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Announcement: The Common Draft public library of contract clauses and templates, with extensive research notes and commentary, is posted (in draft). If you’d like to be notified of significant developments in the project, please subscribe to updates at right, because I’ll be posting announcements on this blog. See also my first e‑book, Signing a Business Contract? A Quick Final Checklist for Greater Peace of Mind.

Arbitration streamlining

This post provides additional annotations and commentary for the Common Draft arbitration-streamlining clause.

Why expressly authorize arbitration streamlining

It can sometimes be very useful for an arbitration agreement to explicitly encourage arbitrators to streamline the proceedings, because otherwise their inclination might be to go along with requests by the parties' counsel for (expensive) discovery, motion practice, etc.

Arbitration proceedings can sometimes get bogged down in litigation-like rabbit trails. That can happen in part because attorneys (and arbitrators who are attorneys) are comfortable with familiar rules of civil procedure, and because arbitrators, desiring repeat business, can be reluctant to hold counsel's feet to the fire. See generally, e.g., Thomas J. Stipanowich, Arbitration: The New Litigation, 2010 Ill. L. Rev. 1. It therefore can be helpful for an arbitration agreement to expressly encourage the Arbitral Tribunal to streamline the proceedings.

You might think that such encouragement wouldn't be necessary, because most arbitration rules already give the tribunal at least some authority to manage the proceedings. See, e.g., Rules R-32 through R-35 of the October 2013 revision of the American Arbitration Association's Commercial Arbitration Rules.

Any given arbitrator, though, might secretly fear the consequences of taking too muscular an approach to managing the proceedings:

  • The arbitrator might worry, for example, that excessive streamlining of a case could make the award vulnerable to being overturned in subsequent court proceedings: Under the [U.S.] Federal Arbitration Act, for example, one of the few grounds on which a court is allowed to vacate an arbitration award is that "the arbitrators were guilty of misconduct … in refusing to hear evidence pertinent and material to the controversy." 9 U.S.C. § 10. See Stipanowich, supra, at 12-13.
  • The arbitrator might also worry that streamlining the case will irritate one side or the other, potentially jeopardizing the arbitrator's chances of getting future business from that side and its lawyers. See id.

For both these reasons, drafting the arbitration agreement to include an express request to "please, please streamline the proceedings" can help overcome any reluctance on the part of the arbitrator to do so.

Motion practice for early disposition of issues

In some disputes, considerable time and money might be saved by employing early-disposition procedures such as those of Rule 12(b)(6) or Rule 56 of the U.S. Federal Rules of Civil Procedure. The Arbitration Rules might expressly allow for such dispositive motions, as is the case with, e.g., Rule R-33 of the AAA's Commercial Arbitration Rules.

Some arbitrators are reluctant to grant motions to dismiss or for summary judgment. Their concern, generally, is that failing to allow a party to put on whatever evidence the party deemed appropriate could jeopardize the enforceability of the arbitration award under applicable law or the New York Convention.

Other arbitrators take a different view: They reason that contracting parties can be reluctant to agree to arbitration if an expensive, time-consuming, full-blown evidentiary hearing would be required for all issues, with no possibility of early disposition of meritless claims or defenses. See, e.g., Catherine Amifar and Claudio D. Salas, How summary adjudication can promote fairness and efficiency in international arbitration, in the International Bar Association Arbitration Newsletter, Sept. 2010, at 77.

Some general guidelines on early disposition of claims or defenses can be found at the CPR Guidelines on Early Disposition of Issues in Arbitration.

Early deposition scheduling for specific weeks

To help keep costs down, it can be useful to get the parties' counsel to commit, early on, to taking depositions during specific time periods.

Parkinson's Law — "work expands to fill the time available" — is alive and well in litigation and arbitration. Counsel usually must juggle a number of cases and other commitments; that can make it hard for counsel to organize an aggressive effort to "get in, get it done, get out."

Just setting a discovery cutoff date won't do much to remedy the problem. What can help, though, is encouraging the parties to schedule, near the beginning of the process, specific time periods for taking depositions.

(Hat tip: Houston arbitrator David Waddell, who says he routinely does this in his pre-hearing scheduling orders.)

Representative depositions

Assuming depositions are even allowed in a given arbitration, it might well make sense for a party to designate a representative to serve as a witness on the party's behalf. U.S. litigators are quite familiar with this procedure under Rule 30(b)(6) of the Federal Rules of Civil Procedure and its state-law counterparts.

