Nowadays Assume an Arbitration will Proceed / Appointing Arbitrators

I read today an interesting decision from the Ontario Court of Appeal a couple of weeks ago in Haas v. Gunasekaram.  Mr. Haas invested $200,000 in an Italian restaurant in Toronto that failed.  He then sued his co-owners for fraudulent misrepresentation saying that he was, in essence, duped into making his investment.  All of the co-owners were parties to a shareholders’ agreement and the other owners brought a motion to have the lawsuit stayed since there was an arbitration clause and they said that the dispute should go to arbitration.  The motions judge denied the motion and this was appealed to the Court of Appeal.  The Court of Appeal allowed the appeal and ruled that the dispute should go to arbitration.

In paragraphs 9 through 16, Justice Lauwers reiterates what has become fairly straightforward law nowadays that if there is an arbitration clause, the starting point is almost always to send it to arbitration and let the arbitrator(s) decide his/her/their jurisdiction (ie. ability) to decide the dispute.  Mr. Haas argued that only disputes related to the terms of the contract could be the subject of arbitration and that he was suing on the representations made to him that resulted in the shareholders’ agreement being created in the first place – so his dispute wasn’t covered by the arbitration clause.  The Court of Appeal disagreed and noted that the arbitration clause was broadly worded and, more importantly, did not exclude the type of claims that Mr. Haas was making.  As such, the dispute should go to the arbitrator(s) to let him/her/them decide if the dispute was within the arbitration clause.  The result isn’t particularly surprising since this does not really make any new law.

What is interesting, though, is the length to which the Court of Appeal was willing to give preference to arbitrations.  The arbitration procedure had a typical clause that provided that if the parties agreed on an arbitrator, then there would be one arbitrator.  However, if they didn’t agree, then the wording provided that “each party” would appoint their own arbitrator and then either those two arbitrators would appoint a third arbitrator or else (if they couldn’t agree) the Superior Court would appoint the third arbitrator.  Mr. Haas said that this was flawed since there were 4 parties.  As noted by Justice Lauwers at paragraph 49:

[49]        I agree with Mr. Haas that the arbitration agreement was designed for a bilateral agreement, not for an agreement with multiple partners, as this case presents, but that is not fatal. Mr. Haas argues: “If the clause is effective, Haas would immediately be outnumbered by arbitrators appointed by Gunam and Feng, stacking the arbitral panel against him.” There is a simple answer: if the parties cannot agree on a single arbitrator, then each side to the dispute will appoint an arbitrator to select a third arbitrator. If these arbitrators do not appoint a third arbitrator, then under the agreement a Superior Court judge will appoint one. There is nothing inoperable about the arbitration agreement.

For this particular case, and for this particular moment in time, the decision is fine.  As it stood on October 13, 2016 (when the decision was released), we have Mr. Haas on one side and the other three shareholders / owners on the other side.  No problem.  But what happens if two, or all three, of the other shareholders / owners start to fight among themselves.  Now we no longer have only two “sides” but could have either three or four sides.

So how does one deal with such a situation.  Mr. Haas’ concern was that he could be “ganged up on” if there are 3 arbitrators for the others and only 1 for himself.  A few things should be considered (and businesses and their lawyers should think about this when drafting their arbitration clauses):

1. Subsection 10(4) of the Arbitration Act, 1991 provides that if there is 3 or more arbitrators then they must elect a chair from among themselves.  Why?  Because if there is no unanimous or majority decision on an issue, then the chair has the tie-breaking decision.  So some further thought should be given to determining how a chair is to be selected in case the arbitrators cannot agree among themselves.  While subsection 10(4) indicates who is to make the decision on a chair, it does not go further to indicate what is to happen if they cannot agree.  Presumably, though, an application could be made to the Superior Court for the determination (or appointment) of a chair for the arbitral tribunal.  But it is often preferable to establish a procedure for making this determination rather than leaving it to a judge of the Superior Court who will impose (or at least that is how the “losing party” will feel) a chair.  Specifically giving powers to the chair of the tribunal may alleviate a “ganging up” situation.  For example, you can provide that the binding decision will be that of the chair and at least one other arbitrator – which could minimize or negate a concern similar to that of Mr. Haas in this case.

2. Subsection 11(1) of the Arbitration Act, 1991 provides that every arbitrator must be impartial and independent of the parties.  This helps to alleviate Mr. Haas’ concern that he would be ganged up on because the arbitrators should be impartial.  That’s all nice and wonderful in theory but, sometimes in practice, it’s a bit of a pie in the sky view.  If an arbitrator is consistently appointed by a particular party or law firm, there can be an implicit assumption that that arbitrator should try to find in favour of the party that appointed him/her in order to ensure future work from that party or law firm.  A way to minimize this is to ensure that there be certain standards imposed for arbitrators.  For example, saying that any arbitrator appointed by any party must be a member of the Chartered Institute of Arbitrators.  Why?  Because they have a code of ethics that requires strict impartiality.  To give an example, I worked hard (and spent a good deal of money) to get my Fellow status with the Chartered Institute (known as being an FCIArb).  Yes, it would be nice to get hired as an arbitrator and be paid for that arbitration.  But it wouldn’t be worth the risk of losing my FCIArb status if a complaint was made and found to be valid that I was not completely impartial.  In addition, if there truly is an issue of bias, then that is one of the bases on which an arbitrator can be challenged or on which any arbitral award can be challenged or not enforced.

3. There can be an agreement up front about picking one or three arbitrators and setting out a specific list.  For example, I had a settlement years ago where the lawsuit was being settled right away and the lawsuit would not go to trial.  However, there were valuation issues that would continue for at least another year or two and, while about 80% of the lawsuit could be finalized right then and there, the other 20% would require additional time and there could be further disputes about how to deal with that remaining 20%.  The parties decided that they would settle the lawsuit and deal immediately with the 80%.  In the event that any disputes arose for the 20%, those disputes would be handled by arbitration.  But the settlement went further and actually provided that it would be only one arbitrator and provided a list of 5 or 6 arbitrators, in order of preference, to be appointed – but the same could have occurred for a panel of 3 arbitrators with a slightly longer list of potential candidates.  If none of those arbitrators were available or willing to hear the dispute, then the first fallback was for the parties to agree on someone else or, failing that, to get someone appointed by an institution from its roster (I believe it was the ICC).  Agreeing to arbitrators before-hand (even if setting a list), can avoid the concern of impartiality since everyone should have agreed before any dispute even arises and therefore cannot feel that the arbitrator(s) is/are chosen with a bias in favour of whomever has appointed them.

Something to think about.




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