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Prepared for: HBA M&A Section Meeting Drafting Effective Arbitration Clauses and Understanding their Long-Term Impact. Porter Hedges LLP. Thursday, April 17, 2014. Presented By: Jeffrey R. Elkin Allison J. Snyder. COMPARISON OF ARBITRATION AND LITIGATION. Some factors to consider:.

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slide1
Prepared for:

HBA M&A Section Meeting

Drafting Effective Arbitration Clauses and Understanding their Long-Term Impact

Porter Hedges LLP

Thursday, April 17, 2014

Presented By:

Jeffrey R. Elkin

Allison J. Snyder

topics we will cover
Topics We Will Cover:

Scope of Arbitration Provision

Named Provider or Ad Hoc

Number of Arbitrators and Method of Selection

Location / Venue of Hearing

Discovery Limitations

Award

Recovery of Fees and Costs

Pre-Arbitration Negotiations or Mediation

Confidentiality

Limitations on Damages / Arbitrator’s Authority

Schedule

scope of arbitration provision
Scope of Arbitration Provision

The AAA has proposed the following basic pre-dispute arbitration clause:

“Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Commercial [or other] Arbitration rules [including the Emergency Interim Relief Procedures], and judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction thereof.”

The CPR has proposed the following basic pre-dispute arbitration clause:

“Any controversy or claim arising out of or relating to this contract, or the breach, termination or validity thereof shall be settled by arbitration in accordance with the CPR Rules for Non-Administered Arbitration, by (a sole arbitrator) (three arbitrators, of whom each party shall appoint one) (three arbitrators, none of whom shall be appointed by either party). The arbitration shall be governed by the Federal Arbitration Act, 9 U.S.C.§1-16, and judgment upon the award rendered by the Arbitrator(s) may be entered by any court having jurisdiction thereof. The place of the arbitration shall be (City, State).”

“… any claim or dispute arising out of or related to this Agreement, or the interpretation, making, performance, breach, or termination thereof, shall (except as specifically set forth in this Agreement) be finally settled by binding arbitration …”

scope of arbitration provision continued
Scope of Arbitration Provision (continued)

“Any and all disputes among the Parties to this Agreement (defined for the purpose of this provision to include their principals, agents and/or Affiliates) arising out of or in connection with the negotiation, execution, interpretation, performance or nonperformance of this Agreement and the transactions contemplated herein shall be solely and finally settled by arbitration…. The Parties hereby renounce all recourse to litigation and agree that the award of the arbitrator shall be final and subject to no judicial review.”

“… any dispute arising out of this Agreement or any related document delivered by a party hereunder shall be settled by … binding arbitration …. The Parties agree that this is an essential term and parties have entered into this Agreement provided that all disputes are resolved through arbitration under this …. EACH PARTY, BY SIGNING THIS AGREEMENT … VOLUNTARILY, KNOWINGLY, AND INTELLIGENTLY WAIVES ANY RIGHTS SUCH PARTY MAY OTHERWISE HAVE TO SEEK REMEDIES IN COURT OR OTHER FORUMS, INCLUDING THE RIGHT TO JURY TRIAL.”

“… any dispute, claim or controversy arising out of or relating to this Agreement … or the breach, termination, enforcement, interpretation or validity hereof or thereof, including any request for specific performance, claim based on contract, tort, statute or constitution or the determination of the scope or applicability of this agreement to arbitrate, will be determined by arbitration …. Each Party agrees that this Agreement does not preclude any Party from (1) seeking provisional remedies in aid of arbitration, including specific performance or other equitable remedies, from any court of competent jurisdiction or (2) seeking judicial remedies for any matter not required to be resolved by arbitration hereunder in (x) the trial courts located in Santa Clara County, California or (y) the United States District Court for the Northern District of California….”

named provider or ad hoc
Named Provider or Ad Hoc

AAA, CPR, JAMS most common in domestic cases.

“… in accordance with the then current Commercial Arbitration Rules of the American Arbitration Association ….”

“The arbitration will be conducted in accordance with the JAMS Comprehensive Arbitration Rules and Procedures, as modified in this Section …. The arbitration shall be administered by JAMS in accordance with those rules.”

