Sep 7, 2016
Arbitration is often promoted as a cheaper, faster alternative to traditional litigation, but that’s not always the case. Properly assessing an organization’s situation to determine whether arbitration is the most viable option is crucial to counsel making the most efficient use of their valuable time and resources.
Developed by Kevin O’Brien, a partner in Osler’s Litigation Practice Group, and Andrew MacDougall, a partner in Osler’s Corporate Practice Group, this installment in our Brief the Board series provides insight into assessing arbitration agreements as well as tips on navigating the arbitration process to ensure the best possible results. Counsel will also learn how to effectively communicate with business leaders to enable effective decision-making and will gain a deeper understanding of
- the difference between arbitration and litigation, including associated benefits and risks
- whether arbitration is right for the organization and its disputes
- how to understand and evaluate arbitration clauses
- how to brief a board on the most common arbitration scenarios
These resources will provide guidance on helping a board navigate the arbitration process and drive positive business outcomes:
REBECCA HALL-MCGUIRE: Good afternoon. Welcome to Osler's webinar series Brief The Board. I'm Rebecca Hall-McGuire. I'm an associate and Osler's litigation department in Toronto. This is the second in a series of webinars that Osler is presenting on how counsel can brief their board members and senior management across a variety of litigation topics. In today's webinar, we will be discussing briefing boards and senior management about arbitration.
I'm joined today by Andrew MacDougall and Kevin O'Brien. Andrew is a corporate partner at Osler with extensive experience in corporate governance. Andrew has also sat on multiple boards. Kevin is a litigation partner here at Osler. Kevin has extensive experience dealing with complex commercial arbitration and litigation. If you have any questions during the webinar, please email us or type them into the area provided on your screen, and we will respond to them as time permits.
Note that after the webinar, we will be sending out a copy of the slides along with a one page summary of the content discussed today. With that, I'm going to turn it over to Andrew and Kevin. Thanks very much.
KEVIN O'BRIEN: Good afternoon, everyone, and thanks very much for joining Andrew and I today. The purpose of this webinar is really, as Rebecca alluded to, to provide you with an overview of arbitration as a dispute resolution process, including its various forms, its key differences with the formal litigation process, and its associated risks and benefits.
And it's meant to do this in a way and at a level that will be helpful to you in meaningfully answering the types of questions that you may get from your board relating to arbitration both before it's contemplated as a process that may be selected for resolving a dispute and once you find yourself actually involved in an arbitration. For those that have been involved in arbitrations before, the level of this presentation may seem fairly high level. But hopefully it can act as a useful refresher and provide some other new valuable insight.
So it's probably useful to start with the basics of what arbitration is. Arbitration is a form of dispute resolution, like negotiation, mediation, or a lawsuit brought in the formal court stream. It's similar to litigation in that it's an adversarial process designed for there to be a winner and a loser at the end of the day. But it's also a form of dispute resolution that is entirely voluntary, and for the most part, one that is private. An arbitrator, unlike a judge, doesn't have any inherent authority over the parties. They only have the authority that the parties choose to give to them. And the parties also have the ability to specify which types of disputes between them will be resolved by arbitration and carve out other disputes that can be dealt with through the formal court stream.
Now, given that arbitration is a private, voluntary process, the party's decision to submit a dispute to arbitration is formalized by way of agreement. Now, often if the parties are in an ongoing commercial relationship, the agreement that governs that relationship will also contain a clause that calls for the submission of certain disputes or all disputes to arbitration. In other cases where a dispute has arisen and there is no arbitration clause in the agreement or no formal agreement between the parties, the parties may still choose to enter into arbitration by way of a standalone agreement.
ANDREW MACDOUGALL: So we're going to talk a little bit about reporting to the board on arbitration. And the first thing to bear in mind, I think, is the words of Diogenes, that time is the most valuable thing that one can spend. The board meets periodically. It will have a full agenda. So it is important to consider the reason for disclosing the arbitration matter to the board and the outcome to be achieved from doing so. As the board's principle focus is on oversight of strategy and its implementation, the focus of the discussion should be forward looking. So consider whether you need input. And perhaps members of the board can provide insight or direction on the desired approach to be taken with respect to the arbitration.
