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A Guide to Arbitration Clauses

04-Nov-15

By Kathleen Garbutt and Bryan Kwan

In the face of rising litigation costs and what can frequently turn into lengthy disputes, arbitration clauses are becoming increasingly common in construction contracts. Sometimes, arbitrating disputes results in earlier resolution of the issues, which can mean lower legal fees and other costs for all involved. Almost all standard form contracts contain some form of arbitration clause.

In Alberta, where a contract contains a mandatory arbitration clause, the parties are required to resolve any disputes arising from the contract through arbitration. The Arbitration Act provides the jurisdiction for an arbitrator to decide the issues between the parties. The rules and procedures governing the arbitration are typically found in the contract.

Canadian Construction Documents Committee (“CCDC”) 40, contains an arbitration clause and also outlines the rules and procedures. For example, parties are required to first refer disputes to a Consultant. Where the dispute remains unresolved, the parties are typically required to continue working, while the dispute is referred to a Project Mediator. If the Project Mediator is unable to resolve the dispute within 10 working days, the issue may then be referred to arbitration.

Many contracts incorporate the rules and procedures outlined in the CCDC 40. Where a contract is silent, rules and procedures are left to be negotiated by the parties or to be determined by the Arbitrator.

It is noteworthy that notwithstanding an agreement to arbitrate, an unpaid party may still exercise its rights under the Builders’ Lien Act. This means that an unpaid party may still register a builders’ lien, and must commence an action in the Court of Queen’s Bench to enforce its lien claim. However, if the contract between the parties contains an arbitration clause, the lien action may be stayed pending the outcome of the arbitration proceedings.

So what use is an arbitration clause where the Court may still be engaged in relation to a Builders’ Lien?
Generally, even where a builders’ lien has been registered, parties to a contract that contains an arbitration clause may still avoid lengthy court proceedings by relying on the arbitration clause. If an arbitration clause is triggered and a builders’ lien has been registered, the parties are typically required to continue with arbitration.

Section 7 of the Arbitration Act specifically provides that the Court shall stay a court action where there is a relevant arbitration agreement, subject only to very narrow exceptions. Exceptions to this general rule are also found in section 7 of the Arbitration Act and include, for example, where the application for a stay was brought with undue delay or where the arbitration agreement is invalid. The Court may also decline to stay a court action if the action involves additional claims or parties that are not subject to the applicable arbitration clause.

With the lien action stayed, the parties will proceed with the arbitration and the outcome of the arbitration proceedings should determine the builders’ lien claim.

Throughout an arbitration, parties must remain mindful of the strict timelines imposed by the Builders’ Lien Act since they are not extended by the arbitration process.

What if the parties are not satisfied with the arbitrator’s decision?
An arbitral award may be overturned or changed by asking the Court to review the decision. However, the circumstances where the Court will actually interfere with an arbitral decision are rare.

The case of Sattva Capital Corp. v. Creston Moly Corp., confirms that the Court will be slow to review an arbitral award and will typically only do so where there is a question of law. Generally, this does not include review of an arbitrator’s interpretation of the contract in dispute or any monetary award ordered, as these are considered factual findings.

What should you consider before agreeing to an arbitration clause?
It is important that all clauses of a construction contract are carefully reviewed and considered. Arbitration clauses are not simply standard contract wording; they are important clauses which have a significant impact on the parties’ rights.

Prior to entering a contract, parties should consider if they truly want to give up their right to access the courts in the event of a dispute. Although arbitration can result in a more efficient process, parties are also giving up many of the procedural rights of the litigation process. For example, the Court requires mandatory disclosure of relevant documents and records and where parties are uncooperative, court assistance may be sought. The right to document disclosure may be limited in an arbitration proceeding.

Once a contract containing an arbitration clause is entered into, parties should ensure they fully understand what they are agreeing to. Is the arbitration mandatory? Who will arbitrate? Are there any deadlines to be aware of? Where issues are complex, will arbitration ultimately take just as long as litigation?

Further, where there are potentially competing procedural processes, as where parties have agreed to arbitrate but may also properly register a builders’ lien, they must tread carefully. Where a builders’ lien has been registered, parties to an arbitration agreement must ensure that both processes are strictly followed to avoid prejudicing their claim and ultimately their ability to get paid.

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