Arbitration: its growth, practical uses and limitations in an employment law context

There is a growing appetite to resolve employment disputes by arbitration.  This is the finding of the UK Employment Lawyers Association (ELA) which published its Report on Arbitration and Employment Disputes in November 2017.  The Report, a product of over two years of research, conducted by ELA's Arbitration and ADR Group (chaired by Peter Frost of HSF and Paul Goulding QC of Blackstone Chambers), concludes that arbitration clauses are increasingly found in partnership and LLP agreements, deferred remuneration scheme rules and contracts of employment.

The Report notes the development of the European Employment Lawyers Association (EELA) arbitration scheme, including EELA's bespoke arbitration rules, a model arbitration clause and a submission agreement (prepared with the assistance of Hannah Ambrose of HSF) under which existing disputes can be resolved by arbitration. Interestingly, the Report encourages the adaptation of the EELA's documentation to provide the materials for a truly bespoke dispute resolution process for UK employment contracts.

In addition, the ELA intends to bolster its training programme by including sessions focusing on arbitration and its applications. The goal is twofold. First, ELA seeks to provide practical education to those involved in drafting and negotiating employment contracts and those litigating employment disputes. Second, this initiative will help to develop a pool of specialised arbitrators, advocates and advisers.  Such efforts will ensure appropriate use of arbitration in the context of an area that is tightly regulated by statute in many jurisdictions.

What is arbitration?

Arbitration is a system of dispute resolution whereby disputes are finally resolved before an independent and impartial tribunal of either one or several private individuals.  When parties enter into an arbitration agreement, the intention is that the arbitral tribunal then has exclusive jurisdiction to determine any disputes falling within the scope of that agreement. Such determination is final in the sense that there is (usually) no appeal on the merits available and the award issued by the arbitrators can be enforced, either in the country in which it was issued, or internationally in 157 countries that are signatory to the New York Convention 1958. The number of arbitration cases around the world has grown exponentially over the last half century, and arbitration clauses continue to be included in all sorts of commercial (and other) transactions of vastly varying value, in a myriad of sectors by parties of various nationalities and different legal traditions.

Key features of arbitration and their suitability for resolution of employment disputes

The ELA Report draws out the key features of arbitration which may be particularly suited to employment disputes – not least its private nature. Whilst there are circumstances in which the details of an arbitration may become public (for example, if the arbitral award is challenged or enforced before national courts), arbitration hearings are held in private and there is no public access to the file.  This is beneficial in employment disputes, where confidentiality can be in the interest of both parties. For example, it may be damaging to enforce a restrictive covenant concerning the use of confidential information in a public forum.  The private nature of hearings and largely confidential nature of arbitral awards might even, in many cases, positively influence the substantive outcome. For instance, witnesses may be more comfortable in private proceedings than they would in open court proceedings and may therefore give evidence with a greater degree of clarity.

Other features of the arbitral process can be an advantage in employment claims – for example, a key principle of arbitration is party autonomy.  The parties can thus influence the procedure to craft something which provides an efficient and effective way of resolving their specific dispute, without being bound by the often rigid civil procedure rules of national courts.  They can, in many cases, also appoint arbitrators with industry knowledge or experience, which makes them better suited to understand and decide the case.

A key consideration in any dispute resolution process is costs. Unlike a state court system, parties to arbitration must pay for all expenses (e.g. hearing of their dispute and the tribunal's remuneration). In the UK (and in many other jurisdictions), an arbitral tribunal generally allocates these costs between the parties after it determines the dispute, generally following the principle that costs follow the event except where it appears that this is not appropriate. Nevertheless, the costs involved are undoubtedly a consideration for parties, in particular individuals. Parties need to be aware of the various ways in which the costs of arbitration can be practically reduced (for example, by using a sole arbitrator or by increased use of technology to minimise in-person hearing time).

As mentioned above, an arbitration award also offers significant benefits in terms of enforcement of the outcome of a dispute.  Whilst there is no global system for reciprocal enforcement of judgments, 157 countries are party to the New York Convention under which state courts are obliged to recognise and enforce arbitral awards on a reciprocal basis as if the award was a judgment of the enforcing court.

Limits on how arbitration may be used in an employment context

Notwithstanding the above characteristics, arbitration may not always be suitable, or even legally enforceable in some employment disputes.

In the UK, contractual and tortious claims arising from an employment relationship are largely arbitrable without restriction. However, there are constraints on contracting out of future statutory employment claims. Indeed, any inconsistency between the dispute resolution provisions agreed to in an employment contract and statutory requirements as to those dispute resolution provisions can lead to undue delay, costs and have the potential for increased publicity regarding the claim. For example, in Clyde & Co LLP, John Morris v Krista Bates van Winkelhof [2011] EWHC 668 (QB) the High Court refused to injunct proceedings before an employment tribunal between an LLP member and an LLP on the basis that the arbitration clause in the LLP agreement violated statutory provisions in the Employment Rights Act 1996 and Equality Act 2010.

Considerations as to the enforceability of arbitration clauses in an employment context are not restricted to the UK. ELA's Report highlights other jurisdictions which impose restrictions on the use of arbitration for resolution of employment disputes.  Even in the US, a jurisdiction where arbitration of employment disputes has been historically more prevalent, a bipartisan bill recently introduced to Congress in the wake of the increased attention on gender discrimination and harassment, proposes to restrict compulsory arbitration of sex discrimination or harassment claims. Whilst similar bills have not reached the statute book, the political climate and bipartisan nature of the bill may lead to success. Notably, neither this bill nor its predecessors intends to preclude arbitration completely in the context of employment disputes.  Instead, the aim is to ensure that arbitration agreements are entered into only after a dispute has arisen and therefore with the unequivocal, voluntary and informed consent of the parties.

It is clear that parties that seek to have their disputes resolved by arbitration must be aware that, unlike standard commercial contracts, employment-related issues may be subject to additional requirements and therefore not all disputes arising therefrom are arbitrable. This raises considerations as to the most practical and effective way of making sure that all claims arising from a single dispute / set of disputes – whatever their legal basis - can be resolved in the same forum, minimising the risk of parallel proceedings.

A practical solution: submission to arbitration after a dispute has arisen 

To use arbitration effectively and ensure compliance with statutory restrictions in the UK, parties may agree to arbitrate after the dispute has arisen by entering into a settlement agreement.  Providing that such settlement agreement is compliant with the statutory requirements, the arbitration clause therein (known as a submission agreement), will be enforceable in relation to all the claims that have arisen. As ELA observes, in a situation where an employee has brought a number of claims based in both contract and statute, this can be an appealing solution for both parties who wish to resolve all their claims (sometimes in more than one jurisdiction) in a single forum. They can take advantage of the benefits of arbitrating, rather than litigating, and avoid the risk of inconsistent outcomes, inherent in cases of multiple related proceedings.

A valuable option for resolution of disputes in employment related transactions

Whilst arbitration will not be suitable for all employment-related transactions, bringing together expertise in both employment law and arbitration law and practice can help parties identify where alternative dispute resolution methods can be used. Arbitration can bring advantages in a wide variety of employment disputes from those concerning bonuses and deferred remuneration, to disputes about restrictive covenants and team moves.  Parties are encouraged to consider the benefits of including an arbitration clause in employment related contracts and the opportunity to submit their dispute to arbitration after it has arisen.

For more information, please contact Peter Frost, Partner, Hannah Ambrose, Professional Support Consultant, or your usual Herbert Smith Freehills contact.