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Breakout Session # 105Edward M. Mullins, ShareholderAstigarraga, Davis, Mullins and Grossman, P.A.

Miami, Florida Date: Tuesday, April 15th, 2008

Time: 2:10 p.m. – 3:10 p.m.

Keeping Them Honest: Drafting Binding and Effective Arbitration Clauses

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Start with “The End” in Mind

• The Four Purposes of an Effective Arbitration Agreement:

1. Define what is arbitrable 2. Commit to resolve disputes through arbitration; 3. Provide rules for arbitration 4. Provide for entry of judgment

Source: John Townsend, Drafting Arbitration Clauses, Dispute Resolution Journal, vol.58, No.1, Feb-Apr 2003

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Scope: Broad v. “Unbroad” Clauses

• “All disputes arising under this Agreement”

v.

• “All disputes arising under or in connection with this Agreement”

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AAA Approved Clauses - Future

• 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 in accordance with its Commercial [or other] Arbitration Rules [including the Optional Rules for Emergency Measures of Protection], and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

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AAA Approved Clauses- Existing

• We, the undersigned parties, hereby agree to submit to arbitration administered by the American Arbitration Association under its [Commercial or other] Arbitration Rules the following controversy: [describe briefly]. We further agree that a judgment of any court having jurisdiction may be entered upon the award.

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ICC Clauses

• 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 one or more arbitrators appointed in accordance with the said Rules.

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ICC Clauses - Obligation to submit dispute to ICC Expertise, followed by ICC Arbitration as required

‘In the event of any dispute arising out of or in connection with clause [X] of the present contract, the parties agree to submit the matter, in the first instance, to administered expertise proceedings in accordance with the Rules for Expertise of the International Chamber of Commerce. If the dispute has not been resolved through such administered expertise proceedings it shall, after the Centre’s notification of the termination of the expertise proceedings, be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules of Arbitration.’

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Scope

• What causes of action or claims?• Trend: Plaintiff’s Bar

– Contractual– Tort– Statutory

• Antitrust• Distributorship• Unfair and Deceptive Trade Practices

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Scope: Broad v. Broader

• “any dispute arising out of or relating to the lease between WTC and TMI”

is not as broad as:• “any dispute between them or claim by either

party to the contract against each other”

Telecom Italia, SpA v. Wholesale Telecom Corp., 248 F.3d 1109 (11th Cir.2001)

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Scope: Damages

• Punitive Damages? – Create Gap? Two approaches– AAA Rule 28(5)-International Context

• Punitive damages NOT allowed unless Agreement says otherwise

• But in U.S. context: Arbitrators allowed to award punitive damages unless Agreement says otherwise. Mastrobuono v. Shearson Lehman Hutton, 514 U.S. 52 (1995).

– Is it waivable?

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Scope: Termination Issues

• Will arbitration clause be effective after termination of the contract?

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Termination: Expired Contracts

• An arbitration agreement contained in an expired fixed-term contract "can be said to arise under the contract only where it involves facts and occurrences that arose before expiration, where an action taken after expiration infringes a right that accrued or vested under the agreement, or where, under normal principles of contract interpretation, the disputed contractual right survives expiration of the remainder of the agreement."  

Litton Financial Printing Division v. NLRB, 501 U.S. 190, 205 (1991)(emphasis added).

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Scope: Termination Issues (1)

Compare:“The parties shall use their best efforts to

resolve by negotiation any dispute, controversy or claim that may arise between them in connection with or arising out of this Agreement. In the event the parties cannot resolve directly any such dispute, controversy or claim, then such dispute, controversy or claim shall be submitted to arbitration . . .”

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Scope: Termination Issues (2)

With:“Dispute Resolution Generally. (a) All disputes,

controversies, and claims directly or indirectly arising out of or in relation to this Agreement or any of the Related Agreements, or the validity, interpretation, construction, performance, breach, termination or enforceability of this Agreement (including, without limitation, this clause) and the Related Agreements (collectively “Disputes”) shall be resolved in accordance with the procedures set forth in this Article IX.”

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Scope: Non-Signatory Parties

Claims against parent corporations, affiliates, officers, employees

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Scope: Injunctive Relief

“Injunctive Relief: Manufacturer agrees that in the event any breach by Manufacturer of any of the provisions of this Agreement which would cause immediate and irreparable injury to the Distributor, the Distributor shall be entitled to injunctive relief and any or all other remedies applicable at law or in equity in any court of appropriate jurisdiction.”

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Scope: Other Considerations

• Language

• Discovery

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Scope: Section of Arbitrators

• Number of Arbitrators

• Selection Criteria

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Scope: Pathological Clauses

• Equivocation– “in case of dispute, parties agree to submit to arbitration, but

in case of litigation, Florida courts shall have jurisdiction.”

• Omission– “any disputes arising out of this Agreement will be finally

resolved by binding arbitration.”

• Over-Specificity– Including too much detail to where it becomes impossible to

put into practice. E.g.: Arbitrators shall be experts in nanotechnology

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Pathological Clauses (cont.)

• Unrealistic– “hearings will be concluded in no more than three (3) days”

• Overreaching– Hooters Case – One party has total control of process,

choice of arbitrators, etc.

