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<xTITLE>International and U.S. Arbitration from a Business Perspective: The Importance of the Arbitration Clause </xTITLE>

International and U.S. Arbitration from a Business Perspective: The Importance of the Arbitration Clause

by Gerry DeNotto
February 2013 Gerry DeNotto
This article makes the case that business should use arbitration to resolve disputes. I was involved in arbitrations as a general counsel and president of a company in the energy industry on three continents: North America (U.S. and Canada), Europe and Africa. This article shares three examples from my experience with arbitration: one good, one bad and one ugly.  It will demonstrate how a well-drafted arbitration clause is likely to result in a cost effective, well-managed dispute resolution process that will provide real value to business, which the public court system cannot match and avoid the problems my company faced. The key is to make the arbitration clause the screenplay or the musical score for the arbitration.  An artfully drafted arbitration clause will serve for arbitration the same purpose a good screenplay or score serves a movie or a song: it guides and adds certainty to the entire process.

Court-Based Litigation, the Alternative to Arbitration, Is Not Cost-Effective.

My journey in becoming a supporter of arbitration started early in my career.  When I graduated from law school, I decided to try cases to see if I should specialize in litigation. As a law student, I clerked at a couple big law firms and saw that young attorneys in large law firms were never allowed to try a case so I joined a small litigation law firm.

Trying a case was exciting.  However, there was one overarching drawback.  I disliked wading through the discovery quagmire in order to get to trial. Discovery abuse, in economic terms, is a transfer of money from the client to the legal profession for no value in return. Too often the discovery grind amounted to a grab of a For A Few Dollars More by some of the legal profession. Further, it contributes to the public’s harsh view of attorneys and makes the wheels of public justice move that much slower. I decided litigation was not my preferred line of work and made it my job to get into business. I believe the public court system did a very good job given its limited resources and the large number and variety of cases with which it contended.

I became part of the law department of a large utility. That’s where I became acquainted with the energy business, which I have enjoyed ever since.  But I wanted to work for a smaller business so I moved on again.

I joined a start up independent power producer, formed as a result of the1978 Public Utility Regulatory Policies Act (PURPA).The company developed, owned and operated power generation plants. PURPA opened up the electric generation industry to competition from non-utility companies. Fortunately, I stayed for 20 years and worked my way up to company President, which I served as from 2006 to October, 2011.

Over the course of my involvement in several commercial arbitrations, I witnessed The Good, The Bad and The Ugly of arbitrations. They all provided lessons of what to do and not do, and, more importantly what should be included in an arbitration clause. My experience might be helpful to, among others, the transaction and in house attorneys who draft and negotiate arbitration clauses.

Author’s Guarantee: The stories you are about to read are true. The names have been deleted to protect the innocent and, especially, the not so innocent.

The Good

Arbitration can work in a business-like time cycle from filing to finality.

Since I’m using the title from the Sergio Leone classic film let me start with the good aspects of my arbitration experience. For attorneys who bill by the hour “Time is Money “  in the accretive sense. However, most businesses view time as the enemy. Our company developed, owned, constructed, and operated over 3,000 MWs of electric power generation plants in North America, Central America and the United Kingdom. We felt that the longer a project stayed on the drawing board the less likely it would become a reality. Changes in the target market, the governing party, law or regulations, or new competitors entering the market were examples of problems facing a developer caused by the mere passage of time. So we were always in a hurry.

For instance, a 600 MW gas-fired power plant, costing over $500 million dollars, can be built in two years. However, it is a common occurrence in U.S. and European courts for a case to be on the court docket for more than two years. When I told our business people a lawsuit could take three  years for it to go to trial they exhibited a combination of marvel and disbelief. For most businesses that is an unacceptably long cycle. I am not suggesting a case be decided with the speed of a NASCAR as in Talladega Nights, but it should proceed with the deliberate speed and pace of the runners in Chariots of Fire.

Although our arbitrations were not simple cases, they were completed within one year. That is the kind of achievement that business appreciates.

 Lesson: The arbitration clause should state the time frame for the case from filing to decision.

