Managing Conflict in Startups: the minutia of forced arbitration clauses

Written by Lucas Pelster
JD Candidate 2026 | UCalgary Law


Mandatory arbitration clauses have become a common feature in contracts across various industries in Canada. These clauses require parties to resolve disputes through arbitration rather than through litigation, often promising an expedited and less expensive resolution. However, binding oneself to an arbitration process is not without it’s risks. When considering whether to include a mandatory arbitration clause in a contract, it is crucial to understand not only the rights gained but also the rights potentially forfeited.


Advantages and Disadvantages of an Expedited Process 
Dispute resolution through arbitration makes intuitive sense, especially within the small business venture sector. Business look to grow as large as possible in as small as possible time frame. Litigation is a large deterrent to a company trying to keep up with the market or beat its competitors in product development. Further still, businesses seek investment from shareholders, shareholders would be weary to trust a business that is tied up with disputes in court. The solution, then, in dealing with disputes is mandatory arbitration set out by contract.
 
One of the primary advantages of arbitration over litigation is its potential for speed and cost-efficiency. For smaller disputes that involve moderate sums of money, or require quick resolution, arbitration can be highly beneficial. However, this expediency often comes at the cost of procedural rigor.
 
For example, arbitration typically involves fewer document production obligations compared to civil litigation. This can hinder a party's ability to demand crucial documentary evidence from the other side. An arbitrator may disallow document production requests to maintain the speed and cost-effectiveness of the process, even if such documents would be producible under civil litigation rules. In complex disputes, where documents are a significant source of evidence, mandatory arbitration may do more harm than good.
 
Appeal rights are another area where mandatory arbitration clauses significantly limit parties' rights. While civil litigation allows for extensive appeals and reviews, such rights are almost entirely removed in arbitration. Interlocutory decisions, such as those on document production, are generally not appealable, forcing parties to accept decisions that could have substantial consequences on their case development. The ultimate decision of an arbitrator is only appealable in narrow circumstances, typically concerning the application of law rather than factual determinations. This limitation can be risky when significant amounts are at stake, as parties may want to exhaust all procedural remedies to ensure the correct decision is made.


Concerns of Enforceability
The enforceability of arbitration clauses is another critical consideration. Once entered, such clauses are usually binding. However, there are exceptions. In Uber Technologies Inc. v. Heller, the Supreme Court invalidated Uber's arbitration clause on the grounds of unconscionability and public policy.[1] The Court found that the inequality of bargaining power between Uber and its drivers resulted in an "improvident bargain," making the arbitration clause unenforceable.[2] This decision highlighted that arbitration clauses in standard form contracts, especially those involving significant power imbalances, could be struck down if they are deemed unfair.
 
In contrast, the Court of Appeal of British Columbia in Williams v. Amazon.com upheld an arbitration clause in a standard form contract, distinguishing it from the Uber case.[3] The Court found that the arbitration agreement did not unduly advantage Amazon or disadvantage the plaintiff, and thus, it was enforceable. This case underscores that while some provinces preclude mandatory arbitration clauses in consumer contexts, others, like British Columbia, do not.


The Telus Communications Inc. v. Wellman Case
The Supreme Court of Canada's decision in Telus Communications Inc. v. Wellman further illustrates the complexities surrounding mandatory arbitration clauses.[4] In this case, Wellman filed a class action against Telus, alleging that customers had been overcharged due to undisclosed billing practices.[5] The contracts included a mandatory arbitration clause for resolving disputes. The class action involved both consumers and business customers.
Ontario's Consumer Protection Act prohibits mandatory arbitration clauses and class action waivers in consumer agreements.[6] However, this protection does not extend to business customers. Telus argued that the business customers were bound by the arbitration clause, while the consumers were not. The lower courts sided with Wellman, allowing the lawsuit to proceed despite the arbitration clause. However, the Supreme Court reversed this decision, ruling that the business customers were bound by the arbitration clause and their claims must be stayed in favor of arbitration.
 
This decision underscores that arbitration clauses in commercial contracts will generally be upheld, even in the context of class actions. It also highlights the importance of clear legislative frameworks to protect consumers while balancing the interests of businesses.


Insolvency and Arbitration 
The protections of arbitration agreements in Canada are generally robust, but they can be challenged in the context of insolvency. When one party to a dispute is in an insolvency proceeding, the rules can change, and the agreement to arbitrate may not proceed as expected. If the insolvent party is the target of a claim, arbitration is generally stayed, and the claim is dealt with through a centralized claims process in the insolvency proceeding. This approach, known as the "single control model," ensures that all claims against an insolvent party are handled in a single forum, preventing the debtor from expending extensive resources defending claims in various jurisdictions.
 
