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Drafting and Negotiating AlternativeDispute Resolution Clauses

David Laurence KreiderChartered Arbitrator andGeneral CounselVodafone New Zealand

International Contract Law Symposium 2008Grand Hyatt Hotel 4 - 5 March 2008, Singapore

Alternative Dispute Resolution, or ADR

• Definitions vary, but ADR generally refers to voluntary and consensual dispute resolutions techniques, including negotiation, mediation and conciliation.

• It is recommended that arbitration, expert adjudication, and other types of proceedings involving determinations on the merits by third party neutrals or experts, which are binding and enforceable, should for clarity be distinguished from voluntary forms of ADR.

• Although mediation and conciliation are often used interchangeably, conciliation may best be understood as an evaluative form of mediation, where the mediator or neutral expresses his or her views on the merits of the dispute (typically with the consent of both parties).

Why ADR?

• Commercial relationships, especially long-term relationships, can be healed in a less confrontational atmosphere.

• Stark determinations of narrow legal rights can be avoided in favor of imaginative “win-win” solutions, with assistance from a credible and experienced facilitator or mediator;

• Confidentiality can be reasonably assured;

• Litigation or arbitration in multiple jurisdictions can be avoided.

A caveat about ADR?

• Recall the adage, never argue (or go to mediation) with a scoundrel, or a fool.

• The resulting settlement agreement, if achieved, will only be enforceable as a simple contract. You may find yourself back at square one.

• Both parties must seek and be willing to accept a negotiated outcome, for ADR techniques to be effective.

• ADR processes can be, and are increasingly gamed by sophisticated and unscrupulous parties, or used as a substitute for discovery.

Why international commercial arbitration?

• In cross-border disputes, arbitration is generally a less formal process compared to national court proceedings;

• Arbitration is flexible, as procedures may, within limits, be agreed by the parties;

• A neutral jurisdiction can be selected as the place or seat of arbitration, thereby avoiding perceived or actual local bias or home court advantage;

• Arbitration is private (but not necessarily“confidential”), and results solely from the valid agreement of the parties to submit future disputes to arbitration;

• Unlike the judgment of a national court, the final award can be readily enforced in the more than 140 jurisdictions that are signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958)(“New York Convention”).

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The legal framework ofinternational commercial arbitration

• The New York Convention requires that national courts of signatory states:Compel parties to perform their arbitration agreements, unless such

agreements are “null and void, inoperable, or incapable of being performed” (Art. II); and,

Recognize and enforce binding foreign arbitral awards, unless such awards offend the public policy of the enforcing country; pertain to matters not arbitrable under the laws of the enforcing country or the laws of the state where the award was made; or where it is proved that the losing party was denied natural justice (Art. V).

• The United Nations Commission on International Trade Law Model Law on International Commercial Arbitration, 1985 (UNCITRAL Model Law), implementing the New York Convention, has been adopted by more than 60 jurisdictions.

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The limitations ofinternational commercial arbitration

• Arbitrators lack the coercive powers of national courts, which may be helpful in dealing with intransigent parties.

• Parties may wish to openly and publicly assert their legal rights or establish a binding precedent in certain types of cases (e.g., an intellectual property dispute).

• Inability to join unwilling third parties.

• The case for litigation in the national courts is much stronger for purely domestic disputes.

Before you begin drafting the ADR clause

• Inexperienced lawyers will declare victory when an overseas counterparty agrees to a governing jurisdiction clause allowing suit to be brought in the drafter’s national courts, where the counterparty may have no assets against which a judgment could be enforced.

• Before you begin drafting, always consider:– What types of disputes are likely to arise? Are the issues arbitrable?– What relief may be sought? Is there an efficient national court

available with jurisdiction to grant such relief?– Are conservatory measures likely to be required?– Where would a judgment against the counterparty need to be

enforced? Do any international treaties provide for the enforcement of a foreign court judgment?

– Are the jurisdictions of the seat and the enforcement state both signatories to the New York Convention?

Avoid the eleventh hour clause

• A pathological disputes clause may be worse than none at all, and could leave you without recourse to resolve a dispute.

• Having too few lawyers at the beginning, and too many at the end is not a happy result.

• Tiered escalation of disputes or step clauses, where the parties move from negotiation to mediation to court or arbitration, are increasingly used in construction and technology contracts.

• Escalation clauses can be helpful, especially where the parties have a long-term relationship, but may increase risk if not thoughtfully drafted.

• Be sure that the negotiation team focuses on dispute resolution early, and is supported by a disputes resolution specialist.

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Drafting the arbitration agreement

• The ICC model arbitration clause reads:All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by a sole arbitrator appointed in accordance with the said Rules.

• A preface to the ICC rules further recommends: Parties are reminded that it may be desirable for them to stipulate in

the arbitration clause itself the law governing the contract, the number of arbitrators and the place and language of the arbitration.

