Resolving commercial disputes in Canada

February 2011 | TALKINGPOINT | LITIGATION & DISPUTE RESOLUTION

financierworldwide.com

FW moderates a discussion between Geoff Shaw at Cassels Brock LLP, Frank M. Vettese at Deloitte and Allan J. Guty at Parlee McLaws LLP, on resolving Canadian commercial disputes.

FW: Have you seen an increase in commercial disputes in Canada over the last 12 months or so? Which sectors seem prone to corporate conflict?

Vettese: Over the last 12-24 months many Canadian litigators have reported an upsurge in dispute activity. For financial experts and advisers, the increased activity in commercial disputes has been more recent. It is not clear, however, whether this represents new work or work delayed by the economic crisis. I suggest it is a bit of both. The financial services sector has been particularly active, with institutions becoming more aggressive in pursuing loan fraud through creative and efficient legal techniques.

Shaw: Commercial litigation disputes are on the rise. In a difficult economic climate, when money is particularly tight, the stakes in commercial claims become higher. As such, in the past 12 months, delays or non-performance on the part of debtors has led to problems between lenders and third parties, as well as liabilities for large scale entities. There has also been an increase in lawsuits surrounding commercial transactions, which have been followed by financial failure. Further, large corporate bodies have increasingly been taking action against other corporations for large amounts of money and/or company control. Alternative dispute resolution has become a vital cost-cutting and time-saving tool under these circumstances.

Guty: I have not seen an increase or decrease in oil and gas litigation over the past 12 months. It has stayed relatively constant which means it tends to be quite busy. For defendants in highly complex and high stakes litigation, however, the pace of litigation has slowed in some cases. Because litigation is sometimes a discretionary expense, plaintiffs will in some cases slow the litigation to make the expense more manageable during a time when revenues are down. For this reason, it is sometimes strategic for defendants to be the party pressing the litigation, thereby increasing the plaintiff’s expenses and, at the same time, pushing for settlement.

FW: What types of disputes seem to be most prevalent?

Shaw: Disputes in which large amounts of money are at issue and those where parties are seeking declaratory relief seem to be most prevalent today. There has been a significant increase in securities litigation, particularly in the US, which in turn has profound effects on shareholders, borrowers and other businesses. Internal disputes relating to the management of businesses, such as shareholders’ rights and remedies claims, oppression claims, and derivative actions, are widespread as well. Additionally, class action proceedings, often containing multiple issues and multiple parties seeking injunctive relief, are common. Product liability, franchising and intellectual property claims have similarly come to the fore of commercial disputes.

Guty: Bankruptcy and insolvency practitioners are significantly busier than they were prior to the recession in the US and central Canada. In western Canada, this increase in B&I litigation is largely due to low natural gas prices and the continued fallout from the 2008-09 credit crisis. I anticipate that B&I litigation may increase as natural gas prices increase as lenders will push borrowers into bankruptcy or receiverships at the point when the secured assets have gained in value allowing for greater recovery.

Vettese: International arbitration is definitely on the rise. A key question is where such arbitration will take place. Some Canadian legal firms have a high profile in this area of practice. Purchase price disputes and contract disputes also represent a significant portion of new assignments, as do class action suits against public companies for disclosure issues or errors made affecting the stock price. There has also been an upswing in disputes involving franchisees and distributors as companies act to reshape themselves due to the recession. Disputes around the boardroom table are increasing, with cases more likely to be resolved by mediation and arbitration as businesses realise that going the judicial route can be more expensive and time-consuming.

FW: How important is it for companies to establish a pre-emptive strategy to deal with potential disputes?