Perhaps there is a material risk to the business or strategy. And the dispute itself might be material or possibly the dispute is indicative or a forerunner of similar disputes in the future that could collectively materially affect a business. Consider whether there might be disclosure implications. For example, public companies must report material facts and material changes. Essentially, information that would be reasonably considered material to an investor in deciding whether to buy, hold, or sell company's shares.
Having in mind the objective, that should help you focus on tailoring the discussion. For example, if the goal is to get input on the approach to be taken to resolve the dispute, the underlying causes or facts may be less important. And if the goal is to address a recurring risk of similar disputes, the underlying causes or effects may be key.
You should be considering the different actions that could be taken, the alternatives, their respective pros and cons, and the recommended approach should be outlined to the board. The board may raise other considerations or alternatives or choose not to follow the recommended approach. But there should be a starting point for the discussion. And the focus should always be on furthering the long term interests of the corporation.
KEVIN O'BRIEN: Now, given that arbitration is a voluntary process, a key decision is when or why would you choose to submit a dispute to arbitration over litigation and what are the key considerations involved in that decision? And to that end, a helpful starting point is to understand some of the major differences between arbitration and litigation.
Perhaps the most important difference for many parties is that litigation is public. Statements of claims, defenses, evidence in a hearing are all filed in the court registry and can be accessed by any member of the public who comes up to the desks and is willing to pay for copies. In court you also have absolutely no control over who your decision maker is.
ANDREW MACDOUGALL: But I'll just pause there. There's an interesting-- the confidentiality point is one that is very key when you're trying to decide up front on a choice of arbitration. And just as an illustrative example, in 2002 in the divorce proceedings of the former CEO of General Electric, Jack Welch, it was revealed that he was entitled to receive perks for life from General Electric, including the use of an apartment, a company jet, et cetera.
That disclosure in the court prompted an investigation by the Securities and Exchange Commission in the US into whether there had been proper disclosure of the value of the perks in General Electric's proxy circular. And the SEC subsequently brought charges against the company. Those charges got settled in 2004, but then in the SEC in 2006 revised its compensation disclosure rules. So the fact that things get disclosed in a public court can be a big disincentive to going into court, particularly where you have sensitive materials to be discussed or resolved.
KEVIN O'BRIEN: Absolutely. And oftentimes that will be the crucial determining factor between parties as to whether they want to choose arbitration over litigation. Another difference is that in a court proceeding the rules of procedure and evidence are formalized, and they can't be modified or tailored or opted out of by the parties. And finally, in court proceedings, you generally have at least one appeal route from a decision with the opportunity for more appeals, further appeals, if you're able to obtain leave to an appellate court.
On the other hand, when you're speaking of arbitration, as Andrew alluded to, privacy and confidentiality over the dispute can be maintained with some exceptions that we will discuss. Crucially, you get to handpick your decision maker. The rules of procedure and evidence can be tailored and written by the parties, including for things like deadlines for the exchange of materials or deadlines for a hearing date and then the rules of evidence. And you can also tailor or even eliminate altogether appeal rights.
ANDREW MACDOUGALL: But some of those rules and procedures, although you can tailor them, it means that if you're not careful about how you frame your arbitration, you can find that things that wouldn't normally come before a court or would be excluded under the rules of court will get brought into the arbitration and can lead to rather surprising outcomes. So you do need to give some careful consideration to that.
One of the other things that we think about with arbitration is that it's often better suited where there's an ongoing commercial relationship that needs to be maintained. Because of the confidentiality concern, because the court process can be more adversarial than the arbitration process, and so the need to preserve an existing relationship that will continue for a period of time can tend to lead to arbitration as being a preferred alternative.
And then one other point that tends to influence this, although we're going to be focusing mostly about the choice of arbitration with disputes in Canada, but in other jurisdictions where the court systems are less developed or the commercial courts have less experience or you have less confidence in the fairness of the regime of the foreign courts or where there are cultural differences that make the adversarial relationship awkward to deal with, that might tend to push you towards arbitration.
KEVIN O'BRIEN: Right. And that leads nicely into talking about some of the benefits and drawbacks associated with arbitration, which are obviously crucial to understanding and determining whether it's an appropriate process for a resolution within your ongoing commercial relationships or in the context of a specific dispute.
