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.
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.
Unenforceable Arbitration Clauses
There are two (2) main reasons why courts have held arbitration clause to be unenforceable - bad drafting and matters of public policy:
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.
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, arbitration provisions, and sample arbitration clause language, visit our Small Business Law Library!