(This is based on a suggestion by a senior litigation partner at the K&L Gates firm; see Stephen J. O'Neil, Managing Depositions in Arbitration to Minimize Cost and Maximize Value, 69 Dispute Resolution J. 15 (2014).)

Direct examination testimony by written statement

An increasing number of courts are conducting bench trials by having each fact witness prepare a written statement of his or her testimony and provide it to the other side in advance (much as expert witnesses have been required to do for years). Then at trial:

  • The witness is sworn; presented with a copy of her written statement; and asked to orally adopt it.
  • The written statement, once orally adopted by the witness, is admitted into evidence, subject to objection as to particular assertions in the same manner as oral testimony.
  • Counsel for the party that called the witness conducts a short oral direct examination, having the witness briefly re-cap her written testimony. This helps the witness to get comfortable with being on the stand.
  • Opposing counsel is given an opportunity to cross-examine the witness about her testimony, both oral and written.

See, e.g., a press release by the U.S. Court of Appeals for the Second Circuit and New York County Lawyers' Association, First-of-Its-Kind CLE Program on Using Affidavits in Lieu of Direct Testimony at Trial (2011).

Some lawyers object to providing written witness statements in advance because they fear that preparation of the statements will entail extra costs for the client. But:

  • Any competent counsel will spend time preparing the witness to testify anyway; the incremental cost of reducing her assertions to writing should be comparatively little — and the calling lawyer gets to craft exactly what the witness will "say" on direct examination and needn't worry that she will get it wrong on the stand.
  • The witness can relax about getting her direct testimony "right," because it is written down in advance; the written statement can even serve as a cheat sheet that she can consult if she wishes.

Other lawyers object to preparing witness statements because it supposedly gives opposing counsel a road map for cross-examination. But a competent and thorough pre-trial deposition of the witness by opposing counsel will do much the same thing — at greater cost for all concerned.

Many courts in the U.S. are turning to the use of written witness statements. For example;

• In the famous e-book pricing conspiracy trial of U.S. v. Apple, federal district judge Denise Cote directed that witness testimony on direct examination be taken mainly by affidavit. See United States v. Apple, Inc., No. 12 CIV 2826, slip op. at 5-6 & n.2,(S.D.N.Y. July 10, 2013) (Cote, J.), affirmed, Nos. 13-3741-cv etc. (2d Cir. June 30, 2015).

• The U.S. Federal Judicial Center has published Sample Form 49, a model order setting out procedures for direct testimony by written statement, based on an order used by then-Chief Judge Vaughn Walker of the Northern District of California.

• Similar practices are followed by some other U.S. federal district judges, including, for example, Colleen McMahon of the Southern District of New York; Thomas C. Platt of the Eastern District of New York; and Douglas P. Woodlock of the District of Massachusetts. See, e.g., Individual Practices and Procedures, Judge Colleen McMahon (Dec. 20, 2012); Individual Practices of Judge Thomas C. Platt, at 8 (Dec. 18, 2002); Order Regulating Non-Jury Civil Trial, part III.2 (Woodlock, J.).

The use of written statements for direct-examination testimony is said to be a common practice in commercial cases in England and Scotland. See generally The use of signed witness statements or affidavits in commercial actions (March 2012).

Examining multiple witnesses at once

Apparently it's not uncommon in Australian courts to have expert witnesses testify together in a panel-discussion format, known colloquially as "hot-tubbing" the witnesses; this reportedly results in dramatic time savings. See, e.g.:

One Australian commentator says, "It is remarkable how the demeanour of some expert witnesses will change when sitting alongside their opposite number and answering questions from the tribunal rather than the advocate on the other side." Lionel Persey QC, Effective Case Management at 4 (undated).

In an appropriate case, a similar procedure might save time and trouble even for fact witnesses, especially if their credibility is not in issue. (In some cases, of course, the Arbitral Tribunal might have to actively manage the proceeding to maintain civility among opposing witnesses.)

Summary exhibits

See generally Fed. R. Evid. 611(a) (trial judge should exercise reasonable control over order and mode of presenting evidence), 1006 (summaries).

Chess clock

Chess-clock procedures are not uncommon in international arbitration. See Albert A. Monichino, Stop Clock Hearing Procedures in Arbitration (2009). One British commentator observes:

The chess-clock procedure is increasingly used in arbitrations. In my view its use should be the rule rather than the exception. It encourages the parties and their advocates to focus on the real issues in the case.