So some of the big pros of arbitration, as we've alluded to, confidentiality. And oftentimes parties, they'll want to keep not only the evidence in a dispute but also the very existence of a dispute private. And arbitration can't afford that privacy. There's no public repository of the information and the parties will agree almost in all occasions, and there'd be no reason not to, to agree not to disclose or discuss the dispute outside of that private process. And also given that the decision will be private, it doesn't have the authority of precedent for future disputes that one of the parties may find themselves in with customers or counterparties. A type of dispute that may occur on multiple occasions will not be informed by a binding court precedent that's publicly available.
It also affords control over the process and decision maker. And oftentimes a dispute may be very technical in nature or require background or expertise in a certain industry. You certainly can't guarantee that a judge will have that expertise. But the parties can identify and agree on an arbitrator who does. And that can also lead to significant savings and efficiencies in terms of time spent having to educate a judge. It can also be useful to have a decision maker familiar with norms and customs within a given industry.
ANDREW MACDOUGALL: Or it could avoid having to bring in outside experts. For example, if you were dealing with an accounting issue, having an arbitrator that has an accounting background or a valuation issue, having a valuator that already has that background can simplify and expedite the process.
KEVIN O'BRIEN: It also gives you the ability to customize and tailor your rules of evidence and procedure. For example, providing for tighter deadlines to exchange material, quicker ways of submitting your evidence. For example, many arbitrations now will have parties submit their evidence in chief of their own witnesses in writing rather than having them give their evidence in chief live, which can obviously save a fair bit of time, especially for long, complex arbitration with many witnesses. And appeal rights can be limited for purposes of finality. So once you've got your decision, you know it's over and done with and you're not going beyond that stage.
And that ability to control things can often lead to cost savings and a quicker resolution than what might be available in the court system. You're not going to be subject to the same delays caused by a backlog in a busy court in a city. And you almost certainly won't have to wait weeks or months, as you may have to do in Toronto and across the province, to get before a judge to resolve a preliminary procedural issue. Arbitrators, one of their key advantages and their selling features is their availability on a very tight turnaround.
There is one important caveat to that last point on cost and efficiency, however. Arbitration can be faster and cheaper, but in many cases that will depend on the will of the parties. Poorly drafted arbitration clause that leave ambiguous the precise types of disputes that the parties are agreeing to arbitrate can lead to unfortunate and time-consuming disputes at the outset over whether a dispute is even properly subject to arbitration. And also without the hammer of a court order and the threat of contempt that comes along with that for failing to, for example, comply with court deadlines, a party may be tempted to drag its heels more than it would in a court proceeding.
And there are also ways where confidentiality can be lost. First if the arbitration agreement does provide for a right of appeal to a court and a party takes up that right of appeal, then the appeal, obviously, becomes public. And so the existence of the dispute and the issues raised in that dispute will also become public. And once an appeal is filed, the evidence contained in any appeal record will be filed and on the public record.
ANDREW MACDOUGALL: So let's talk a little bit about how to communicate with your board about an arbitration. The key starting point is to outline the nature of the dispute, summarize the reasons for the dispute, be clear whether it's an isolated incident or whether similar disputes are likely to arise in the future, and talk about why arbitration was chosen. It may have been chosen up front and set out in the agreement. You may need to remind the board of some of the key differences between arbitration and litigation that influenced the choice to arbitrate the dispute and some of the differences in processes and outcomes, because those won't necessarily be a natural thing for the board to remember at the time you are speaking to them.
The board will be very interested in the choice of arbitrator, including whether the arbitrator has specialized expertise, sense of the arbitrators approach, or a predisposition towards similar issues and indeed any background information that can be provided. You should speak to the impact of the dispute, including the impact on any ongoing relationship, particularly if the opposing side is a party to an ongoing commercial relationship with the organization. The board will want to understand how the arbitration process will affect that relationship and how any anticipated outcomes might affect that relationship.
Reputational concerns are always a key issue at the board level. And you should outline the confidentiality of reputational concerns that not only impact the decision on whether to arbitrate but also that might impact the range of potential outcomes to be considered. Consider as well whether there are any relationships with third parties that might be impacted by the results of the arbitration, because the decision could impact the way business is conducted by the organization going forward.