Written direct testimony works.

Our arbitration case in the United Kingdom employed the use of written direct testimony for all witnesses, fact and expert. It worked well! The case involved construction claims for a $100 million facility, which required two types of construction experts.

The written testimony was delivered 72 hours before the witness was scheduled to be cross examined. Because it was written the testimony was cogent. How many times have you witnessed a less than sterling line of questioning or an inarticulate witness accidently cause confusion and delay?  After the confusion has occurred, the party putting on the witness has to clear it up, which takes more time. In construction cases, eliciting testimony about, for instance, the “critical path” of a construction schedule is naturally complicated and the traditional direct testimony method does not lend itself to being presented in a clear light. Further, testifying even in a somewhat informal arbitral setting can be intimidating to a witness. Arbitration should de-emphasize rhetorical skills and focus on the facts and law. Let’s inject a little less lawyering and more business into the dispute resolution process.

In the UK case, the cross examiner had ample time to prepare a fulsome cross examination and the hearing schedule suffered no delay.  Have you ever had the hearing day end early because the witness had just finished his direct testimony and the opposing attorney asked for a recess until the next morning  in order to prepare for the cross examination? In addition, quite often the cross examiner needs the witness’s transcript in order to properly prepare and has to wait for the court reporter to produce the transcript. Written testimony removes these delays.

We have heard the major reason against written direct testimony. The usual suspect trotted out is that the testimony is (Oh, my gosh!) written by an attorney and that’s not cricket, old boy. I found that all witnesses carefully read a draft of their proposed written testimony, especially the expert witnesses. A self- respecting expert witness will point out a part of the proposed testimony as being A Bridge Too Far if he thinks he cannot support it. The trial attorney will dutifully change it until the expert witness is satisfied.

Lesson: The arbitration clause should state that the expert witnesses shall provide their direct testimony in writing. It should also require the experts appear together for cross examination. I would go one step further and require written direct testimony from fact witnesses, too.

Well- Crafted Limited Discovery/Disclosure Plan Resulted in a Timely Hearing.

Attorneys in the U.K., compared to their American counterparts, do things a little different Over There. As Sir Mick sings, “You can’t always get what you want, but if you try sometimes well you might just find you can get what you need.”

In the UK case, the arbitrator asked the attorneys what kind of discovery/disclosure they needed, not what kind they wanted, and the attorneys with alacrity sorted out a focused discovery/disclosure plan. A lot more discovery would have only driven up the cost for both sides and not shed any more light on the issues to be decided. The proceeding moved along quickly, progressing from start to finish in nine months. Bravo. However, I would not rely on the opposing parties and their attorneys always being so cooperative, thus the discovery/disclosure plan has to be imbedded in the arbitration clause.

Lesson: The arbitration clause should state that the number of depositions for each party and the cumulative time for them.

The Bad

We had a bad experience in an arbitration that combined two contracts. The problem could have been avoided with better drafting. Our company’s key executive had an employment agreement with an arbitration clause and a separate shareholder agreement which was silent on claim resolution. The company and the executive had a falling out. The executive filed an arbitration claim and wanted both agreements to be arbitrated. The arbitrator agreed reasoning that both agreements were intricately connected. The arbitrator’s decision awarded the executive an amount in the mid twenties of millions of dollars, seventy five percent of which was allocated to the shareholder agreement. The company could pay the employment award, but being a start-up company could not pay the shareholder amount of the award. If the award stood, the company was bankrupt.

We appealed the shareholder portion of the award claiming it should not have been arbitrated. The court ruled in our favor. The company survived but it was a close call.

Lesson: If you do not want a contract’s disputes to be arbitrated make it clear and state in the dispute resolution clause that the claims cannot arbitrated.

The Ugly

The company suffered through a tainted arbitration that incurred in an unnamed country.  The company was a claimant in a dispute involving a long term power purchase agreement. The gross revenue over the life of this 20 year contract would easily exceed $2 billion so there was real money at stake. The respondent held an incredible amount of influence in the region. It was the quasi-governmental utility and the area’s largest employer. It had a lot of clout. However, the venue for the arbitration was one of the nonnegotiable conditions set down by the other party for getting the deal done. We had three arbitrators – all upstanding (so we thought) members of the local legal community including one retired federal system judge. What happened?

