CASUAL LEGAL: Dangers of Mandatory Arbitration Clauses

Dangers of Mandatory Arbitration Clauses

By Sean Ward

Reynolds Mirth Richards Farmer LLP

AMSC Casual Legal Service Provider

There has recently been a trend towards the use of alternative dispute resolution processes, including mediations and arbitrations, to help resolve legal disputes. Those options offer many advantages as compared to resolving disputes through litigation in the court, as they can be a more expedient and efficient process for resolving disputes in a more cost effective manner.

However, it is also important to be aware that there are potential risks that arise when a party agrees in a contract that any disputes must be resolved through arbitration. In particular, there is a risk of agreeing to a mandatory arbitration process with one party, when other related parties on a project are not tied to the same process.

For instance, in the course of a construction project, a municipality may enter into contracts with a number of parties, including design consultants, contractors and suppliers. When a problem or dispute arises on a project, there may be several different parties involved, and it may be difficult to determine with certainty which party is responsible for a particular problem. If the municipality has agreed in a contract with one of the parties that any disputes will be resolved through arbitration, that does not bind any of the other parties on the project. That has the potential to put the municipality in a difficult position.

In many cases where there is a defect or deficiency that arises during a construction process, there is a dispute as to whether it is caused by an error in the design or in the construction. If a contractor were to sue the municipality for extra costs it incurred because of an alleged design issue, the municipality could both defend that claim while also third partying the design consultant; essentially passing on any potential liability to the party potentially at fault. But in a scenario where one of those parties has a mandatory arbitration clause and the other does not, the municipality will not easily be able to pass on that liability to the party not involved in the arbitration.

Instead, the municipality could find itself going through an arbitration with one party, and if that party is awarded damages, the municipality would have to commence separate legal action to recover those damages from the party it believes is at fault. Because those are separate proceedings, the municipality would have to prove the other party’s responsibility, and the findings of the arbitrator are not necessarily binding. That gives rise to at least a risk of a court reaching a different conclusion from an arbitrator, where the municipality that has done nothing wrong is unable to recover amounts it has paid out through an arbitration. While that result seems unfair, courts in Canada have declined to order a stay of arbitrations for the purpose of allowing litigation that would involve all the relevant parties.

This concern can be avoided by ensuring each contract the municipality enters into on a project has equivalent arbitration requirements, with the ability to join other parties into any arbitration or dispute resolution process that involves those parties’ work or alleged breaches of their obligations. It is important to carefully review agreements on any project where multiple parties are involved to ensure there is no gap in the dispute resolution provisions that would lead to these risks.

To access AMSC’s Casual Legal Helpline, AUMA members can call toll-free to 1-800-661-7673 or email casuallegal [at] amsc.ca and reach the municipal legal experts at Reynolds Mirth Richards and Farmer LLP. For more information on the Casual Legal Service, please contact riskcontrol [at] auma.ca, or call 310-AUMA (2862) to speak to AUMA’s Risk Management staff. Any Regular or Associate member of the AUMA can access the Casual Legal Service.

DISCLAIMER: This article is meant to provide information only and is not intended to provide legal advice. You should seek the advice of legal counsel to address your specific set of circumstances. Although every effort has been made to provide current and accurate information, changes to the law may cause the information in this article to be outdated.