Guty: In my opinion it depends on the dollar value and complexity of a contract, and the parties to that contract. In Canada, unlike the US, commercial cases are rarely if ever tried before juries. They are typically tried before a judge sitting alone. As a result, companies do not elect to proceed with ADR because they are attempting to avoid the perceived unpredictability associated with the jury system. In Canada, companies elect ADR because they want to resolve any disputes before experienced and respected arbitrators/mediators who have an expertise relevant to the dispute. This is particularly the case when parties to a contract know that they will have an ongoing, or future, relationship regardless of whether there is a dispute and therefore, when disputes arise, they must be resolved in an expeditious and fair manner which does not impede that ongoing relationship. It should be noted, however, that in my opinion arbitration is rarely less expensive than going to court. Those companies that adopt arbitration clauses because they think they will spend less money in legal fees are misguided. For example, paying for a panel of three arbitrators in a complex and length commercial dispute will often prove to be very expensive.

Vettese: For companies and sectors prone to litigation, it is very important to demonstrate a proactive stance. Product recalls are on the rise as safety regulators intensify their enforcement efforts. With recalls, come class action and product liability claims, followed by shareholder actions against the board of directors and management. All of these events must be anticipated and planned for: once companies are immersed in damage control, developing a coherent strategy ‘on the fly’ is impossible. For example, every oil exploration company must anticipate the possibility of a disaster, large or small. Alternatively, companies facing one-off litigation appear less interested in pre-emptive efforts.

Shaw: Litigation must always be considered to be a potential business risk and it is therefore necessary to manage for it and insure against it. In the face of a dispute, it is extremely important to assess a case’s strengths and weaknesses, as well as its costs and benefits, as early as is practically possible. Planning early is essential to developing an effective strategy which can be implemented throughout the life of the litigation. Moreover, building a pre-emptive strategy puts parties in a better position to prepare for the dispute; more specifically, it is vital to keep all information which is relevant to the matter, to collect every document and to consult every potential witness and expert, as early as possible. These types of preparations also enable parties to narrow issues by bringing early motions, thus shortening the length of the proceedings as a whole.

FW: What general advice would you offer to Canadian companies on preparing for litigation and arbitration?

Shaw: Both litigation and arbitration require an evaluation of short and long term costs, as well as the types of individuals or corporate entities which will be parties to the proceedings. Controlling confidential information is also important in any dispute. For example, if an employee leaves his/her workplace, it ought to be considered whether that person may be a potential witness or if he/she possesses relevant information. It is key to conduct an analysis of the jurisdiction in which the dispute has arisen and determine whether the client would benefit from an arbitrator or from a judge or jury with a particular background or expertise. Further, corporations should consider budgeting for litigation by adopting evidence and document preservation systems, if possible. The preferred method of any proceeding depends on the dispute itself, as well as the nature of the relationship between the parties.

Guty: In today’s litigation the number of documents produced by each side, and the length and amount of discovery, is far greater that what we have seen in the past. It can be quite a burden on the person within the company who is appointed as the corporate representative in highly complex and document intensive litigation. My general advice therefore is, depending upon the size of the company, to appoint an experienced knowledgeable person who understands and is willing to carry out the obligations of a corporate representative in major litigation.

Vettese: While arbitration appears to be gaining favour due to cost and speed, arbitrations are less likely to settle than litigation, although settlements in the latter may take longer to achieve. Clients are encouraged to pursue an acceptable settlement, as the decision of a judge or arbitrator can be unanticipated. They are also reminded that all advice should come from highly-qualified professionals. In Canada, sought-after financial advisers possess credentials such as CA, CA.CBV, CA.IFA and CA.CIRP, and are familiar with legal processes. One of the biggest and most immediate challenges companies face is lining up legal counsel and accounting or financial experts – conflicts may arise that can take weeks to clear. Advisers need sufficient time for case strategy development, document retention or creation, and examinations for discovery. Allegations of spoliation or the failure to preserve evidence are becoming very frequent. Many parties now undergo rigorous e-discovery processes – knowing this, companies are advised to implement a stringent internal email policy at the outset. The need for e-discovery expertise is especially important for cases involving any nexus to the US.

FW: To what extent are companies in Canada embracing alternative dispute resolution (ADR) methods?

Vettese: ADR is being accepted in an increasing proportion of disputes, both mediation and arbitration. However, arbitrations seem to ‘go all the way’ more frequently than litigation. It’s unclear whether the decision to embrace ADR is premised on speed to resolution or on other factors. Notably, the increasing popularity of ADR makes it difficult to quantify the number of commercial disputes today.

