Avoiding Unnecessary Stays: Drafting Arbitration Clauses In Collection Matters

Delay can be a massive hindrance to the litigation process, especially for collection matters. Unavoidable delay and cooling-off periods can be inevitable in litigation; however, there are some delays that can simply be avoided by a combination of organized and proactive drafting. Drafting solid Arbitration Clauses can result in time and money being saved before an action even arises. The article below will walk through some issues that can arise from Arbitration Clauses, and some tips on how to avoid those issues.

Function of Arbitration Clauses 

Unsurprisingly, one of the pivotal aspects of drafting a contract is for the parties to agree upon what constitutes a breach of contract. Similarly, it is proactive, when drafting, to ensure that parties agree as to which dispute resolution forums are available to the parties and when they will be available. That is where Arbitration Clauses come in. Arbitration Clauses are typically designed to ensure both parties to a contract are aware of the potential disputes under the contract that are better decided by an Arbitrator, rather than proceeding with litigation through the Courts.

Some of the benefits of Arbitration include a less formal/less adversarial environment than litigating an issue through the Courts, potentially less costs than the fees associated with proceeding to Court, potentially faster timelines than litigating the matter, the benefit of a neutral third party, who may be specialized to better address the dispute, and more. It is sometimes the case that parties will agree to have certain subject matter reserved for Arbitration. Issues can arise for litigants when contracts are silent regarding what matters they wish to litigate and are more ambiguous regarding the precise matters that they wish to go to Arbitration.

Accordingly, Arbitration is not always an effective dispute resolution mechanism. This is especially the case in more straightforward disputes. For instance, in the case of a default on a loan of a small monetary amount, it can be far more efficient for parties to proceed to Small Claims Court. The Small Claims Court has various built-in mechanisms that can assist in resolving debt collection matters, including mandatory settlement conferences and streamlined processes for litigation.

Considering the recent increase to the monetary amount claimable in the Small Claims Court, increasing from $35,000.00 to $50,000.00, if you are a lender and frequent creditor, having a correctly drafted Arbitration Clause can be the difference between obtaining a judgment and having a dispute embroiled in more delay and costs.

Accordingly, it is critical that when drafting agreements, lenders are aware of the pitfalls of poorly drafted Arbitration Clauses and the peripheral clauses that interact with them that could lead to a party staying the action, when it would be cheaper and faster to proceed with litigating the matter.

Below is an explanation of how a matter can be stayed for Arbitration, and how you can draft contracts to better avoid having a matter stayed.

How Actions Can Be Stayed for Arbitration

An action can be stayed by a party for litigation by raising section 7 of the Arbitration Act, 1991, S.O. 1991, c. 17 (the “Arbitration Act”). It is important to know that not all matters can be stayed for arbitration under this section. An arbitration clause must exist in the contract for a party to raise this issue. Essentially, this section acts as an explicit rule for parties to point to when they assert that an action has improperly started, when it should have been referred to an arbitrator. That is why it is so important to have meticulously drafted Arbitration clauses that do not leave the forum of a dispute up to debate.

Tips for Arbitration Clauses

Don’t Overcomplicate It 

One of the easiest ways to prevent an order that your matter be stayed for arbitration, when you would prefer that it proceed through litigation, is to be specific in your drafting. One way to mitigate this is to avoid using ambiguous language such as “us”, “we”, and “you” when referring to the parties; even if these terms are defined, they can confuse decision-makers on what obligations are owed to whom. Sticking to explicit language that sets out which matters are covered by Arbitration and for which parties is the easiest way to avoid unintended loopholes that lead to delay.

Organize It

Having separate clauses in a contract all relating to Arbitration may cause confusion for decision-makers. To avoid this, having all mentions of Arbitration in one cohesive section, where possible, ensures that interpretations of your contract do not fall apart because decision-makers have to jump around in the contract to understand the parties’ intentions.

Set out the Implications of Default and Arbitration

Sometimes you may want to include provisions in a contract that you do want to be resolved through arbitration. That being said, relying upon the notion that default of the contract will by itself save any potential order requiring you to stay your action is not the safest option, and still opens the possibility of an unwanted stay. Instead, the contract should set out verbatim the implications of default on any arbitration provisions, and as stated, ideally, this would be organized in a way that a decision maker can look to one section of the contract to make their determination.

A Saving Grace, Subsection 7(2) 

If a party fails to draft a water-tight arbitration clause, a party can still seek to avoid a stay of their action by invoking subsection 7(2) of the Arbitration Act. This subsection dictates that a matter can still proceed with litigation under any of the following situations:

1. A party entered the arbitration agreement while under a legal incapacity;
2. The arbitration agreement is invalid;
3. The subject matter of the dispute is not capable of being the subject of arbitration under Ontario Law;
4. The motion was brought with undue delay; and,
5. The matter is a proper one for default or summary judgment.

Subsection 7(2)(5) is the most applicable clause that a creditor, facing a straightforward collection case, could rely on. If the creditor has a strong case with supporting documentation of default, no defence with merits, and clear utilization of a credit product, they may be able to proceed with their action without issue. However, it follows naturally that if factual complications arise in the case, or if the matter was never straightforward, the risk increases that an action will be stayed, as the matter would no longer be eligible for summary judgment.

So, one can raise section 7(2), yet it is not a “foolproof” method that eliminates the need for prudent drafting; nor does it guarantee that a matter will not go to arbitration. Which is why it is still vital that Arbitration Clauses are drafted plainly to reflect the true intentions of the parties.

Take Away

Ultimately, a great preventative measure for keeping a simple collection action on track before it even starts is to keep Arbitration clauses organized, drafted for external scrutiny, and to ensure that what happens upon default is explicitly stated, with as little reliance as possible on precedent and inferences.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.