The arbitrators without warning or explanation permitted every witness of the respondent to testify off 3 x 5 cards. I kid you not! While I like written direct testimony I think it should be afforded to all parties, not just the Home Team. Worse of all, there must have been one or more ex parte communications between the arbitrators and our opposing counsel in order to arrange the farce. We were left in the dark. The arbitrators delivered Oscar winning performance as they kept a serious demeanor during the charade. It was The Longest Day of my arbitration experience.

As I watched the first witness read from his 3x5 cards and I reeled my jaw up from the floor I made a mental note that a reasoned decision would not be necessary in this case. “Waiter, we’re through, just give me the bill, please.” This was the Home Town nightmare of all nightmares, but, at least, the case was done quickly. One must look for the small pleasures in life. By the way, the restaurants were good too.

Lesson: This case makes the setting of a neutral venue critical. In a contract involving parties from different countries the hearing should to be in a neutral venue. A neutral venue would have prevented the tainted behavior because the chief arbitrator mostly would have been selected from the neutral venue, thus not subject to the undue influence of one of the parties.

Professional Responsibility Note: In Illinois ex parte communication between an arbitrator and one of the attorneys during an arbitration can result in professional discipline against the attorney. See In re Kerry Irene O’Sullivan, M.R. 24972, 2011PR00078. (ILL. January 13, 2012).

 A Different Venue Experience with a Happy Ending: The company negotiated a joint venture agreement with a Central American party for a power plant in its country. That party had the leverage and wanted its country’s law to govern all disputes and have all disputes resolved in their court system. Well, I could see even without having read the book how this movie would end up for us if there ever was a dispute. We agreed to the governing law, but requested that all disputes be settled by arbitration in Miami, Florida – a neutral venue. Our company could readily accept Central American law being administered by a neutral arbitrator, but not having a neutral venue would be fraught with peril for us. Fortunately, the Central American partner agreed.

What should an Arbitration Clause Include?

The arbitration clause should be a mix of positive and negative commands. Bing Crosby would advise  that, “You Need to Accentuate the Positive and Eliminate the Negative” aspects of court litigation and set down those aspects of arbitration that attracts business when drafting an arbitration clause.

Every arbitration clause should:

  • Pick a set of Rules to govern the arbitration. Why fight over which rules should govern the case after a dispute has broken out between the parties? Also, pick the language for the arbitration in a multi-national transaction.
  • Set a neutral venue for the hearing. This prevents you from being the unwelcomed recipient of a Home Town tar and feathering committee.
  • Mandate that expert witness direct testimony shall be in writing and that the opposing expert witnesses shall be cross examined at the same time. I prefer all direct testimony to come in written form.
  • Set a discovery/disclosure plan. Do not rely on the good nature of future company representatives and trial attorneys to set up a discovery plan when they are in the midst of a dispute.
  • Set a limit to the number of depositions and their collective duration.
  • Forbid or Limit Interrogatories and Requests to Admit. Quite often answers given in response to Interrogatories and Requests to Admit  are, as Sam Goldwyn used to say when referring to oral contracts, “not worth the paper they’re written on.” 
  • Make the losing party to a dispositive motion pay the winning party’s attorney fees. Any party thinking about bringing a dispositive motion will think more than twice before bringing it.
  • Forbid or severely limit opening and closing arguments. A little less lawyering will attract business.
  • Set a time limit for the proceeding and decision.
  • Require a Preliminary Hearing and Case Management Order Within 14 days of the Answer’s due date.  An in house counsel or business person must be present for each party hearing.
  • Require a Confidentiality Order. Arbitration is private, but not inherently confidential.
  • Set the number of arbitrators.
  • Require mandatory evaluative mediation attended by the parties’ business people as a precondition to discovery. But require the mediation not to interfere with the arbitration schedule and be completed within 60 days of the selection of the arbitrator(s).
  • Require that the arbitrator’s decision will be based only on the pleadings, evidence elicited from discovery and at the hearing, and the governing law.
  • The arbitrator shall award attorneys’ fees and costs, including expert witness expenses, to the substantially prevailing side.