From a disclosure perspective, you should outline the expected range of financial impacts from the different potential outcomes and consider whether the nature of the dispute and the potential impact the dispute may have might need to be disclosed in the financial statements of the organization or elsewhere, and give some thought to and describe the nature of what might need to be disclosed. And finally, you should outline any risks to the organization that might arise due to an inadvertent or other loss of confidentiality from the proceedings.
KEVIN O'BRIEN: So having outlined some of the key differences between arbitration and litigation and some of the reasons why you may want to choose arbitration, we'll now turn to how you end up in arbitration in the first place. And that's by way of an arbitration agreement, as we stated earlier, most often contained as a clause within a broader agreement governing two parties' ongoing business relationship.
And we can't stress enough how important at the outset drafting the arbitration clause properly is, because it can save a lot of time and headaches. And it's very important to not simply be a brief boilerplate type language about the parties agree to submit any dispute that may arise to arbitration, because that just will give rise and can give rise to a whole host of problems down the road.
So what are some of the things that an arbitration clause should consider? For one, the process for appointing the decision maker. It should specifically provide for the scope of confidentiality and the nature of the confidentiality obligations between the parties. To that end, parties may agree that there will be no right of appeal to any court and that the arbitrator's decision will be final. And while that may not always be desirable for reasons we'll discuss, it does foster finality of the dispute and helps with the goal of preserving confidentiality.
The clause may also specify that the parties agree through a business as usual type clause not to let their ongoing relationship be affected while the dispute is being arbitrated and specifying that all other obligations under the agreement shall continue to be complied with even though there is a dispute that's being arbitrated. And very importantly, it should specify the precise kinds of disputes that parties are agreeing to submit to arbitration. It can be broad.
For example, it can call for all disputes that may arise under the agreement, including the interpretation of the agreement to go to arbitration. Or it can be hyper specific and carve out only very specific types of disputes for being arbitrated. And the powers of the arbitrator can also be tailored and limited. But what it should do is reflect a clear intention of the parties as to the types of disputes that may arise and those specific types of disputes that they'll want determined by way of arbitration.
And by way of example on that issue of scope, here on the slide are two examples of actual arbitration clauses that were litigated that led to significant preliminary skirmishes that had nothing to do with the merits of the dispute and that took up a lot of time and expense. One example is from the T1T2 Limited Partnership and Canada case. And that was a dispute involving the cancellation by the government of contracts for the privatization of terminals one and two at Pearson.
And the arbitration clause in those agreements provided that, and there were three related agreements, said that any dispute or difference between the parties here to arising under this lease except a dispute or difference involving a question of law may be referred to an arbitration tribunal. Now, the parties agreed in that dispute that the issue between them raised questions of mixed fact and law but disagreed as to whether the language in that arbitration clause excluded disputes of mixed fact and law from disputes that would be arbitrated or whether it only excluded disputes over pure questions of law from disputes that would be arbitrated.
And that's important, because many if not most commercial disputes involve interpretation of the provisions of a contract or allegations of breach of contract, which are generally considered to be questions of mixed fact and law. So if claims for breach of contract are calling for the interpretation of a contract were excluded from arbitration, then the most common type of dispute that could arise between the parties would not be subject to arbitration.
Now, the court in that case found that questions of mixed fact and law were, in fact, excluded from being subject to arbitration based on the precise language in that clause and therefore that the dispute did not have to be determined by way of arbitration. The court commented that if the parties wanted to exclude only pure questions of law, they should have drafted that clause to specifically say that. So in that case, the party who thought they had agreed that these types of disputes would be dealt with privately by way of arbitration found that their clause did not provide that protection and that the other party could force them to bring their claim in court.
The second example comes from the Supreme Court's decision in Deuterium and Burns. And it involves what's called a Scott and Avery clause. And a Scott and Avery clause is a clause that makes it a precondition of a court action that you first have an arbitration award. The clause in this dispute read that the award of an arbitrator shall be the condition precedent for either party to bring an action suit or proceeding in a court of law.
And quite famously, the Supreme Court held in that case that when you have a Scott and Avery clause in an agreement, the parties must submit that matter to arbitration first before a court case can even be started. And in fact, in that context, the party cannot bring an action at law, because no cause of action actually arises until the arbitration award is made. Now, that can become a practical dilemma when a party needs to obtain urgent relief by way of injunction. A court can grant an injunction, but an arbitrator can't do that unless the parties specifically agree to delegate to him or that authority. So again, having an arbitration clause that's not carefully considered and is either too narrow or too broad can lead to unforeseen circumstances that can prevent you from even getting started on the resolution of the actual issue between the parties.