We all know from experience that most cases turn on very few key points at the end of the day and that much of the evidence that is adduced proves to be completely irrelevant to the outcome. …

Absent any bombshells, there should be no excuse for hearings overrunning.

Lionel Persey QC, Effective Case Management at 4 (undated).

Tentative or draft award

Having the arbitral tribunal circulate a "draft" award for comments might well be the parties' only shot at correcting (what they regard as) errors in the draft, because:

  • Under the doctrine of functus officio, once the final award is issued, the arbitral tribunal will likely have little or no power to alter the award. See, e.g., Bosack v. Soward, 586 F.3d 1096, 1103 (9th Cir. 2009) (functus officio doctrine "forbids an arbitrator to redetermine an issue which he has already decided") (internal quotation marks and citation omitted).
  • And in many jurisdictions, a party disappointed with the final award will have only limited grounds for appeal. See, e.g., Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 128 S.Ct. 1396 (2008), in which the Supreme Court of the United States ruled that an appeal of an award rendered under the Federal Arbitration Act could be appealed only on the grounds stated in 9 U.S.C. § 10.

The Eighth and Ninth Circuits have held that awards not expressly stated to be final are not subject to functus officio. See Bosack v. Soward, 586 F.3d at 1103 (citing and following Eighth Circuit decision).

Some state courts in California routinely issue tentative rulings on motions. That gives the court the opportunity to fine-tune the ruling, based on input from the parties. See, e.g., Superior Court of California, Alameda County, Tentative Rulings.

[End]

Ken Adams reports on a Houston court of appeals case: A bank sued to recover $1.7 million from defaulting borrowers and their guarantor and won on summary judgment. Unfortunately for the bank, though, the loan documents referred to the amount borrowed as "one million seven thousand and no/100 ($1,700,000.00) dollars" (capitalization modified, emphasis added). Reversing in part and remanding, the appeals court said that the words, not the numbers, controlled. See Charles R. Tips Family Trust v. PB Commercial LLC, 459 S.W.3d 147 (Tex. App.–Houston [1st Dist.] 2015).

The Uniform Commercial Code states the precedence

The appeals court said that "[u]nder the Uniform Commercial Code, which governs negotiable instruments such as the Note, '[i]f an instrument contains contradictory terms, typewritten terms prevail over printed terms, handwritten terms prevail over both, and words prevail over numbers.'" Id. at 153, quoting Tex. Bus. & Com. Code § 3.114 (emphasis added, extensive case citations omitted).

Parol evidence isn't considered on summary judgment

The court said that for purposes of summary judgment, it didn't matter that the evidence showed that the borrower had in fact received the $1.7 million stated in the numbers, as opposed to the $1.007 million recited in the words. This bothered Ken, who says that "[t]he bank in this dispute has reason to feel hard done by," because "[t]he court should have considered parol evidence," that is, evidence extrinsic to the "four corners" of the contract document(s).

This discomfiture might be justified if there'd been a full trial on the merits. But in a summary judgment proceeding, parol evidence is not allowed to be considered — as the appeals court explained:

[A] court may not consider extrinsic evidence about a contract's meaning unless the contract is ambiguous. PBC does not contend that the documents are ambiguous; any material ambiguity in the contracts would have made summary judgment for PBC improper for that reason alone.

* * *

The agreements unambiguously set the amounts of the promissory note and guaranty obligations at $1,007,000.00 each. Because the amount of principal set forth in the Note and Guaranty Agreement is not ambiguous, for purposes of interpreting the documents as a matter of law, neither the trial court nor this court may consider extrinsic evidence such as the amount of money that actually changed hands amongst the parties, and such evidence could not have supported the trial court's [summary] judgment.

Id. at 155-56 (emphasis added, citations omitted).

Perhaps feeling sympathy for the bank, the appeals court drew a road map for the bank's counsel to follow on remand:

We need not and do not express any opinion on what legal or equitable remedies the parties might have in such a hypothetical scenario. On the appellate record before us, the only issue is what the terms of the written agreements mean as a matter of law.

Neither party sought an equitable reformation of the loan in the trial court, so no issue of equitable relief has been presented in this appeal. The scenario proposed by PBC thus has no bearing on how we must apply the law to the record before us.

Here, the words “one million seven thousand” control over the numerals “$1,700,000” to set the amount of the promissory note and guaranty obligations.

Id. at 155 (emphasis and extra paragraphing added).