More Reasons Why Business Should Prefer Arbitration to Litigation.

As much as business should prefer arbitration for what it is, it should like it even more for what it is not.

Let us look at what arbitration is not. Arbitration does not have:

  • Voir dire;
  • Jurors;
  • Endless sidebars;
  • Jury instructions;
  • Dread on your part wondering if the juror in the second row, third seat from the left harbors a secret hatred of (Fill in the blank);
  • Interruptions caused by an emergency TRO for the judge to hear, which blows up the witness schedule, and shortens the hearing that day or, in federal court, the judge has to preside over a criminal matter ASAP;
  • Jury consultants;
  • Mock jury trials; and
  • Publicity.

Arbitration’s flexibility should make it the preferred method of dispute resolution. Let business people have it “My Way.”For instance, Arbitration:

  • Can be tailored to suit the parties, facts and issues. (It is like a bespoke suit versus one off the rack.)
  • Is private, which is important in some cultures.
  • Can be made confidential.
  • Can be conducted in a professional manner and setting by professionals respectful of business  and their employees(Again, important in some cultures);
  • Is not hamstrung by strict adherence to the time consuming and confusing Rules of Evidence and Procedure.
  • Uses knowledgeable, professional, and fully attentive arbitrators.
  • Can be conducted in a business time cycle.
  • Discounts rhetorical skills and sophistry that can sway a jury in contrast to the facts and law.
  • Results in better witness availability. Have you ever had a witness die before a long awaited trial?

What about arbitration’s limited right to appeal?

The lack of the right to appeal an arbitrator’s decision is held up as the biggest reason to avoid arbitration. Well, the vast majority of appeals filed in the court system fail. But would the mere threat of

an appeal prevent the overt act of bias my company experienced in the Ugly episode? I do not think so. If an appeal was available to the company, the tainted arbitrators could have hidden their bias and the company would be no more the wiser.

Arbitration’s Future is Bright

An arbitration based on a well thought out arbitration clause is more likely to result in timely justice than court litigation. In the minds of businesspeople most legal disputes are cost centers and the sooner they end the better. Further, as the public justice systems of large metropolitan areas continue to be cash strapped and forced to reduce employees and services thereby lengthening the time it takes to get to trial, more businesses will opt for the private justice system of arbitration and mediation.

Conclusion:  A good arbitration clause is good for business.

 Business is all about managing towards an objective standard, i.e. profitability, and that includes reducing uncertainty caused by delays. A business wants disputes resolved reasonably quickly and wishes the resolution of disputes to cause as little disruption to its core business and employees as possible.

The Lessons Learned show how a well-drafted arbitration clause can make arbitration more attractive to business for resolving disputes. Failure to incorporate a business-oriented arbitration clause leaves too many decisions up to parties mired in the midst of a dispute. It is better to create the framework (or screenplay) for dispute resolution while the parties are in a cooperative mood, which is often the case at the beginning of a contract. An arbitration clause should mandate and prohibit certain behavior.  A good arbitration clause can foster timely justice.

Biography


Gerry DeNotto was President (2006 to 2011) of Indeck Energy, a private independent power producer, that developed, owned, or operated over 3,000 MWs of natural gas, coal, hydro and renewable electric power generation projects in the U.S, the U.K., Canada, and Guatemala.  Also, Mr. DeNotto was Vice President and General Counsel of Indeck Energy and affiliated companies from 1991 to 2006. He has served as a director of four publicly held companies. Mr. DeNotto was a speaker or panelist at Projects & Money:  Biomass Market Outlook, Power-Gen International  Co-Firing Pellets in Coal Plants , Biomass Finance & Investment Summit , Project & Money Summit .  He has served as an expert witness in energy contract litigation.  Mr. DeNotto is an arbitrator and mediator.



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Website: www.denottoadrservices.com

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