The parties also should include specifics about the nature of their confidentiality obligations under the agreement. It's not enough just to rely on the fact that arbitration is supposed to be confidential. Oftentimes parties, for as Andrew alluded to, for reputational or competitive reasons will want to keep the very existence of a dispute private.
So when discussing the importance of a confidentiality agreement within an arbitration clause, you're going to want to be specific and weave in concerns about reputation, competitors, and other third parties. And that will help remove any ambiguity about the nature and the importance of those confidentiality obligations. It should also specify that the deemed undertaking rule, the rule that prohibits the use of material exchange in a dispute for any other purpose than use within that dispute, specifically state that rule applies.
Now, when you're drafting the clause relating to the selection of the arbitrator, there are several things you'll want to address. First, you're going to want to determine whether you will use a single arbitrator or a panel of three arbitrators. You'll obviously need to determine how they're selected. In some instances, it'll be the parties exchanging lists of names until they hit on a match and that match is the person that's selected to arbitrate.
For a panel, the party could each pick one panel member and then try to agree on a third, failing which the two panel members will agree on the chair. If you can't agree, you can go to court to have a court appoint your arbitrator, but the loss of control in that scenario over who's going to be making your decision is often a very strong incentive for the parties to come to an agreement themselves.
You may also want to specify the expertise that your arbitrator will be required to have. It's very common for arbitration clauses to say that the arbitrator has to be, for example, a former appellate court or Supreme Court judge or that they have to have an engineering degree or background or that they have to have involvement or expertise in a particular industry.
And you may also wish to specify that the arbitrator is going to hear all procedural steps or motions within the proceeding. Because this, again, can be one of the key advantages that institutional knowledge that the arbitrator will have over the dispute that makes arbitration more efficient and quicker, because that will not be the case in a court proceeding. You could have an ongoing dispute in a court proceeding that has three or four preliminary motions and end up with three or four different judges hearing those motions and then also hearing the trial. And even in a case where you have a specific designated case management judge, they may hear the procedural steps leading up to a trial but will not be your ultimate trial judge.
Another key decision that should be specified is the procedure that's going to apply to the arbitration. Your clause should specify the rules of procedure that are going to be followed. Now, for disputes involving, say, two Canadian parties from the same country or two Ontario counterparties, oftentimes the parties will default to the rules of the seat or location of the arbitration subject to a specific modification. In international arbitrations, there's also helpfully several recognized and established international arbitration organizations that have their own procedural rules that are publicly available which the parties can choose to adopt.
But before selecting them, obviously you're going to want to understand how those rules might differ from those of your home jurisdiction and that you're familiar with. You'd not want to assume, for example, that you have the same broad evidentiary rights that your local rules provide for. And that can be a significant consideration in deciding what rules you'll select based on the case you think you have to make out to prove your case in that dispute.
ANDREW MACDOUGALL: And we don't specify it here, but specifying the language of the arbitration is an important factor, because it is not always going to be in the language that you expect.
KEVIN O'BRIEN: That's an important consideration. You also want to pay particular attention to the appeal rights that you're going to allow for. For a domestic arbitration, again, one generally involving two Canadian parties held in Canada, the default under the applicable legislation in the province is that you can appeal only on a question of law alone. For international arbitrations to which the Canadian International Act applies, which we'll talk about, the Provincial International Acts apply, the default is that there's no right of appeal.
However, parties can choose to expand or eliminate any appeal rights altogether. There's obviously pros and cons associated with this. An obvious pro is the finality and confidentiality and expediency in having no appeal. The drawback is that arbitrators, like judges, are certainly not infallible. And it may give a sense of great unease to the parties not having a single appellate check on a decision where a party could potentially get stuck with an unfair result and having no one to take a look at it. And you can never eliminate court oversight from the process altogether.
For example, if a party objects that basic principles of fairness and natural justice were not adhered to in the arbitration process, the courts reserve the right to oversee an arbitration on that basis. You can have, as we talked about earlier, a dispute at the outset that a dispute is even subject to arbitration under the parties agreement, in which case a party could go ahead and rush and start a court action and you may need to seek a stay of that court action on the basis that the parties have agreed to submit the dispute to arbitration.
