An express and clear provision in a contract that defers any dispute first to arbitration before any litigation is commenced.
In the 1856 British case from which the rule of law draws its name, Alexander Scott and George Avery, at issue was a contract which provided that any differences or disputes had to be referred to arbitration. A Scott v Avery clause makes arbitration a condition precedent to any court action.
The House of Lords reviewed the judicial treatment of such an arbitration clause through the history of British courts. Some of the judges thought that such a clause would be against public policy; an attempt to avoid the courts of law and the rule of law.
Justice Campbell in Scott v Avery:
"... where it is expressly, directly and unequivocally agreed upon between the parties that there shall be no right of action whatever till the arbitrators have decided, it is a bar to the action that there has been no such arbitration."
The English Reports summary of the decision:
"It is a principle of law that parties cannot by contract oust the courts of their jurisdiction; but any person may covenant that no right of action shall accrue till a third person has decided on any difference that may arise between himself and the other party to the covenant."
In Russell on Arbitration, the authors wrote:
"While parties cannot by contract oust the jurisdiction of the courts, they can agree that no right of action shall accrue in respect of any differences which may arise between them until such differences have been adjudicated upon by an arbitrator. Such a provision is often termed a Scott v Avery clause."
In Borowski, one of the litigants argued that they had a Scott v Avery clause, which read as follows:
"Any controversy or claim arising out of or relating to this Agreement as the breach hereof shall be submitted by the parties to binding arbitration by submitting same for arbitration ... and judgment upon any award rendered in such arbitration may be entered in any court having jurisdiction thereof."
Justice Murray of the Alberta Court of Queen's Bench disgreed and wrote:
"At common law an agreement to oust the jurisdiction of the Courts was invalid. However, if the parties agreed that their rights were to be determined by arbitration as a condition precedent to the accrual of a complete cause of action and therefore to the Courts having jurisdiction, such an agreement was valid. This was the case in Scott v Avery.
"The wording of the clause is the key. If the covenant is framed so there will be no cause of action until after arbitration, then the parties must arbitrate before seeking a remedy in the courts of law, but, if the wording is such that the arbitration will only arise after a cause of action has arisen, then the courts are not excluded."
The Court then held that the clause was not a Scott v Avery clause as it was merely an agreement to submit to arbitration - an arbitration clause - but not stated to be a condition precedent to litigation.
In Babcock, the court held that:
"Arbitration is not a condition precedent to litigation in the absence of express or implied terms making arbitration a condition precedent. "
REFERENCES:
- Babcock & Wilcox Canada Ltd. v Agrium Inc. 2003 ABQB 1004
- Borowski v Heinrich Fieldler 29 CPC 3d 264 (1994, ABQB)
- Czarnikow v Roth, Schmidt & Co. 92 LJKB 81 (1922)
- Duhaime, Lloyd, ADR - A Glossary of Terms
- Scott v Avery 10 ER 1121 (1856); or 25 LJ Ex 308; or 5 HL Cases 811
- Walton, A. and Vitoria, M., Russell on the Law of Arbitration (London: Stevens & Sons, 1982), page 199-200.