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Project Members Christopher Bloch is a JD candidate with a certificate in international law, graduating in May 2010 from

Pace Law School. He completed his undergraduate coursework at Loyola College in Maryland with a degree in political science and minors in marketing and Asian studies. Mr. Bloch taught in the business school of Assumption University in Bangkok, Thailand before coming to Pace Law and has worked during his law school summers at Clayton Utz in Sydney, Australia and Freshfields Bruckhaus Deringer in Cologne, Germany. He is a research assistant at the Pace Institute for International Commercial Law and works as a teacher’s assistant in Contracts, Civil Procedure and Constitutional Law. cbloch@law.pace.edu

Rebecca Emory is a JD candidate with a certificate in international law, graduating in May 2010. She completed her undergraduate coursework at George Washington University with a degree in political science. Ms. Emory is a dual citizen of Germany and the United States and spent her law school summers working in Sierra Leone as an intern in the Judicial Chambers of the Special Court of Sierra Leone which tries war criminals from the civil war. She has also done work as a summer associate for FreshfieldsBruckhaus Deringer in Dusseldorf, Germany where she worked in the Corporate Practice Group. remory@law.pace.edu

Roberto Pirozzi received his LL.M in Comparative Law with a concentration in International Arbitration from Pace Law School in December 2009 and completed his law degree at LUMSA, University of Rome (2003, summa cum laude). As a qualified Italian attorney since 2006, Mr. Pirozzi worked in Rome as an associate in the Alternative Dispute Resolution Department of Pagani & Partners LLP and a senior associate in the Antitrust Department at Legance LLP. During his time at Pace, Mr. Pirozzi has worked as an intern at Colliern, Halpern, Newberg, Nolletti & Bock LLP in White Plains, NY in their Commercial Litigation Department and spent time as a judicial intern in the chambers of the Honorable Alan D. Scheinkman, New York State Supreme Court, White Plains. rpirozzi@law.pace.edu

Leslie Nadelman is a JD candidate at Pace Law School, expecting to graduate in May 2010. She works at the Brooklyn District Attorney’s Office, Trial Bureau and is interested in International criminal work. Ms. Nadelman has worked at the Pace Institute for International Commercial Law on several research projects. lnadelman@law.pace.edu

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Project Aims and Purpose

Assess and compare the effectiveness and general use of multi-step arbitration clauses in international commercial contracts through legal research and empirical study focusing on corporate counsel

Set forth best practices and model language to be utilized in the application of multi-step ADR clauses based on the survey results

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Presentation RoadmapSt

ep

Cla

use

s • What is a step clause?

• Why have step clauses become the norm today according to survey results?

• Best Practices for drafting a step clause based on survey N

on

-Bin

din

g P

roce

sse

s • Negotiation –Definition and Considerations for Their Use

• Mediation –Definition and Considerations for Their Use

• Practical Application

Bin

din

g P

roce

sse

s • Arbitration –Definition and Considerations for Their Use

• Designating the Substantive Law and Governing Procedures

• Enforcing an Arbitral Award Under the New York Convention C

om

pe

llin

g C

om

plia

nce • Court Enforcement

of Step Clauses

• Binding Nature of Clauses on the Parties

• Condition Precedent for Steps

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Survey Results Survey Results Survey ResultsSurvey Results

What are Step Clauses?

Definition of a step clause

Trend towards the use of step clauses

Why are step clauses important in international contracts?

5

18%

82%

One Step

Multiple Steps

Single vs. Multi-Step ADR Clauses

Four Basic QuestionsWhen are step clauses included?

Why are step clauses included?

Are step clauses effective compared to standard ADR clauses?

What are the essential ingredients in drafting a step clause?

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Survey PoolIndustries Represented in Survey

Most survey takers conduct business in North America (43%), Western Europe (23%), and Southeast Asia (15%) with an annual revenue of over $1 Billion (58%)

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Litigation

Arbitration

Mediation

Negotiation

Alternative Dispute Resolution Processes

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Increasing Financial and Relationship

Costs

Formalities of Arbitration Increase• e.g., discovery procedures

Parties Want to Keep Working Relationships

Total Contracts Including ADR Clauses Contracts Using One Step vs. Multiple Steps

18%

82%

One Step

Multiple Steps

15%

11%

9%

25%

39%0-25%

26-50%

51-75%

76% or more

All Contracts

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Binding Processes as a Last ResortStep clauses are “grounded on the notion that disputes are best resolved by relatively informal, flexible, efficient and inexpensive means, and that binding adjudication through arbitration or litigation should be reserved as a final step in the event all else fails.” -Thomas Stipanowich, THE ARBITRATION PENUMBRA (2007)