You may also have court oversight of parties aren't complying with evidentiary obligations in an arbitration because, again, it's the court that has the authority to-- that hammer of contempt to force parties to comply with a court order. And in the rare instances where an arbitrator may need to be removed, that's obviously something you have to go to the court for, because the arbitrator is not going to make that decision him or herself.
So to this point, we've talked about arbitration is one homogeneous concept. But another benefit of it, and a key benefit, is not only that it can be tailored with respect to the decision maker and procedure, but also to the very form it takes. It can be ad hoc or institutional in nature. It may be domestic or international, and there's consequences to those designations or impacts to those designations. It can also take very different forms tailored to meet the specific type of dispute that's arisen between the parties.
So one key difference in form is whether the arbitration will be ad hoc or institutional. Practically speaking, this often comes down to whether a dispute is domestic, in which case it's very likely to be ad hoc, or international. In an international dispute, understandably, neither party is going to be willing to subject itself to the procedures or norms of the jurisdiction of the opposing party. If there's a dispute over a distribution agreement between a Canadian and a German company, for example, neither parties, the German company won't want the arbitration determined under Canadian rules and vice versa.
Fortunately, as we talked about, there's a number of international arbitral bodies with their own established, publicly available procedures that the parties can submit to. Some of the most known and used of these are the International Chamber of Commerce's Court of Arbitration or the ICC arbitration. UNCITRAL arbitration, the United Nations Commission on International Trade Law, which is actually the basis for the International Arbitration Acts in each of the Canadian provinces, common law provinces. Or the London Court of International Arbitration.
Those are frequently used freestanding international arbitration bodies. Basically, the difference between ad hoc and institutional is the parties get to tailor the process themselves in the ad hoc process, but in an international one, you're submitting to the jurisdiction of an established arbitral body.
With respect to institutional arbitrations, parties can generally expect that they won't always or necessarily be much quicker or cheaper than courts with the exception that there's, as a default, usually no appeal right. The rules tend to be less flexible and the procedure in those is very formal and can be quite court like. However, along with that, it comes with certainty, which is obviously welcome in cases where you're dealing with parties from different countries and certainty over the rules, the process, and then the enforcement of awards in those jurisdictions, which is obviously a huge factor in obtaining an award. You want to make sure you have a regime in place where you can easily enforce that outside of your home country.
And now while arbitration is a voluntary and largely private process, it is still subject to legislative requirements and oversight. That legislation largely provides basic procedural principles that apply to the arbitration and put certain duties on the arbitrator. They're not rules of process. Those are largely left to the parties. But more principles, like fairness, due process, right to call evidence that have to be present in all arbitrations. So the best way to look at it is that the courts and the legislature became more willing to hand over jurisdiction over dispute resolution to private decision makers, but they still wanted to ensure that there were certain basic baseline safeguards in place to make sure that the dispute resolution process met a basic minimum level of fairness.
In Ontario, like all the other common law provinces, there's a Domestic Arbitration Act and an International Act. So that then begs the question, what makes an arbitration domestic versus international? And how do if the Domestic or International Act will apply to your dispute?
Well, an arbitration will be domestic, and therefore the Domestic Act will apply to it, unless it falls into one of the categories set out in the International Act. So the default is domestic. But the International Acts in Canada, in the Canadian common law provinces, for the most part just codify the UNCITRAL model law and arbitration. So essentially, if the parties have-- and the determination is made at the time that the parties enter into their arbitration agreement.
So if at that time the parties have their places of business in different countries, if a substantial part of the obligations of the commercial relationship are performed outside of Canada or if the place of the subject matter of the dispute is most closely connected with a place outside of Canada, then the International Act is going to apply.
Now, why does that matter? Well, practically speaking, if you really want the International Act to apply, you can specify in your agreement that the UNCITRAL model law that forms the basis for the International Act will replace the rights and obligations of the parties under the Domestic Act. And there are a few provisions of the Domestic Act that can't be ousted. For example, the prominence of the Scott and Avery clauses or the grounds on which a party can move to set aside an award. But for the most part, it's meant to facilitate an ad hoc arbitration that the parties can largely tailor to fit their needs.