Guty: Companies both large and small are embracing ADR, particularly mediation. In Alberta, many are pleased that the Rules of Court now require litigants to participate in mediation before they can apply to the court for a trial date.

Shaw: Though arbitration has been a buzz-word since the early 1980s, most mainstream ADR is happening now. Today, ADR firms and mediation practices are commonplace. Companies seeking to resolve employment disputes often use ADR to keep costs down and preserve amicable relationships between parties. Insurance companies involved in personal injury disputes, as well as mining, construction and trade industry companies, are known to use ADR. ADR is helpful in these areas as there is often a relationship to preserve or an ongoing project or transaction to be completed, in spite of the dispute. Larger financial and corporate firms tend to put arbitration clauses in their commercial contracts, thus utilising the ADR processes when disputes arise.

FW: How would you describe arbitration facilities and processes in Canada?

Vettese: In the Toronto area, arbitration facilities are becoming widely available and increasingly sophisticated. Throughout Canada, processes are generally well established, with retired judges more likely to be arbitrators than lawyers with commercial backgrounds. The use of non-legal experts as arbitrators is not yet common, but has been effectively employed in certain circumstances. Arbitration panels consisting of legal, industry and/or financial experts appear to be a more frequent approach than has historically been the case.

Shaw: Canada has a wide array of independent arbitration service providers who are experienced in the legal community. These professional facilities are typically spacious and contain hearings rooms which can seat up to 40 people. Additionally, these arbitration facilities provide transcription services in both English and French, thus serving the population as a whole. Canada is also a well-received forum for arbitration proceedings due to its multicultural society and it reputation for fairness and neutrality. Canadian courts are increasingly giving effect to the Model Law and the New York Convention by limiting the scope of judicial review over Canadian arbitral awards, thereby supporting the arbitration process as an effective method of dispute resolution.

FW: Are there any issues surrounding the enforcement of arbitration awards by Canadian Courts?

Guty: There are few to no issues surrounding the enforcement of arbitration awards by Canadian Courts. Most, if not all, Canadian provinces, including Alberta, have reciprocal enforcement of judgment legislation – applicable to arbitration awards – and therefore there are few issues in enforcing foreign judgments, particularly when those judgments are from other common law jurisdictions such as the US or UK, for instance.

Vettese: Canadian courts increasingly seek to enforce arbitral awards, understanding the importance of freeing up court resources for areas such as family, children, and criminal law. The days when judges were reportedly offended by parties trying to avoid courts through arbitration are long past. In fact, today courts require that parties attempt mediation before going to trial.

Shaw: As Canada is a party to the New York Convention, the country is a receptive environment for foreign arbitration awards. The New York Convention provides the legal framework in Canada for the recognition and enforcement of foreign arbitral awards, and Canadian courts have been very reluctant to refuse enforcement under Article V of the legislation. Complications may arise, however, where the particulars of an international arbitration are not fully understood by the domestic court of law. As well, other issues may arise where the arbitration agreement is invalid, the award deals with matters beyond the scope of arbitration, or improper procedure has been followed. It is important to explicitly detail the applicable law and jurisdiction in arbitration agreements in order to avoid issues at the enforcement stage.

FW: What additional challenges tend to arise in multijurisdictional disputes involving companies?

Vettese: As Canadian companies increasingly conduct business overseas, they can face difficulties dealing with foreign legal systems and cultures – particularly when a disagreement arises. Depending on the size of the Canadian company and its bargaining power, the company may need to accept being governed by the laws of a foreign country. Any dispute arising under such an agreement will be litigated in a foreign jurisdiction, and the extent of damages awarded can be extraordinary compared to those in Canada. Language facilities, especially accommodations for French, can also be limited. Another notable challenge is the control of multinational disputes by US counsel.

