1. 1
Drafting and Negotiating Alternative
Dispute Resolution Clauses
David Laurence Kreider
Chartered Arbitrator and
General Counsel
Vodafone New Zealand
International Contract Law
Symposium 2008
Grand Hyatt Hotel
4 - 5 March 2008, Singapore
2. 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).
3. 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.
4. 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.
5. 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 of
international 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 of
international 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.
8. 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?
9. 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.
