Leonard Rodes of Trachtenberg Rodes & Friedberg LLP takes part in Negotiating Effective Contracts & Dealing with Disputes

QUESTION ONE – What is your best practice approach when advising General Counsel, to ensure dispute resolution clauses are to their real advantage and do not obstruct enforcement proceedings?

Not infrequently, new clients engaging us for U.S. litigation or arbitration, express surprise at the ways in which the various dispute resolution provisions in the relevant contract or governance instruments work against them. In many such instances, the provisions had been imported from prior contracts as mere boilerplate, with unintended consequences.

For example, while an exclusive home-state venue provision may be unassailable in one case, its inclusion in a contract involving performance and property wholly outside of the home state may cause proceedings arising therefrom to be delayed, dismissed, or transferred to an unfriendly forum, based on convenience and fairness doctrines. Similarly, a foreign counterparty’s contractual consent to New York jurisdiction, may not be worth much if a resulting judgment (especially if on default) may be disregarded in its country, where its assets are located. The lesson to be learned from these and numerous other examples, and the most important advice we can give to clients drafting dispute resolution provisions, is to consider and draft such provisions in the specific context of each contract or instrument that calls for them. Taking the time to do so – to consider the most likely dispute scenarios and tailor the resolution provision accordingly – may not be easy when the client’s dealmakers are anxious to ink a contract that, for them, presents the only upside. But the practice may pay important dividends if the deal goes south.

Finally, a word about commercial arbitration clauses that are subject to the Federal Arbitration Act (relating to interstate and international commercial contracts). It has been settled for some time that an arbitration clause may effectively vest an arbitrator with authority to decide threshold questions concerning the validity and scope of an arbitration clause. But until recently, even where an arbitration clause did so, some U.S. courts have been willing to stay or limit arbitration if they found the argument for arbitrability to be “wholly groundless.” However, under a 2019 decision by a unanimous U.S. Supreme Court, courts may no longer consider arbitrability questions if a broad arbitration clause vests the arbitrator with the authority to decide them. So, in drafting arbitration clauses, general counsels (GCs) must carefully consider not only any limitations on the scope of arbitration under the clause but also whether they wish a court or the arbitrator to decide the question. A GC wishing to preserve the power of a court to decide such issues, should make that intention clear in the clause, especially if the clause otherwise incorporates the rules of the large arbitration administration companies (like the AAA or JAMS) which state that their arbitrators have the power to determine the scope of their own authority.

QUESTION TWO – Are there any particular rules around funding litigation in your jurisdiction that General Counsel should be aware of?

Third-party litigation funding, which has long been in widespread use abroad, has not only spread to the U.S. in the last decade but is growing rapidly. Today, in addition to financing individual cases with their own resources, several established litigation finance firms (from abroad) have begun forming and raising investment in funds that finance ‘pools’ of lawsuits. These funds attract capital from wealthy investors, family offices, endowments, and PE firms who regard litigation finance as an alternative asset class that is largely uncorrelated with equity and debt markets. This recently prompted a Bloomberg headline claiming, ‘For the World’s Super Rich, Litigation Funding Is the New Black.’

While opponents of litigation funding have pushed for its regulation, almost no regulation has so far been promulgated in the U.S. There is a growing debate on the issue, which appears to be focused on the question of disclosure. Should such financing arrangements be disclosed? If so, should the disclosure be mandatory and automatic, or subject to a case by case consideration? Should funding agreements be reviewed only in camera by the judge, or should opposing parties also get to know the details of financing agreements? While legislation has been introduced in the U.S. Senate that would require limited disclosure of funding agreements in class actions and multidistrict litigation, it has so far not progressed to passage. On the state level, as of this writing, only Wisconsin has enacted a law mandating disclosure of funding agreements upon the filing of a state court action in that state.

Finally, attempts by defendants to obtain disclosure of funding-related documents under U.S. court discovery rules have met with limited success. As for funding agreements themselves, while there are federal court decisions that have required disclosure (or at least portions of such agreements), other decisions deny all access to them on the ground that they are not relevant to any material issue in the case. Regarding documents reflecting communications between plaintiffs and their funding sources, there is consistency: in general, the courts have viewed such communications as either privileged or protected by the work product doctrine, based on the view that the “common interest” or “agency” exceptions to waiver are applicable.

QUESTION THREE – What techniques are typically used by international counterparties in your experience when attempting to gain the initiative during a dispute? How important are civil procedural rules?

Under federal law (28 U.S.C. §1782), the U.S. district courts may, upon application of a foreign court or litigant, issue subpoenas to U.S. residents to give testimony or produce documents relevant to a foreign legal proceeding. Needless to say, the opportunity for parties in foreign proceedings to obtain U.S. style discovery of evidence relevant to those proceedings is invaluable. This evidence gathering mechanism is available to, among other litigants, foreign bankruptcy trustees who may have an interest in investigating potential claims against U.S. persons and companies. In one interesting matter we have handled, a Norwegian bankruptcy trustee obtained documents and deposition testimony which, while relevant to the Norwegian bankruptcy, also provided a basis to assert misfeasance claims against the debtor’s U.S. advisors, leading to a seven-figure settlement reached on the basis of an un-filed draft complaint. This recovery would not have been possible without the information obtained under the aforementioned procedure.

TOP TIPS FOR: Successful negotiations

DOS

A thorough understanding and evaluation of pertinent legal and factual issues are indispensable. Preparation is crucial.

Confirm in writing the confidentiality and inadmissibility of all statements to be made in the negotiation, not only those that are statutorily protected. This will promote candour on both sides.

DON’TS

Ignore collateral issues that are neither financial nor legal. Emotion is often the biggest obstacle to settlement, even in a business setting.

Select mediators the same way you do arbitrators. It may be best to accede to an adversary’s choice of a (well-qualified) mediator, on the theory that the adversary may be more likely to be influenced by a mediator picked by its own lawyers.

To review the full publication please CLICK HERE.

Contributing Advisors