“The arbitrators shall decide all substantive and procedural issues by a majority of votes. As soon as possible, the arbitrators shall establish arbitration procedures as warranted by the facts and issues of the particular case. Except as provided specifically in this Article, the arbitrators shall have the power to determine all procedural rules of the arbitration, including, but not limited to inspection of documents, examination of witnesses, and any other matter related to the conduct of the arbitration…. The arbitrator shall not be obligated to follow judicial formalities or the rules of evidence except to the extent required by Applicable Law. To the extent permitted by Applicable Law, the panel shall have the authority to issue subpoenas (including subpoenas to third party witnesses) and other orders to enforce their decisions.

number of arbitrators and method of selection
Number of Arbitrators and Method of Selection

“Such arbitration shall be conducted by a single arbitrator chosen by mutual agreement of the Parent and the Stockholders. Alternatively, at the request of either party before commencement of arbitration, the arbitration shall be conducted by three independent arbitrators, none of whom shall have any competitive interests with, ownership interests in, or other conflicts of interest concerning Parent or the Stockholders.”

“The arbitration shall be before three arbitrators, one chosen by each of Buyers and Sellers and the third independent arbitrator chosen jointly by the two arbitrators…. The arbitrators shall each be a lawyer neutral as to each Party who is experienced in commercial business affairs.”

“… [the arbitration] shall be conducted … by a single arbitrator selected by the Parties. The arbitrator shall be a lawyer familiar with business transactions of the type contemplated in this Agreement who shall not have been previously employed or affiliated with any of the Parties.”

number of arbitrators and method of selection continued
Number of Arbitrators and Method of Selection (continued)

“… each of Buyer and Seller will … summarize its position with regard to [any] such disputed adjustment(s) that have not been resolved by Seller and Buyer … in a written document (an “Arbitration Notice”) and submit such summaries to the Houston, Texas office of Ernst & Young LLP (or if Ernst & Young LLP is unable or unwilling to serve as arbitrator within 20 days after receipt of a written request from the Parties to serve and absent agreement by the Parties as to a replacement for such arbitrator within 10 Business Days after notification that Ernst & Young LLP is unable or unwilling to serve, the arbitrator will be a nationally recognized accounting firm not materially affiliated with Seller or Buyer selected by the Houston, Texas office of the AAA) (the “Accounting Arbitrator”) ….”

“Arbitrations under this Agreement shall be conducted before a panel of three (3) arbitrators, one selected and paid for by Buyer, one selected and paid for by the Sellers’ Representative, and one selected by mutual agreement of the arbitrators selected and paid for by both Buyer and the Sellers’ Representative.”

location venue of hearing
Location / Venue of Hearing

“The arbitration shall be conducted in Los Angeles, California, and shall be governed by the laws of the State of California.”

“The location of all proceedings shall be determined by the arbitrators.”

“Any arbitration shall take place in New York, New York.”

“The arbitrator will have the power to order hearings and meetings to be held in such place or places as he or she deems in the interests of reducing the total cost to the parties of the arbitration.”

discovery limitations
Discovery Limitations

“… each party shall be limited to calling a total of three witnesses both for purposes of deposition and the arbitration hearing. . . . [T]he arbitrator or arbitrators . . . shall set a limited time period and establish procedures designed to reduce the cost and time for discovery while allowing the parties an opportunity . . . to discover relevant information from the opposing parties about the subject matter of the dispute. The arbitrator, or a majority of the three arbitrators . . . . shall have the authority to impose sanctions for discovery abuses, including attorneys’ fees and costs, to the same extent as a competent court of law or equity, should the arbitrators or a majority of the three arbitrators . . . determine that discovery was sought without substantial justification or that discovery was refused or objected to without substantial justification.”