However, if the insolvent party or its estate representative is asserting the claim, the appropriate venue for resolution is less clear. The insolvent party may advocate for an expedited court process for speed and efficiency, while the counterparty may argue for arbitration based on their contractual rights. This complex scenario was recently addressed by the British Columbia Court of Appeal in Petrowest Corporation v. Peace River Hydro Partners.[7]
 
In the Petrowest case, the receiver pursued claims under several agreements that included arbitration clauses. The Court of Appeal determined that a receiver cannot selectively enforce favorable terms of an agreement while disclaiming unfavorable ones. However, the court also concluded that the receiver could avoid the arbitration clauses based on the doctrine of separability, which treats arbitration clauses as independent agreements. The receiver, not being a party to the original arbitration agreements, was not bound by them and could pursue claims through the court.


Implications for Commercial Corps.
The Petrowest decision has significant implications for parties to agreements with Canadian counterparties that contain arbitration clauses. It highlights that arbitration clauses may not be enforceable when defending claims by the receiver of an insolvent counterparty. The analysis may differ in a debtor-in-possession restructuring scenario, where the debtor itself is pursuing claims and could disclaim agreements. Courts will consider whether the disclaimer enhances the prospects of a viable compromise and whether it causes significant financial hardship to the counterparty.


Third-Party Beneficiaries
The recent decision in Husky Oil Operations Limited v. Technip Stone & Webster Process Technology Inc. by the Court of Appeal of Alberta further complicates the enforceability of arbitration clauses, particularly concerning third-party beneficiaries.[8] The Court cautioned against enforcing arbitration provisions on third-party beneficiaries unless the requirement to arbitrate is manifest and expressed in clear and explicit language. This decision emphasizes the importance of clear contractual language and the limitations of imposing arbitration obligations on parties who did not expressly agree to them.


The Orica Canada Inc. v. ARVOS GmbH Case
Another important case is Orica Canada Inc. v. ARVOS GmbH, wherein the Alberta Court of King’s Bench addressed the kompetenz-kompetenz principle and the interpretation of arbitration clauses.[9] The court found that the kompetenz-kompetenz principle, which allows an arbitral tribunal to rule on its own jurisdiction, does not apply to jurisdictional challenges involving pure questions of law or mixed fact and law requiring only superficial consideration of the record. Additionally, the court held that claims arising by operation of law, such as indemnity claims under the Tort-Feasors Act (Alberta), do not fall within the scope of an arbitration agreement.
 
This case focused on a third-party claim which arose in the context of litigation but was subject to an arbitration agreement. The plaintiffs, Orica Canada Inc. and Orica International Pte. Ltd., filed a claim against ARVOS GmbH for fabrication and assembly deficiencies in industrial equipment. ARVOS, in turn, filed a third-party claim against Arsopi, the equipment's manufacturer, under a purchase order that included an arbitration clause.
 
The court applied the principles established by the Supreme Court in Peace River Hydro Partners v. Petrowest Corp. and Uber Technologies Inc. v. Heller. It found that the kompetenz-kompetenz principle did not apply because the jurisdictional challenge involved pure questions of law and there was a real prospect that the challenge might never be resolved by an arbitrator due to time-barred arbitration under German law.
 
The court also determined that while the Tort Claim and Contract Claim fell within the scope of the arbitration clause, the TFA Claim did not, as it arose by operation of law under the Tort-Feasors Act and common law. This decision introduces potential for bifurcation of arbitration proceedings, leading to increased costs and risks of inconsistent results.


Main Takeaways​
While arbitration offers speed and cost-efficiency, it often comes at the expense of procedural rights such as document discovery and appeals. The decision to include an arbitration clause should be carefully considered, considering the relationship between the parties, the nature of potential disputes, and the monetary stakes involved. Arbitration clauses can be beneficial for timely dispute resolution but are not a one-size-fits-all solution. Both the decision to include such a clause and its contractual language should be carefully evaluated.
 
In conclusion, while mandatory arbitration clauses can streamline dispute resolution, they also pose significant risks and limitations. Parties should weigh these factors carefully and ensure that any arbitration clause is tailored to their specific needs and circumstances. Clear and explicit language is essential, especially when dealing with third-party beneficiaries, to avoid unintended obligations and ensure enforceability.
 


[1] Uber Technologies Inc. v Heller, 2020 SCC 16 [Uber].

[2] Ibid at para 64.

[3] Williams v Amazon.com Inc., 2023 BCCA 314 [Amazon].

[4] Telus Communications inc. v Wellman, 2019 SCC 19.

[5] Ibid at para 10.

[6] Consumer Protection Act, 2002 S.O. 2002, c. 30, Sched. A at section 7(2).

[7] Peace River Hydro Partners v Petrowest Corp., 2022 SCC 41.

[8] Husky Oil Operations Limited v Technip Stone & Webster Process Technology Inc, 2024 ABCA 369.

[9] Orica Canada Inc. v ARVOS GmbH, 2024 ABKB 97.