But there are key differences between the default rules under the International and domestic act. So if you don't specify it in your arbitration clause, these are what's going to apply, and this is where some of these principles can be different. The default under the International act is that you're going to have a three member arbitration panel, whereas the domestic act provides for a default of one arbitrator.
There's no appeal as a default under the International Act. There are limited grounds to move to set an award aside, such as a failure to comply with the arbitration agreement or if the award is obtained as a result of fraud. Whereas the Domestic Act, the default is you have a right of appeal, but it's on a question of law alone.
The Domestic Act as a default recognizes oral arbitration agreements where the International Act does not. The agreement has to be in writing. And under the International Act, the parties can with consent use the same person who was, for example, a mediator in that same dispute between the parties as an arbitrator, whereas you're not permitted to do that under the Domestic Act.
And so not only can there be differences with respect to the formality of the arbitration or to its domestic or international scope, but also to the very form it takes. Most arbitrations will be recognizable as similar to court proceedings in that the parties will leave their evidence, they'll call their witnesses, they'll make opening and closing submissions, and the arbitrator will issue a formal written decision. But there are several different forms it can take. Some that we've been involved with, for example, are things like baseball or final offer arbitration, which was popularized by Major League Baseball.
But now the process is one where the parties will each submit one offer to the arbitrator and the arbitrator's jurisdiction is limited to selecting one or the other of those offers. He or she cannot simply split the baby and send both parties away happy or unhappy. One party is going to get what it asked for and the other party will not. Given the all or nothing stake of a baseball arbitration, the purpose of it is to incentivize the parties to be as reasonable as they can be in making their offer to avoid the possibility of them being hit with an award at the end that they simply can't live with.
There's also night baseball arbitration, which is similar to baseball arbitration. But the arbitrator's going to make his or her decision without the benefit of knowing what the parties offers are. The offers are kept private. The arbitrator makes his or her decision. And whatever offer that number comes closest to, that's the final award.
We also talked briefly in the slide about bounded or high low arbitration. But you also have different things you can do procedurally within the arbitration. For example, if it's really going to be something of a highly technical nature involving scientific or engineering or expert evidence in various fields, there's processes the parties have adopted called hot tubbing, where you hot tub your expert.
And really what that means is instead of the regular process of examining an expert in chief and then cross examining the other party's expert, both experts can be put on the stand at the same time and essentially have a live debate or interaction face to face of the issues in front of the arbitrator with that discussion being guided and driven by questions from the decision maker in terms of the information they need to understand to make their decision.
So given how flexible arbitration is, the form it can take is really only limited by the type of dispute and the ingenuity of parties and counsel and how they want their dispute to be resolved. You can have a multi-stage process where you go to negotiation between senior persons or executives at the companies first. Failing that, then you go to formal mediation before a mediator. And failing that, you can go to arbitration.
The parties can agree to submit their dispute entirely in writing if there aren't a lot of factual issues involved to a recognized expert to determine it, which can be a very quick, cost effective way to determine disputes in appropriate circumstances. And they may reserve a right of appeal to an arbitrator from that decision. There's really an infinite number of processes that can be specified to meet the particular needs of an ongoing business relationship or a particular business relationship or a kind of dispute.
So we hope that's been a useful overview for you of what arbitration is, how it differs from litigation, some of its benefits and limitations, and some things to consider in preparing arbitration clauses to avoid unnecessary preliminary skirmishes. And we've hopefully given you some insight in how you can meaningfully communicate to your board these differences in a way that hits the information that they'll need and is most relevant to them and at the appropriate level of detail.
REBECCA HALL-MCGUIRE: Great, thanks very much. Now, we've got a few minutes for questions. So we'll just go through a few of them that we've received. The first one, what happens when a party is not collaborative? How can both parties agree on the tailored arbitration process and procedures if there's just not a foundation of collaboration?
ANDREW MACDOUGALL: So if you haven't, this would be a situation where you haven't already contemplated arbitration in the form of an agreement between the parties and have built it into the contract. And so you are now dealing with a situation where a dispute has arisen and you've put forward arbitration as a possible way of resolving the dispute and the other party has objected.