“Each party to the arbitration will be entitled to the timely production by the other parties to the arbitration of relevant, non-privileged documents or copies thereof. If the parties are unable to agree on the scope and/or timing of such document production, the arbitrator will have the power, upon application of any party to the arbitration, to make all appropriate orders for the production of documents by any party to the arbitration or to authorize a party to the arbitration to seek the discovery of documents from Persons that are not parties to the arbitration…. [E]ach party to the arbitration will be entitled to conduct depositions to provide non-privileged testimony that is relevant to the controversies, claims, or disputes at issue. If the parties to the arbitration are unable to agree on the propriety, scope, number, or timing of the deposition or depositions, the arbitrator . . . may make all appropriate orders in connection with the proposed deposition or depositions.”

discovery limitations continued
Discovery Limitations (continued)

Discovery. Discovery will be strictly limited: (1) each party will promptly produce to the other all relevant and non-privileged documents and electronic data for inspection and copying; and (2) each Party will promptly submit written reports of its testifying expert witnesses to the other party, and permit the other parties reasonable opportunity to depose such expert witnesses. The parties shall not conduct any further discovery unless permitted by the arbitrator(s) for good cause shown. The arbitrator(s) shall not conduct any independent discovery, procure experts, or subpoena witnesses without the prior written consent of the parties.

Each party shall be limited to written requests for production (no more than 50)and no more than 43 hours of fact witness depositions, per party. The time restriction on fact witness depositions applies to depositions noticed by either party.

award
Award

“The decision of the arbitrator or a majority of the three arbitrators, as the case may be, as to the validity and amount of any claim hereunder shall be final, binding, and conclusive upon Parent, on the one hand, and the Stockholders, on the other hand. Such decision shall be written and shall be supported by written findings of fact and conclusions of law which shall set forth the award, judgment, decree, or order awarded by the arbitrator(s)….”

“The arbitrator shall, within thirty (30) days of the conclusion of the hearing, unless such time is extended by mutual agreement, notify the parties in writing of his/her decision, stating the reasons for such decision and separately listing the findings of fact and conclusions of law.”

“The arbitrator shall promptly hear and determine (after giving the Parties due notice and a reasonable opportunity to be heard) the issues submitted and shall render a reasoned award in writing within a reasonable period after the appointment of the arbitrator.”

award continued
Award (continued)

“The Parties will instruct the Accounting Arbitrator that, within 20 Business Days after receiving the Parties’ respective submissions, the Accounting Arbitrator will render a decision choosing either Seller’s position [as] presented by Seller or Buyer’s position … whichever is most accurate based on the terms of the Agreement and the [submitted] materials described above…. The Accounting Arbitrator will be authorized to resolve only the specific disputed aspects of the Final Settlement Statement submitted by the Parties as provided above and may not award damages, interest (other than with respect to Section 3.3) or penalties to any Party with respect to any matter, notwithstanding any AAA Rules to the contrary.”

The arbitrators shall issue a standard award.

“Decision/Appeal. Upon reaching a final decision, the arbitrator(s) must render findings of fact and conclusions of law upon which the decision is based.

recovery of fees and costs
Recovery of Fees and Costs

“The parties agree that each party shall pay its own costs and expenses (including counsel fees) of any such arbitration, and each party waives its right to seek an order compelling the other party to pay its portion of its costs and expenses (including counsel fees) for any arbitration. Any fees of the arbitrator(s) shall be borne in accordance with the Commercial Arbitration Rules of the American Arbitration Association governing the arbitration.”

“The arbitrator shall divide all costs (other than fees and expenses of counsel) incurred in conducting the arbitration in the final award in accordance with what the arbitrator deems just and equitable under the circumstances….”

“The expenses of any arbitration pursuant to this section shall be borne by the losing party.”

pre arbitration negotiations or mediation
Pre-arbitration Negotiations or Mediation

“The Parties shall promptly attempt to resolve any Dispute by negotiations between Buyers and Sellers (or their Affiliates). Either Buyers or Sellers may give the other party written notice of any Dispute not resolved in the normal course of business. Representatives of Buyers (who may include the CEO or the CFO of Company) and Sellers (who may include the CEO or COO of Equity Owner) shall meet at a mutually acceptable time and place within 30 calendar days after delivery of such notice, and thereafter as often as they reasonably deem necessary, to exchange relevant information and to attempt to resolve the Dispute. If a negotiator intends to be accompanied at a meeting by legal counsel, the other negotiator shall be given at least three Business Days prior notice of such intention and may also be accompanied by legal counsel. If the Dispute has not been resolved by these Persons within 60 calendar days of the disputing party's notice, or if the parties fail to meet within such 30 calendar days, either Buyers or Sellers may initiate binding arbitration as provided below.”