“ A poorly drafted dispute resolution clause is worse than no clause at all.”

ICDR Guide to Drafting Dispute Resolution Clauses

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Scope: Award Enforceable in Court

• U.S. – Clause should come within meaning of Section 2

of Federal Arbitration Act– States have their own arbitration acts, but FAA

preempts inconsistent law • International

– Clause should come within meaning of Art. II.1 of U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), or Panama Convention

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Scope: Enforcement of Award

Provide for severability in case some portion of the clause fails

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Terms of Engagement- Arbitrability

• Who decides if dispute is arbitrable?– Court– Arbitrator

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Terms of Engagement• Governed by:

A. Substantive law for merits of case

B. Arbitral law governing the arbitral process and its outcome

C. Procedural rules for the conduct of the arbitration

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Terms of Engagement• Preconditions to engagement:

– Mandatory negotiation or mediation – “Step Up” Provisions

– Effect?– Waive or forfeit arbitration rights

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Terms of Engagement

“Start with the end in mind”

Impose time limit

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Terms of Engagement

“The parties shall use their best efforts to resolve by negotiation any dispute, controversy or claim that may arise between them in connection with or arising out of this Agreement. In the event the parties cannot resolve directly any such dispute, controversy or claim, then such dispute, controversy or claim shall be submitted to arbitration in accordance with the rules of the American Arbitration Association in force on the date of this Agreement.”

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Terms of Engagement

“Start with the end in mind”

Leave no gap

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If any controversy arises between the parties derived from this contract or that in any way affects in a serious manner the normal functioning of ABC Holding S.A., . . . the representatives of the Board of the Directors of the parties will meet . . . to settle it amicably.

Con’t. Next Slide

SETTLEMENT OF CONTROVERSIES

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“Any controversy arising from the interpretation, performance or termination of this agreement or its noncompliance that cannot be settled by the parties in accordance with the provision and terms established in the foregoing paragraph, will be submitted to arbitration . . .”

_______________________________________“ . . . derived from this contract or that in any way it

affects in a serious manner the normal functioning of ABC Holding S.A., . . .”

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Terms of Engagement

• Substantive law for merits of case

– But consider: • Effect of a choice of

law provision upon the arbitral law

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Terms of Engagement

• Seat – Legal “location” of the Arbitration

• Effect: possible selection of law governing arbitration and its effect

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Terms of Engagement- Seat (1)

• Legal Location of the Arbitration– Some arbitration laws apply where

“arbitration conducted” or “arbitration takes place”

– Where did arbitration “take place”?

– “Seat” vs. “Location of the arbitration”

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Terms of Engagement- Seat(2)• Location of the Arbitration:

– Chose arbitral law?Rintin Corp. v. Domar, Ltd., 766 So.2d 407 (Fla. 3d DCA

2000):Parties chose FIAA in the arbitration clauseResult: arbitrability was issue for arbitrators, not court

– Where will one get other relief? • Compel arbitration• Vacate

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Terms of Engagement- Seat (2)Cont.

• Personal Jurisdiction: – “ARBITRATION: . . . If the party successfully breaches this arbitration

provision, jurisdiction in any subsequent suit will be limited to Florida law & Florida law will apply…”

Held: Personal jurisdiction was not appropriate under the Florida long arm statute; notwithstanding the parties’ stipulation that arbitration is the proper way to address their dispute, the petition in Florida to compel arbitration was dismissed due to forum’s lack of personal jurisdiction

In the Matter of Arbitration Between Johns and Taramita, Inc. 132 F. Supp.2d 1021 (S.D. Fla. 2001): Suit between foreigners to compel arbitration

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Terms of Engagement - Seat

Bottom Line- • Specify the forum in which litigation to

compel or vacate arbitration should take place

• Provide that parties consent to venue and personal jurisdiction in that forum

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Terms of Engagement - Seat

• Specific Issues: – Example - Florida Issue:

FIAA provides that circuit courts have in personam jurisdiction over anyone who participates in a Florida based arbitration, or agrees to participate in an arbitration in Florida. Fla. Stat. Section 684.30

Applicable?

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Terms of Engagement

• Institutions– ICC – International Chamber of Commerce – AAA (ICDR) – American Arbitration Association – LCIA – London Court of International Arbitration

• Limits of Party Autonomy

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Terms of Engagement: Ad hoc v. Institutional

• Varying the Rules: Issues to consider– Method for appointment of arbitrators– Qualifications– Language– Discovery– Consolidation– Time Limits – risks associated with setting them– Confidentiality

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Terms of Engagement- Institutions

• Choose well– Local or Domestic Chambers– Continued Existence

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Recent Developments in Arbitration Law

• Arbitration Fairness Act of 2007– Bans predispute arbitration clauses in

• consumer contracts• employment agreements• franchise agreements

• New bill seeks to expand ban to mortgage agreements

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Recent Developments (2)“The Backlash”

• New AFA affects also:– undefined franchise disputes– any dispute arising under any statute intended to

protect civil rights or to regulate contracts or transactions between parties of “unequal bargaining power.”

• Overturns 40 years of Supreme Court precedent on arbitrability.