The complexities of arbitration: What engineers need to know

Contributed by: Victor, an Engineers Canada affinity partner 

While most professional liability disputes are resolved through a private mediation process, disputes can also be resolved through litigation in the civil courts with a judge issuing a binding public decision, or by arbitration with a paid and specialized arbitrator rendering a private and binding decision.

In cases where an agreement includes a mandatory arbitration clause, architects, engineers, and design consultants should consider including mediation as a first step before resorting to a public trial or private arbitration. Mediation is a private, without-prejudice process where an independent third-party mediator is retained by the parties to assist them in reaching a resolution. Mediation is usually the preferred alternative dispute resolution process because it promotes collaboration between the parties and tends to be less costly.

Nevertheless, arbitration is an increasingly popular private dispute resolution process. Every architect, engineer, and design consultant should clearly understand whether their contracts allow for permissive or mandatory arbitration. Without clear provisions, disputes default to litigation in civil courts.

It is worth considering whether to include mandatory arbitration in your contracts because it is not always the most effective and efficient way to resolve an issue. If mandatory arbitration is unavoidable, making mediation a prerequisite will provide an opportunity for the parties to attempt resolution before investing a lot of resources in the arbitration process.

Like litigation, arbitration utilizes an adversarial approach that requires a neutral party to render a binding decision. In Canada, arbitration can be regulated by provincial, territorial and extra-jurisdictional rules and legislation.

The arbitration process can be more timely, efficient, and economical than litigation, depending on the situation. The courts across Canada have been backlogged for years, which means that it can take months or years to secure hearing dates. It also allows the parties to choose a panel or sole arbitrator with expertise in the specific subject area of the dispute.

While there are potential advantages to having disputes resolved by arbitration, there are also several potential disadvantages that architects, engineers, and design consultants should consider when drafting and negotiating contract dispute resolution clauses:

1. Arbitration is often suggested to be more expedient than litigation, primarily on the basis that document production and oral discovery are potentially limited under typical arbitration rules, and the parties have more control over setting their own procedural schedule. However, in reality, arbitration can take longer than judicial litigation—especially on larger projects with multiple issues, parties, and contracts. The more parties there are, the more difficult and time-consuming it will be to reach an agreement on a procedural schedule.
2. While arbitration can be more cost-effective for limited-party, single-issue disputes, it is often not the case for large, multi-party claims, particularly when some of the parties involved are obligated to arbitrate contractually, and some are not. In such circumstances, it becomes increasingly challenging to get contractors and subconsultants, who are not contractually obligated to arbitrate, to consent to voluntary participation in the arbitration process. This can place your firm in an unfavourable situation—defending a claim in arbitration under the arbitration clause in your contract with an owner, while simultaneously pursuing contribution or indemnity claims in civil court. It is also important to note that arbitrators are hired and paid by the parties. They are typically hired due to their extensive experience in the area of law at issue. This experience can come with a hefty price tag. They are paid not only for the hearing of the dispute but also for all conferences or meetings, all time spent reading material as well as the time to draft the final decision.
3. Today, it is common for clients to include “multi-tier dispute resolution clauses” in contracts where the agreement requires the parties to participate in several methods of dispute resolution sequentially (including, but not limited to, notice of a potential claim, negotiation and discussion of claims, formal or informal mediation, followed by formal arbitration if required). Such clauses can cause serious problems due to an increasing trend for some responding parties to assert that a notice of arbitration served before completing all steps in the resolution clause is invalid on jurisdictional grounds. Claims, whether litigated or arbitrated, are subject to time limitations at law. If parties take the aforementioned position and then drag out completion of the required steps in the resolution clause, it can create limitation issues which can result in costly and protracted procedural litigation that does not advance the resolution of the underlying claims.
4. Unlike a court decision, there is little to no appeal from an arbitration award. Unlike litigation, where a judge’s error of fact or law can potentially be corrected on appeal, errors in arbitration are exceedingly difficult to overturn once a panel or arbitrator has rendered a decision.
5. Architects, engineers, and design consultants need to be aware that the timelines in arbitration are often very fast and tight—and will be enforced. The other party may have been preparing its claim for months, leaving your firm at a disadvantage when it comes to gathering required evidence, particularly expert evidence, which is almost always critical for a successful defence.
6. As noted, document and oral discovery are typically limited in the arbitration process. Unlike in litigation, there is no obligation on a party to disclose all relevant documents—only those that support its claim or defence. If you think another party has documents that could harm its case or help yours, the onus is on you to persuade the arbitrator to order that those documents be disclosed. This can be challenging as you cannot always describe those documents with sufficient precision because “you don’t know what you don’t know.” Your ability to defend can be significantly prejudiced as a result.
7. The confidentiality of the arbitration process can be a benefit to parties in a dispute. If there is an unfavourable arbitration decision, it typically does not become a matter of public record (unless an appeal is brought). Potential reputational harm can be avoided. However, the flip side is that arbitral awards have no precedential value—they cannot be relied upon by architects, engineers and design consultants to defend subsequent claims.

Some professional liability insurers limit coverage when a claim is required to be resolved by arbitration. Architects, engineers, and design consultants should carefully review how their professional liability policies address arbitrated disputes before committing to mandatory arbitration clauses in their contracts.

The potential pitfalls of arbitration outlined above reinforce the importance of avoiding mandatory arbitration in your firm’s agreements, where possible. While arbitration has its place in dispute resolution, it is not always the best method to pursue. Limiting how disputes are resolved contractually can be disadvantageous. When in doubt, consult your broker, lawyer or insurer.