Shaw: All of the regular challenges of litigation and dispute resolution are amplified in multijurisdictional proceedings. Determining the proper jurisdiction, as well as which law and procedure will apply, are common challenges. As well, locating witnesses and experts can be difficult. Differences in cultures, legal systems and spoken language also tend to prolong cross-border proceedings, thus creating a rise in costs. Complex scenarios with multiple parties are common features of multijurisdictional claims as it may be difficult to bring multiple parties in different countries under one arbitration agreement. To resolve these issues, it is a good idea to retain counsel experienced in multijurisdictional litigation and appoint internal persons with language capabilities and experience. Further, dispute resolution mechanisms should be clearly spelled out in contractual agreements in order to avoid these conflicts in the first instance.

Guty: Canada is a common law jurisdiction with a well-respected independent judiciary similar to the US and UK. I would imagine that pursuing multi-jurisdictional disputes involving Canadian companies would be no different than a dispute involving British or American companies – aside of course from the major difference between Canada and the US being the absence of juries hearing complex commercial disputes in Canada.

FW: What clauses would you recommend that Canadian companies into their commercial contracts to manage potential disputes down the line?

Shaw: It is difficult to recommend a ‘one-size-fits-all’ clause for resolution of commercial disputes. Clauses that are drafted for international agreements should pay particular attention to the seat and governing law of any arbitration. As well, thought should be applied to enforceability of a decision.

Guty: Depending on the size and complexity of the contract, I tend to prefer mandatory mediation clauses over arbitration clauses. Mandatory mediation allows the parties to fully canvas the strengths and weaknesses of the other party’s case as well as their own. As a result, the party’s are well aware of the risks and expenses involved if they choose to proceed to trial or arbitration instead of settling at or soon after mediation. Of course, the skill of the mediator is essential.

Vettese: Canadian companies are well advised to insert comprehensive ADR clauses that define the desired process, as well as carefully-considered purchase price dispute mechanisms that include the definitions of relevant terms. Specificity and clarity are critical; for example, clauses can make reference to the use of experts who can address certain areas of judgment. To manage costs and complexity, the clause could state that arbitration or mediation take place in Canada, governed by the laws of Canada in a Canadian Court. Companies may also want to consider whether to provide for interim or immediate relief in the event of a dispute, as courts are reluctant to issue orders without a hearing.

Geoff Shaw is a partner at Cassels Brock & Blackwell LLP. His practice focuses on the resolution of business disputes through trial, appeal, mediation or arbitration. Mr Shaw has several specialties including franchise litigation, professional liability for accountants and financial advisers, securities regulatory work, and income tax litigation. He is also a member of the International Franchise Association (IFA) Legal Symposium Task Force, and regularly speaks and contributes articles in the area of franchise law. He can be contacted on +1 416 869 5982 or by email: gshaw@casselsbrock.com.

Frank M. Vettese is the Canadian and global managing partner at Deloitte. He is a member of Deloitte’s Global Executive Committee and the Canadian Leadership Team and his focus is on financial and accounting advisory services. Mr Vetesse is a highly regarded expert, mediator and arbitrator in business disputes. His extensive experience includes dispute consulting, business valuations, forensic accounting, mergers and acquisitions, and accounting standards and practices. He often appears as a qualified expert witness before the courts and tribunals across Canada as well as international arbitrations. He can be contacted at +1 416 643 8278 or by email: fvettese@deloitte.ca.

Allan J. Guty is partner at Parlee McLaws LLP. He has represented oil and gas clients in a large number of cases where comprehensive understanding of the technical aspects of the client’s case has been imperative. He has represented clients involved in intellectual property disputes, including cases of alleged theft of intellectual property by present and former employees, and also appeared before the Court of Queen’s Bench in a large number of applications for injunctions and Anton Pillar Orders. Mr Guty is active in the Canadian Bar Association. He can be contacted on +1 403 294 7079 or by email: aguty@parlee.com.

THE PANELLISTS

Geoff Shaw

Cassels Brock LLP

Frank M. Vettese

Deloitte

Allan J. Guty

Parlee McLaws LLP