for expenditures wasted trying to close a potential transaction.
  • Costs:  It’s important to specify who is paying the legal bill up front, especially if you are concerned that the other party is going to try to charge you for it.  A limitation of liability clause is also good to include for this reason.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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New American Arbitration Association Rules Require Teleconference

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New American Arbitration Association rules require that parties must try to resolve issues first through a teleconference with an arbitrator. They will be permitted to file written motions only if they fail to reach an agreement on the issue during the teleconference.

The new rules apply to consumer arbitrations in the United States. The goal, especially of the manufacturing sector, is to expedite resolution of consumer complaints. Lawyers may find that the new rules are less liberal with respect to filing motions and requests for evidence than the rules applicable to the courtroom.

Read the article here.

Take away:

  • New consumer arbitration rules help manufacturers but may burden lawyers.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Multi-Tiered Dispute Resolution Clauses Enforceable If 4 Criteria Are Met

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Multi-tiered dispute resolution clauses may be enforceable if the procedure is certain (eg. specific mediator or center is specified); mandatory language is used (‘shall’ instead of ‘may’); a clear time limit is provided before arbitration is available; duties to act ‘in good faith’ to resolve the dispute are in the context of a clause which is certain in all other aspects noted above.

A 2014 English Commercial Court case upheld ‘friendly discussion’ obligation clauses in a contract because it had the certainty required for an enforceable contract clause. The clause was a ‘multi-tier’ or escalation clause, which provided for different ways of dispute resolution as disputes escalated. The case marked a departure from previous English decisions, but is consistent with other jurisdictions, including Australia.

Read the article here.

Take away:

  • To be enforceable, the four elements of a multi-tiered dispute resolution mechanism must be drafted in mandatory language (‘shall’, ‘must’).

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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‘Informal Negotiation’ Or ‘Friendly Discussion’ Clause May Constitute Condition Precedent to Arbitration

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If the requirement to attempt to resolve a dispute through ‘friendly discussion’ or informal negotiations is mandatory, time limited, contained in the dispute resolution clause, and arbitration is to follow this, some courts may enforce the requirement as a condition precedent to arbitration. The procedure must be certain and clear before it can be a condition precedent to arbitration.

This article discusses an English Commercial Court decision where the court ruled that an agreement to first seek to resolve a dispute by “friendly discussion” constituted an enforceable condition precedent to arbitration. Parties should be aware that the English courts may now enforce a time-limited requirement to seek to resolve a dispute by good faith negotiations, as a condition precedent to arbitration.

The court made it clear that the mandatory nature of the requirement to engage in friendly discussions results from the language of the agreement itself, and not from general policy considerations.

Read the article here.

Take away:

  • If the language of the arbitration clause states that friendly discussions “shall” or “must” take place within a defined time period before a party may give notice of intention to arbitrate, the friendly discussion clause may be enforced as a condition precedent to arbitration.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Lack of Time Limit Results in Filing of Arbitration Notice 5 Years After Dispute Arose

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A municipality was served with a notice of arbitration disputing the valuation of expropriated land 5 years after the expropriation, because there was no time limit on the ability to file a notice. Parties may wish to consider any time limitations applicable both during and after the termination of the contract.

The City of Woodstock Ontario expropriated land in 2002, was served with a notice of arbitration challenging the valuation of the land expropriated in 2007, and paid a settlement in the matter in 2014. Because of the delays, the interest charges on the increased value exceeded the original valuation. The applicable legislation had no time limit on filing a notice of arbitration.

Read the article here.

Take away:

  • Arbitration agreements should specify clear time limits on the service of a notice of arbitration.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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