0%

10%

20%

30%

40%

50%

60%

0-25% 26-50% 51-75% 76% or more

9%14%

18%

59%

Resolved Through Negotiations

0%

10%

20%

30%

40%

50%

0-25% 26-50% 51-75% 76% or more

48%

19%

8%

25%

Series1

Resolved Through Mediation

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“Plug and Play” Drafting

Since a procedure that may be appropriate for one dispute may not be suitable for another, in the event that parties can reasonably anticipate disputes between them, their goal should be to manipulate boilerplate or model clauses to fit their individual needs.• Boilerplate clauses should not be inserted directly

into contracts, or else they could leave major gaps or lead to ambiguities in the application of such clauses in specific agreements

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Basic Elements Necessary for a Valid Step

Clause Order of steps which must be followed

Desired rules and limitations placed on each step

Indication of time limits for each step (triggering the following step)

Specifying an undisputable trigger for the tolling of such time limits

Who must be notified when the step has been completed or moot

How and when this notification should be completed

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Mandatory Negotiation Step

Generally, negotiation is more practical for settlement when

the parties' need to continue the business relationship outweighs their need to get their way on a particular issue.

Successful Resolution Using Negotiation

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Benefits of Mandatory Negotiations

Parties that include a mandatory negotiation step generally name the following reasons:

Enhances working relationships (64%)

High percentage of successful resolutions at this step (58%)

Cost-efficiency (58%)

Less formal (45%)

Provides a better understanding of client needs (39%)

Client requests it (17%)

Other (e.g., the need or desire to encourage mid-level managers to resolve issues at this level on their own) (5%)

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Pursuing Negotiation Regardless of

Contract Language

If the language does not specifically say that the negotiation is mandatory, parties are not required to enter settlement negotiations at all

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Parties Negotiating Without the Requirement

“Mediation is the intervention of an acceptable, neutral, third

party with no binding decision-making authority, who assists the parties involved in the dispute to reach a mutually acceptable settlement of the issue in dispute.”

Christopher W. Moore, THE MEDIATION PROCESS: PRACTICAL STRATEGIES FOR RESOLVING CONFLICTS (2003)

The Mandatory Mediation Step

Mandatory Mediation Step in ADR Clauses

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Requirements for a Mandatory Mediation

Step

For any mediation step to be considered mandatory, there arecertain requirements that should be included in that portionof a step clause:I. Reasonable transition from negotiation to mediation;

II. Any party or parties to a dispute may initiate mediation by making arequest for mediation;

III. Scope of the disputes intended to be submitted to mediation; and

IV. Any desired rules discussed in the following slides

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Successful Resolution in Mediation

Although a mere 25% of respondents experience the

successful resolution of disputes more than 75% in the use of mediation, several benefits are associated with the use of mandatory mediation in ADR clause, as it will be shown in the next slide Successful Resolution Using Mediation

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Benefits of a Mandatory Mediation Step

Some of these benefits (and percent of results) include:

• Non-binding, but more structured than negotiation (30%)

• Third-party neutral involvement (26%)

• High percentage of successful settlements at this step (23%)

• Enhances working relationships (21%)

• Institutional support (13%)

• Cost-efficiency (3%)

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Allocation of Mediation Costs

Of those surveyed 54% equally share mediation costs, regardless of resolution

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Post-Dispute Mediation Agreement

If parties do not include a mediation agreement in their ADR clause but still want to use a mediation institution to resolve an existing dispute, they can enter into the following submission:

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Post-Dispute Agreements to Mediate Post-dispute agreements are not the norm:

•If parties want to mediate, they are advised to include mandatory language in their ADR clause•Current perceptions

The Binding Processes

Pre-adversarial processes may not result in a completeand final resolution of the dispute:

• Because of that possibility, it is necessary to include a bindingprocess that will finally resolve any outstanding issues

• 60% of parties will use arbitration rather than litigation to finallyresolve any outstanding disputes

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Finishing with Binding Processes

There are considerations to be taken into account in favor of both processes as shown in the following slide

Arbitration Preference

Litigation Preference

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Avoidance of courts (39%) Time-efficiency (35%) Cost-efficiency (34%) Flexibility and Adaptability (31%)

Established precedent (20%) Procedural Familiarity (17%) Codified rules of evidence (15%) Substantive Appeals (15%)

Ad Hoc v. Institutional Arbitration

One of the most basic decisions in an arbitration clause• 84 % prefer Institutional arbitration over ad hoc

• Common institutions named in the survey American Arbitration Association, International Chamber of Commerce, London Court of International Arbitration)

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Ad Hoc v. Institutional Arbitration

Ad Hoc: The arbitration agreement might simply state that"disputes between the parties will be arbitrated", and if theplace of arbitration is designated, that will suffice. Thisapproach would leave all unresolved problems (e.g.,appointment of the tribunal and how the proceedings will beconducted) to be determined by the law of the "seat" of thearbitration.