Drafting tip: Write numerical amounts in numbers, not words

Ken makes a good point (one that's new to me, and to him too, he says) about the danger of writing both words and numbers:

... saying the same thing twice also reduces the likelihood of spotting an error. ... If I say $1,000 and the number should be $2,000, there’s a good chance I’ll notice the mistake. ... [I]f I say one thousand dollars ($2,000), there’s a decent chance that I’ll focus on the more eye-catching digits and not notice that the words state an incorrect number.

So using words and digits to express a number not only introduces inconsistency, it also makes it more likely that you’ll fail to spot that inconsistency.

Ken Adams and the marketplace of ideas

I (used to) comment occasionally at Ken Adams's blog. Recent examples: Here, here, here, here, and here. Ken and I disagree on a number of issues; some of those disagreements have been in private email exchanges. I wish I had Ken's gift for turning a phrase, but I think some of his substantive recommendations to contract drafters could possibly hurt the drafters' clients.

I say that I used to comment because Ken apparently has blocked me from further commenting on his blog. I discovered this when attempting to comment on Ken's latest essay, which urges contract drafters: "Don’t use at its sole discretion, whatever the context." Apparently in Ken's view a drafter should never write (for example), Alice may in her sole discretion do X; the drafter should instead write just: Alice may do X.

Such a categorical position strikes me as very unwise in view of (for example) three state supreme court decisions, two from recent years, on a closely-related subject. So I tried posting the comment below to Ken's essay. The comment includes case citations and commentary from the Common Draft public library of contract clauses.

When I clicked on the "Post" button, I was greeted with a red-background message informing me that Ken had blocked posts from me. I wish I'd taken a screen shot to share it here. EDIT: At a friend's suggestion I just tried again with a different browser to get the blocked-comments message again; a screen clip is below.

Screen Shot 2015-06-29 at 21.55.44

Here's the "find out more" screen clip:

Screen Shot 2015-06-29 at 22.11.23

Here's the comment I tried to post:

Assuming that one cares what a reviewing court might think of particular contract language, it'd be unwise for a drafter to be so categorical in declining to use the phrase "at sole discretion." (All categorical statements are bad, including this one.)

The "Alice may ~in her sole discretion~ do X" is lawyer repellent. It's intended to preclude Bob's trial counsel from later arguing that Alice, in deciding whether or not to do X, had a duty to act in good faith or to abide by standards of commercial reasonableness.

Lawyers do indeed raise this good-faith / commercial-reasonableness argument in court from time to time, sometimes successfully. Here are a few examples, copied and pasted from the assignment-consent section of the ~Common Draft~ public library of contract clauses and commentary:

• Tennessee, 2013: The Tennessee supreme court held that "where the parties have contracted to allow assignment of an agreement with the consent of the non-assigning party, and the agreement is silent regarding the anticipated standard of conduct in withholding consent, an implied covenant of good faith and fair dealing applies and requires the nonassigning party to act with good faith and in a commercially reasonable manner in deciding whether to consent to the assignment." Dick Broadcasting Co. v. Oak Ridge FM, Inc., 395 S.W.3d 653, 656-57 (Tenn. 2013) (affirming vacation of summary judgment and remand to district court).

• Alabama 2009: The Alabama supreme court alluded to such a possibility in the Shoney's case. The contract in suit specifically gave Shoney's the right, in its sole discretion, to consent to any proposed assignment or sublease. The supreme court held that this express language trumped a rule that had been laid down in prior case law, namely that a refusal to consent is to be judged by a reasonableness standard under an implied covenant of good faith. "Succinctly stated, under Alabama law 'sole discretion' means an absolute reservation of a right. It is not mitigated by an implied covenant of good faith and fair dealing in contracts because an unqualified reservation of a right in the sole discretion of one of the parties to a contract expresses the intent of the parties to be subject to terms that are inconsistent with any such implied covenant." Shoney's LLC v. MAC East, LLC, 27 So.3d 1216, 1220-21 (Ala. 2009) (on certification by Eleventh Circuit).

• Oregon 1994: In the Pacific First Bank case, in a lease agreement prohibited the tenant from assigning the agreement, including by operation of law, without the landlord's consent. The lease agreement also stated that the landlord would not unreasonably withhold its consent to an assignment of the lease to a subtenant that met certain qualifications. Notably, though, the lease agreement did not include a similar statement for other assignments. The Oregon supreme court held that ordinarily, the state's law would have required the landlord to act in good faith in deciding whether or not to consent to an assignment. But, the court said, the parties had implicitly agreed otherwise; therefore, the landlord did not have such a duty of good faith. See Pacific First Bank v. New Morgan Park Corp., 876 P.2d 761 (Or. 1994) (affirming court of appeals decision on different grounds, and reversing trial-court declaration that bank-tenant had not materially breached lease agreement).

