Arbitration has become a popular dispute method in many partnership agreements and, increasingly, in employment contracts.There are two main reasons for this. The first is that arbitration is private and confidential, which can be attractive both for the organisation and the individual.
The second is that arbitration is international: it can be adapted to fit the dispute wherever the person is in the world (for example, the arbitration can be held in English even if the individual partner or employee is in a non-English speaking country), and arbitration awards can be enforced throughout the world via the New York Convention. Thus, arbitration is often chosen when the individual is seconded abroad, or when the individual is a senior executive or partner of an organisation that has its headquarters in another country. International law firms, for example, will almost always have an arbitration agreement in their partnership deeds.
With a notable drop-off in some practice areas due to the current economic climate, now is an important time for domestic and international professional services firms to ensure that the arbitration clauses in their partnership agreements and employment contracts are adequately drafted to minimise the fall-out from disputes. Firms should also be aware of the limitations of their current arbitration clauses – most notably that they cannot stop an employee or partner from proceeding with a public employment tribunal claim in England.
Arbitration clauses in partnership deeds and employment contracts are usually expressed in the broadest terms, meaning that all disputes – whether the dispute arises from a breach of the agreement or contract or not – must be referred to arbitration. However, in England, employment or discrimination claims which arise under statute are excluded from arbitration, other than in narrow circumstances. This means, for example, that a partner of an international law firm who works in England can nonetheless bring a public claim for race discrimination in an English employment tribunal, despite being bound by an arbitration clause which apparently says otherwise.
If an individual partner who is bound by an arbitration clause in the partnership deed has both a contractual claim and a discrimination claim (or any other tribunal claim such as a whistleblowing claim), they face a choice about what to do. This is often the case with a partner who is expelled or required to retire from the firm: they might allege both that their expulsion was a breach of the partnership deed, and therefore void as a matter of contract law, because the motives of the partners voting in favour are tainted by bad faith, and also that the decision was unlawful discrimination under the Equality Act 2010. The partner has a range of strategic options around how they seek to vindicate their contractual and statutory rights. For example, they could:
- start claims in both arbitration and the employment tribunal, which will mean running two claims at the same time;
- start the claim in the employment tribunal and postpone the arbitration claim, in the hope that the publicity resulting from the tribunal claim will pressure the firm to settle both claims, without the risk in arbitration, unlike in the employment tribunal, of having to pay the other side’s costs if the claim is unsuccessful; or
- start the arbitration claim first, since their own reputation will be protected by the confidentiality of the forum, and hope that the firm is willing to reach a settlement which means that they will not need to pursue the tribunal claim (although in practice the time-limits for bringing tribunal claims are much shorter than contract claims, so in many cases a claim will need to be filed while the arbitration is ongoing or it will be lost).
Many firms will also have a mediation stage in their partnership deeds, which aims to resolve the dispute before arbitration is commenced. This may be optional, or it may be a compulsory step before either side submits an arbitration claim. However, a partner will be entitled to ignore this before commencing employment tribunal proceedings for discrimination or whistleblowing.
Another possibility is that the individual starts the tribunal claim, but then the firm starts a claim in arbitration, for a breach by the individual of their contractual duties, which could be the misconduct or underperformance which the firm used to justify the dismissal or expulsion of the individual. This can be done as a tactic to put pressure on the individual, who may not want to fight two claims in different forums. An even further complication might arise if one of the parties seeks an interim injunction in support of the arbitration, which can be applied for in the High Court. This would mean that there could be proceedings in three separate forums all at once: in arbitration, in the High Court and in the employment tribunal.
The interaction between breach of contract claims in arbitration and statutory claims in an employment tribunal will never be straightforward, particularly in light of the differing advantages and disadvantages for each. Usually, the employment tribunal route is more attractive to the individual, given that the costs are lower, the burden of proof is often more favourable to claimants than for contractual claims, and the risk of adverse publicity – much greater than that arising from private arbitration – will fall mainly on the firm (although this may not be the case for employees or partners disputing an expulsion or dismissal on the grounds of misconduct). On the other hand, for overseas employees and partners, there may be questions over whether the employment tribunals in England have jurisdiction to hear the types of claim which the individual is seeking to bring.
Due to the many competing factors and the tactical moves open to each side, the individual and the firm will need to think carefully about their strategy and what steps to take towards a successful and speedy resolution. Even before considering any risks around reputation and goodwill in the negotiation, they will need to weigh up the cost, time and stress required by the different claims, against the prospect of a successful outcome.
Fox Williams has extensive experience advising UK and international businesses on disputes, arbitration, partnership, and employment matters. Please speak with Daniel Sutherland, Ben Giaretta or your usual Fox Williams contact for further information.