The simple answer, I think, is that you really can't force them to take arbitration at that stage of the game. This is something that the parties would have to both mutually agree as being a preferred alternative at that point. I think that highlights the importance of giving some thought to arbitration as a potential solution at the time by entering into an agreement between the parties, because that is your first and best opportunity to select arbitration as the alternative.
KEVIN O'BRIEN: And if you are involved in an arbitration, you're in the scenario where you're involved in an arbitration and one party is just ignoring its obligations, you still have the recourse of going to court, having an arbitrator issue an award or an order requiring a party to do something in compliance with their arbitration agreement. If they're going to not comply with the arbitrator's award, you'll find the courts very receptive to on an application giving that preliminary decision by the arbitrator the force of a court order.
So again, there's some associated risks of going to bring that proceeding before a court to get that court order to force compliance with the arbitrator's award of losing confidentiality, and you'll need to think hard about what you'll need to disclose to get that done. But again, the only one with the authority to force a party to comply through the threat of punishment is a court. So that's one of the key considerations about getting into arbitration in the first place.
REBECCA HALL-MCGUIRE: Great, thanks. So next question. What can you say regarding the need to keep your communications privileged, particularly when you're discussing confidential disputes and things of that nature? In particular, with the focus on the minutes of the briefing of a board meeting.
ANDREW MACDOUGALL: So the concept of deliberations at the board level is an important one, and the record keeping is also an important one. Generally when it comes to record keeping at the board level, the right answer on minutes is less is more. The most important thing about minutes is to show that there was consideration of issues and of implications to stakeholder groups but not to include the detailed deliberations that might have occurred at the board level. Instead, the focus should be on recording any actual decision that was taken at the board level.
That does mean, though, that when you present information to the board, particularly if it is information that you're going to want to assert privilege over, you may have to focus very clearly on who is present at the board meeting. Could lose potentially privileged claims if there are people outside of the organization present and listening to the session. For example, I've come across a situation involving attendees who are compensation consultants at a session at the board dealing with a dispute with a former executive over their compensation arrangements.
And that's clearly something that you need to turn your mind to and at the appropriate moment ask the consultants to leave the room so that you can assert or continue to assert privilege over those communications. But if you've kept your minutes to the less is more principle, you should not find yourself in a situation where you've recorded something that you would regret the disclosure of the minutes subsequently.
REBECCA HALL-MCGUIRE: Perfect, thanks very much for that. We have time for just one more question. Do arbitrators tend to split the difference or in a general way are they prepared to have one party win big while the other party loses big?
KEVIN O'BRIEN: So that's a very good question, because that requires an understanding of what their business is, and their business is that they're privately hired by parties to resolve their dispute. And since both parties are paying their bills and potentially both parties are future clients down the road that they may retain the arbitrator, a concern can be had by parties saying, if we're going to go to arbitration, isn't this person who we choose to resolve our disputes is going to split the baby in half and give us half so neither party is completely happy, neither party is completely unhappy, but no one can feel like they were really wronged.
I would say in that circumstance two things. One, for established arbitrators with established reputations, I think that people do talk about their experience with arbitrators from a high level about their reputations. It's a small community within the Toronto and even Canadian legal community about arbitrators. So if a party comes out of an arbitration and loses, they're not going to obviously crow about how great the arbitrator was. But I think there can be a recognition that it's someone who is willing to give a fair hearing, willing to make tough decisions, and the right person for that type of dispute.
So I would say that it comes down to the individual arbitrator. There obviously is a financial incentive. And from a pure business incentive, you can see why there may be a temptation to just split the baby. But I think the more established names and the ones that tend to-- that will stick around for a long time also tend to treat the disputes as they would in a court proceeding and make the most fair just determination based on the evidence before them.
But also if you wanted to remove that concern, we talked about baseball arbitration, which is popular, where the parties submit their offer and then the arbitrator's jurisdiction is limited to picking one or the other. So you take that concern completely off the table when they are only able to make that choice between two different options.
REBECCA HALL-MCGUIRE: Great. Thank you very much. Well, we are out of time for today, unfortunately. If we didn't get to your question, we'll respond to you directly to make sure that we address any questions that were received. Now, on behalf of Andrew and Kevin, I'd like to thank you all very much for joining us for this webinar, and we hope it's given you some useful insights. Thanks very much.