This approach will work only if the arbitral seat hasan established arbitration law. However, if the parties, at anytime in the course of an ad hoc proceeding, decide to engagean institutional provider to administer the arbitration, theyare able to do so by mutual agreement.

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Ad Hoc Arbitration Ad hoc arbitration is managed by the parties and by the arbitrators

(once appointed) without the assistance of an administeringinstitution

It requires the parties to make their own arrangements for theselection of arbitrators and the designation of rules, applicable law,procedures and administrative support

In some ad hoc arbitrations, an institutional presence may not beentirely absent – since the parties may designate an established setof rules even without an administering institution and may alsodesignate an institution to act as an appointing authority for thearbitral tribunal in the event that the parties are unable to agreeupon tribunal by themselves

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Benefits of Ad Hoc Arbitration

Ad hoc arbitration places more of a burden on the tribunal,and to a lesser extent upon the parties, to organize andadminister the arbitration in an effective manner.

The primary advantage of ad hoc arbitration isflexibility, which enables the parties to decide upon thedispute resolution procedure

A distinct disadvantage of the ad hoc approachis that its effectiveness may be dependent upon thewillingness of the parties to agree upon procedures at a timewhen they are already in dispute

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Institutional Arbitration

An institutional arbitration involves a specialized institution that intervenes, not to arbitrate the dispute, but to assume the functions of administering the arbitral process

When naming an arbitral institution at the contract stage, certain factors should be taken into account:I. Nature of the dispute (institutional expertise and connection to

various industries)

II. Value of the dispute

III. Institutional rules (whether they are in line with current practice)

IV. Reputation of the institution

V. Location

VI. Type of Arbitrators

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Advantages of Institutional Arbitration

Some advantages of institutional arbitration and percent ofresponses:• Established procedural rules (46%)• Expertise in arbitration (42%)• Assistance in the appointment of arbitrators (37%)• Institutional reputation (33%)• List of qualified arbitrators (27%)• Cost-efficiency (21%)• Time-efficiency (19%)• Case management services (18%)• Aid in the enforcement of the award (13%)• Other (e.g., physical facilities) (2%)

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Cost Myth – Ad Hoc arbitration is not always cheaper because there are no institutional fees

Allocation of Arbitration Costs

Another consideration to be taken into account when using either institutional or ad hoc arbitration is the allocation of arbitral costs

Allocation of Arbitration Costs (Institutional or Ad Hoc)

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Note: Most institutional rules have a default rule in place giving the arbitrator complete discretion to allocate costs

Designating Substantive Law

The substantive law is that which governs the substantive rights and obligations of the parties, presenting a significant step in

the drafting of any dispute resolution clause.

Percentage of Parties Designating Governing Law

Parties should be aware that they are able todesignate different laws to apply to the:

• Governing the performance of the contract• Governing the dispute• Governing the procedure of the arbitration

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Additional Considerations in Drafting the Arbitration

Provision of an Step Clause

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COMPELLING COMPLIANCE

WITH STEP CLAUSES “*A+ party cannot be required to submit to arbitration any

dispute which he has not agreed to submit” AT&T Tech., Inc. v. Commc’n Workers of America

While the ultimate goal of ADR clauses is to stay out of court,improper drafting and straying from the process created willresult in delays, or worse – litigation

Parties should focus on drafting clear and unambiguous termsincluding the types of disputes covered, the timelines, andany conditions to move forward with the next step

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JURISDICTIONAL OBJECTIONS

• Consent is absolutely necessary

• Preconditions must be met to show consent

• Jurisdiction of the arbitrators is connected to that consent – parties can resolve it in court

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59%

41%

Court

Arbitration

EXAMPLE OF JURISDICTIONAL ISSUE

Mediation between A (claimant) and B (respondent). Their step clause calls for A’s Chief Operating Officer to attend the mediation. On the day of mediation, the COO cannot attend due to an emergency Board of Directors’ meeting. COO sends a replacement. The mediation takes place and no resolution is arrived at, so A files a claim at the AAA for arbitration.• Does B have to go to arbitration?

• What can B do?

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COURT REQUIREMENTS FOR COMPULSION

Nature of the Dispute• Compulsion only for disputes expressly agreed to

Binding Nature• If there are any options or ambiguities in the clause, the

court will not find the clause binding

Conditions Precedent• Be careful about what preconditions you set, because if

they are not met, most courts will not compel the other parties to continue to the next step

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WAIVER

Parties may agree to skip a particular step or waive a condition precedent (e.g., a time limit) jointly

• No unilateral waiver or else no jurisdiction

Unsettled law, so be careful not to bring the courts in at all – Draft Strong Clauses!

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Model Clauses

• For a breakdown of the common institutional model clauses, please refer to the IACCM Manual distributed with these presentation materials

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QUESTIONS AND ANSWERS

• Thank you for your attention

• We will now open up the floor for questions

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