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The role of arbitral institutions

• Global (the ICC and LCIA), specialty (ICSID and WIPO), and local and regional (SCC, SIAC, HKIAC and DIAC), arbitration centers administer arbitration cases, according to their rules.

• The institutions charge a fee, which in the case of the ICC in Paris, is paid up front and calculated as a percentage of the amount in dispute. Hence, institutional arbitration comes at a price.

• The institutional rules present a time-tested, self-contained system of procedural rules.

• The institutions have helpful administrative staff, hearing rooms and other services, to ensure the arbitration runs efficiently.

• An institution’s imprimatur can assist enforcement (e.g., ICC Court of Arbitration scrutiny of draft awards under Art. 27 of its rules).

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Adopt the standard arbitration clause and rules of a recognized arbitral institution

• The careful drafting of the arbitration agreement will greatly improve the odds of having a well-managed arbitration.

• A great many fundamental problem areas in arbitration can be managed by simply agreeing on a recognized arbitral institution to administer the arbitration. Its system of rules will govern.

• The place or seat of arbitration will be critical, as the procedural law of the seat (the lex arbitri) will apply, unless otherwise agreed by the parties.

• Leave ad hoc arbitrations to the very experienced.

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Escalating disputes to senior management

• Consider providing for the escalation of settlement negotiations to senior management to remove the people from the problem, but avoid appeals or successive escalations to senior management.

• Refer to positions or posts within the company.

• Referring to named individuals is seldom advisable, because roles do change.

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Drafting escalation of disputes clauses

• Do not subject the jurisdiction of the arbitral tribunal to the completion of an earlier step or stage, e.g., completion of the prior step as a condition precedent.

• Consider expressly empowering the tribunal to direct a stay of arbitration pending completion of a prior step or stage, or to sanction non-compliance.

• Do not require the parties to agree that negotiation or mediation have failed as a pre-condition to moving on to the next step or stage.

• Clearly delineate the beginnings and endings of escalation stages, by including specific deadlines at which each stage will terminate.

• It is good practice to additionally provide that either party may give written notice that a step or stage has failed and is terminated at any time after commencement of that stage, but before the deadline has been reached.

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Avoid re-inventing the wheel

• Every law student knows that an agreement to agree is not enforceable.

• Mandatory ADR steps or stages are more likely to be enforced by a court or tribunal if the required steps are clearly and specifically prescribed.

• Providing that mediation or conciliation shall be conducted under a recognized protocol, such as that of CEDR, CPR, AAA / ICDR, IPOS or JAMS, will assist enforceability.

• Avoid gilding the lily by invoking complex or numerous steps and stages.

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Include an election to mediate …

• An election, rather than a requirement. There may be good and valid reasons why mediation would waste time and money:The dispute is not appropriate for mediation;The opposing party has no interest in working to achieve a

resolution;

• Provide a short window for either party to elect mediation, or the next stage follows automatically.

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Give your mediation provision teeth

• Impose a specified penalty, or give the tribunal the discretion to award costs where one party elects to mediate, but the other refuses to go along without good reason. Halsey v. Milton Keynes General NHS Trust [2004] EWCA Civ 576.

• Once the mediation has commenced, respect the voluntary nature of ADR by allowing either party to give notice terminating the mediation at any time, even before the specified deadline has run.

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Interim and conservancy measures

• Be sure that the arbitration law of the seat of the arbitration, or your arbitration agreement or incorporated rules, permits a party to apply to the national court or another designated and available authority for interim or conservancy measures, such as injunctive relief.

• This is especially important during the period before the time that the tribunal is constituted (See, e.g., ICC Rules, Art. 23(2)).

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How disputes are typically handled• Arbitration is commenced by serving notice on the opposing party, or

the Secretariat of the arbitral institution, along with the requisite fees.

• At a preliminary meeting, the parties’ agree a timeline for making oral and written submissions and a procedure for presenting evidence at the hearing. Counsel have considerable leeway to agree procedures that will best suit the particular case.

• The IBA Rules on the Taking of Evidence in International Commercial Arbitration have become the de facto standard for presenting lay and expert witness evidence.

• Compulsory disclosure of documents is limited, oral examination of lay witnesses is limited to cross and re-direct, and experts are often "hot tubbed" (questioned together).

• Awards are final and rarely challenged. More than 90% of ICC awards are paid when rendered, without the need for enforcement proceedings.

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Some closing suggestions

• Consider using the recommended model arbitration clauses available on the web sites of reputable arbitral institutions.

• Do not thoughtlessly delegate the selection of a mediator or arbitrator to a third party appointing authority.

• Get specialist legal advice:Before modifying a model arbitration clause;When selecting the seat of arbitration;If your dispute may involve multiple parties;When drafting a disputes escalation clause for your contract, or

when drafting a submission agreement after a dispute has arisen.

Thank You.

David Laurence KreiderChartered Arbitrator and General Counsel

Vodafone New Zealand

david.kreider@vodafone.com

© 2008 David Kreider