“… the parties shall first attempt to mediate the matter. If the matter(s) has not been satisfactorily resolved (or waived), within thirty (30) days after written notice by either party to the other requesting mediation, then the matter shall be referred to arbitration for resolution ….”

pre arbitration negotiations or mediation continued
Pre-arbitration Negotiations or Mediation (continued)
  • Exclusive Process. The dispute resolution process described below shall be the sole and exclusive process for the resolution of disputes between the Parties with respect to this Joint Venture and interpretation of this Agreement.

Step 1 – Senior Executives: Any disagreement which cannot be resolved by the Management Committee established by this Agreement shall be presented for resolution by either Party to a senior executive designated by each Party. The appointed senior executives for each Party are, as follows:

Senior Executives shall attempt to resolve the disagreement within ten (10) days following presentation of the dispute, or within such longer period mutually agreed in writing.

pre arbitration negotiations or mediation continued1
Pre-arbitration Negotiations or Mediation (continued)

Step 2 – Mediation:If Senior Executives are unable to resolve the disagreement, the dispute may be referred to mediation if either Party files a Request for Mediation within thirty (30) days thereafter following expiration of the time stated above (or mutually agreed to) for resolving the disagreement among Senior Executives. Mediation, if instituted, shall be in accordance with the Construction Industry Mediation Procedures of the American Arbitration Association in effect as of the date of this Participatory Subcontract. Mediation, if requested, shall be concluded within ninety (90) days following the filing of a Request for Mediation.

[Step 3 – Arbitration:]

pre arbitration negotiations or mediation continued2
Pre-arbitration Negotiations or Mediation (continued)
  • Dispute Resolution through non-binding negotiation. As a condition precedent to filing litigation, the parties shall attempt in good faith to resolve through negotiation any dispute, claim or controversy arising out of or relating to the Prime Contract, according to the following mandatory procedures:
    • Exchange of Correspondence. Either party may initiate negotiations by providing written notice to the other party, setting forth the subject of the dispute and the relief requested. The recipient of such notice shall respond within ten (10) days of receipt of notice with a written statement of its position on a recommended solution of the dispute.
    • Meeting of Project Level Representatives. If the dispute is not resolved by the exchange of correspondence under (a), then project level representatives of each party with their respective level of settlement authority will meet at a mutually agreeable time and place within ten (10) days of receipt of the written statement outlined in (a) in order to exchange relevant information and positions and to make good faith efforts to resolve the dispute.
pre arbitration negotiations or mediation continued3
Pre-arbitration Negotiations or Mediation (continued)
  • Meeting of Senior Home Office Representatives. If the dispute is not resolved by negotiations between project level representatives within ten (10) days after the initial meeting under (b), then senior home office representatives of each party with their respective level of settlement authority will meet at a mutually agreeable time and place within twenty (20) days after the final project level meeting outlined in (b) to attempt to resolve the dispute.
  • Meeting of Chief Executive Officers. If the dispute is not resolved by negotiations between senior home office representatives within ten (10) days after their initial meeting under (c) then the Chief Executive Officer of each party will meet at a mutually agreeable time and place within twenty (20) days of the date of the final senior home office representatives meeting to attempt to resolve the dispute.
  • Extensions of Time Constraints. Time constraints indicated herein for completing negotiations outlined herein may be changed by mutual agreement of the parties.
pre arbitration negotiations or mediation continued4
Pre-arbitration Negotiations or Mediation (continued)

As a condition precedent to the commencement of arbitration, the parties shall in good faith first attempt to resolve any dispute or disagreement using mediation. Upon the written request of either party, the other party shall endeavor in good faith to agree upon a mutually acceptable mediator. In the event that the parties are not able to agree upon a mutually acceptable mediator within twenty-one (21) calendar days of the date of the party’s request to the other party, either party may commence the mediation process by filing a request for appointment of a mediator and administration of the mediation proceeding with the American Arbitration Association (“AA”) pursuant to its Construction Industry Arbitration Rules and Mediation procedures, in effect at the time of the request for mediation (“AAA Rules”) provided however, that the mediator appointed must possess at least ten (10 years of full or part=time experience as a commercial mediator with significant construction industry experience. The mediation shall be held in ______________ (City and State).