(Emphasis added.)

So: In those three jurisdictions — and very likely in others as well — a contract drafter or reviewer who followed Ken's advice might well disadvantage her client, perhaps seriously.

* * *

Ken's blocking of further comments from me reminded me of his prior pronouncements about the marketplace of ideas. For example:

  • There's this: "I'm all for having competing ideas duke it out, mano a mano, in the marketplace of ideas, so I urge you and others to let me know what you don't agree with."
  • And this: "The only way to improve any body of knowledge is through the marketplace of ideas. Two commentators differ on a given issue? Have them thrash it out—may the best idea win! It does no good to tiptoe around a competing idea for fear of offending anyone."
  • And this: "We could do with a more rigorous marketplace of ideas, instead of mollycoddling our ideas because we’re too lazy or too busy to come up with alternatives, or because we have a vested interest in the conventional wisdom, or because we don’t want to risk wounding our vanity."

On the other hand, Ken has also said this, on the subject of blocking comments: "I don’t regard my blog as a marketplace of ideas. Instead, it’s a place where, with the help of anyone who’s willing to comment, I refine my ideas until they’re ready to do battle in the marketplace of ideas. ... But if discussion consists of reiterating entrenched positions, it’s no longer helpful. That’s most likely to happen with respect to those topics that I’ve analyzed at length and where I challenge the conventional wisdom."

On July 8 I'll be doing a 90-minute Webinar on "Getting a Workable Contract to Signature Sooner" for the Licensing Executives Society USA/Canada (the U.S. branch of a global non-profit), with co-presenter Dr. Susan Stoddard of Mayo Clinic Ventures. It's for LES members only, and free for them.

This will be a reprise of a Webinar I did, to good user reviews, for the International Association for Contract and Commercial Management.

The IACCM Webinar was itself a shortened version of a three-hour workshop that Dr. Andrea Belz and I put on for the LES spring meeting in La Jolla.

Dr. Stoddard and I will be reprising the three-hour workshop at the LES annual meeting in New York City.

Screen-shot examples

Yesterday a client's in-house lawyer said he really liked how I'd quickly reformatted a vendor's contract, in Microsoft Word, to make it easier for us to do a page-turn review on a conference call. Here are some "before" and "after" screen shots to illustrate; there's a more-detailed explanation below.

The first screen shot is a "before" version; it shows a clause from the original contract form as received from the vendor:

Screen Shot of original contract clause before cleaning up

The second is an "after" screen shot of the same clause, after I'd expanded the margins; broken up a long paragraph; increased the font size and line spacing; and added line numbering for easier reference during conference calls:

Screen shot - corrected

The third screen shot shows part of the forum-selection clause, with a long paragraph broken up, and with one portion flagged with yellow highlighting to indicate to the in-house counsel that this was a part that needed his review:

Screen shot with yellow-highlighted forum selection clause

Explanation: What I did

Here's what I'd done:

  • widened the margins, thus shortening each line of text;
  • increased the line spacing to 1.5 lines;
  • increased the font size;
  • broken up some really-long paragraphs;
  • added left-margin line numbering that continued throughout the document — that way, on our conference call, it was easy to say, please turn to Line 517 and have the other participants go right there;
  • added color-coded highlighting, also with Word, to flag particular provisions that needed decisions or confirmation by the in-house counsel (yellow); the business people (blue); or both (green);
  • saved the markup as a PDF document, because Word doesn't necessarily keep the line numbering consistent on different machines; and
  • emailed both the redlined Word document and the PDF to the in-house counsel and business people.

Better substantive review as a result

I do this sort of thing regularly when reviewing contracts. It takes a few minutes, but it's indisputably worth it, because:

  • figuring out where to break up long paragraphs is a great way to be thorough in reviewing a contract; if you leave the document with long paragraphs, your eye might tend to skip over something important;
  • if your client must also review the contract, it'll be much easier for him or her after you've reformatted for improved readability;
  • if you'll be negotiating the contract, you'll have an easier time discussing proposed revisions with the other side.

All of these things will help you get a workable contract to signature sooner.

Drafters: Go and do likewise

Drafters could help by using some of the same formatting principles when they create contract drafts for review.

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