Choosing commercial arbitration over conventional litigation cannot guarantee confidentiality of the process, as a recent decision of the BC Supreme Court shows. The prospect of keeping a commercial dispute confidential has long been recognized as one of the main advantages of arbitration over litigation in the courts, along with the speed of the process, the ability to choose one's decision-maker, and easier enforcement of awards internationally. Confidentiality is certainly enhanced by resolving a dispute through arbitration, and in most cases that confidentiality will be maintained. However, businesses should be aware that the possibility that an arbitration award will be appealed to a judge of the court carries with it the risk that confidentiality may be eroded.
McHenry Software Inc v. ARAS 360 Incorporated concerned a dispute between two software developers, McHenry and ARAS, over their contract to integrate and market their respective proprietary software. When the relationship broke down, the parties commenced arbitration proceedings in Vancouver in accordance with the arbitration clause in the contract. The arbitrator ordered the parties to enter into a confidentiality agreement for the purposes of the proceeding and the matter was subsequently heard in November 2013. Eventually, both parties appealed the arbitration decision. McHenry applied to the court for sealing and confidentiality orders over the two court files to seal the arbitration award (i.e., the written decision of the arbitrator) to preserve the privacy of the dispute.
McHenry submitted that the arbitration award contained commercially sensitive information as well as various details of the company's past business dealings which, it claimed, cast the company in a bad light. McHenry argued that public disclosure of this information would impede the company's ability to find new partners and commercialize its software.
Mr. Justice Ehrcke considered whether the circumstances merited a discretionary sealing order, applying the Supreme Court of Canada's test in Sierra Club of Canada v. Canada (Minister of Finance) which requires an applicant to overcome a strong presumption in favour of open court proceedings. The judge agreed that a sealing order should only be granted when necessary "to prevent a serious risk to an important interest, including a commercial interest, in the context of litigation because reasonably alternative measures will not prevent the risk". Even if there are compelling reasons, the applicant also needs to show that the salutary effects resulting from the confidentiality order outweigh the overarching public interest in open and accessible court proceedings as well as in the right to free expression.
Ultimately, Mr. Justice Ehrcke denied the application on the basis that there was no real and substantial risk to an important commercial interest. Further, he held that there is no general principle that the confidentiality of arbitration proceedings carries over to court proceedings when the arbitration is appealed. In such cases, any expectations of privacy in arbitration will give way to considerations of public policy in open court proceedings and free expression.
The point to take away from this case is that commercial arbitration, while generally a private and confidential process, cannot guarantee complete confidentiality in all cases. An appeal of an arbitration award to the court is always a possibility, notwithstanding the Supreme Court of Canada's recent decision in Sattva Capital Corporation v. Creston Moly Corporation which significantly narrowed the scope for appeal (see Craig Ferris' recent blog post on this case). The confidentiality that attaches to arbitration does not automatically carry over to the court, and the court will apply a very rigorous and high standard before closing its process to the public.
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.