Upon the appointment of the mediator, the mediator and the parties shall determine the date, time and length of the mediation conference. The parties and the AAA (if used) are not limited to any geographical area or mediator fee range with respect to the source of a neutral mediator. Unless otherwise mutually agreed upon by the parties, the mediation conference shall be held within ninety (90) days of the date of appointment of the mediator. In the event that the mediation conference is not commenced within this ninety (90) days period, any party is free to commence arbitration in accordance with the terms of this Agreement. No mediator shall be selected whose schedule precludes him or her from holding the mediation conference within ninety (90) days of his/her appointment.

The fees, costs and expenses of the mediator and the AAA’s administration of the mediation process (if AAA administration is used) shall be borne equally by the parties. Each party shall be responsible for paying its own attorneys’ fees, costs and expenses incurred in the mediation process, provided that if an arbitration is required, the arbitrator(s) shall assess the cost of mediation to the non-prevailing party in the arbitration proceeding.

confidentiality
Confidentiality

“Except as required by Law, no Party may disclose the existence, contents or results of an arbitration brought in accordance with this Agreement, or the documents presented and evidence produced by its opposing Parties, or any analyses or summaries derived from such evidence. To the extent permitted by Law, the arbitration shall be considered and treated by the Parties as a confidential proceeding.”

limitations on damages arbitrator s authority
Limitations on Damages / Arbitrator’s Authority

The arbitrators will have no authority to award punitive damages, exemplary damages, consequential damages, multiple damages, or any other damages not measured by the prevailing Party’s actual damages, and may not, in any event, make any ruling, finding or award that does not conform to the terms and conditions of the Agreement.

The arbitrator(s) shall not grant any punitive damages nor any relief prohibited by or inconsistent with the terms of this Agreement. This Agreement is subject to the Federal Arbitration Act, 9 U.S.C.§§1-16, except as modified herein. All decisions shall be final and binding on the parties, and may be entered in any court of competent jurisdiction, except that appeals based on errors of law, lack of evidence, sufficiency of evidence, or any other grounds provided by statute, may be made to the federal district court nearest the site of the arbitration.

limitations on damages arbitrator s authority continued
Limitations on Damages / Arbitrator’s Authority (continued)

“The arbitrator shall have no authority to award punitive or speculative damages or any damages inconsistent with this Agreement. In addition to monetary award, the arbitrator shall be empowered to award equitable relief, including an injunction and specific performance of any obligation under this Agreement.

“Buyer and the Sellers’ Representative further agree that the arbitrators in any such arbitration shall have full authority to order specific performance or other equitable relief and other damages; provided, however, that the arbitrators shall not be authorized to award any punitive damages in connection with any controversy or claim settled by arbitration hereunder.”

schedule
Schedule

The parties shall have twenty-one (21) calendar days from the end of the mediation process (as determined by the mediator’s conclusion that impasse has occurred) to mutually agree upon and select the arbitrator(s). If after twenty-one (21) calendar days, the parties have not selection all of the arbitrators; either Party may commence the arbitration process by filing a Demand for Arbitration with the AAA. In such case, the arbitration proceeding (including the selection and appointment of the arbitrators), shall be administered by the AAA. The arbitration proceeding shall be held in ______ (City and State). No arbitrator shall be selected whose schedule precludes him or her from holding the arbitration hearing within two-hundred and seventy (270) days of his/her appointment.

The arbitration hearing shall be concluded within two hundred and seventy (270) days of the date on which the arbitrator(s) is appointed, unless the parties mutually otherwise agree in writing. During the entire arbitration process, the arbitrator shall manage the proceeding and engage in all reasonable efforts to minimize any wasteful or unnecessary delays, costs and expenses, including limiting discovery to only that which is reasonably required to allow the parties and their counsel to expeditiously prepare to present evidence of the claims and defenses at issue.