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July 02, 2016

One Step at a Time

If you drafted this arbitration clause, ‘fess up: “In the event of any dispute and if the Parties cannot resolve the dispute through negotiation, the Parties agree first to try in good faith to settle the dispute by formal arbitration under the [ICC Rules] before submitting the matter to litigation….” Talk about a step clause to trip over. What is a district court judge to do?

The answer: Enforce the arbitration agreement as an agreement for binding arbitration, the only form of arbitration the ICC Rules permit. So held a judge of the US District Court in New York. Celltrace Communications Ltd v Acacia Research Corp., 2016 WL 3407848 (S.D.N.Y. June 16, 2016). Never mind any presumption in favor of arbitration, said the Court — finding correctly that there can be no such presumption where the question is whether an arbitration agreement even exists. The interpretation mandated by New York contract law principles (to give full meaning to all words of the contract, including the incorporated words of the ICC Rules, and construe them in harmony) is that the reference to litigation in this clause only contemplates post-award litigation for confirmation or vacatur of the award.

And what does it mean “first to try in good faith to settle by formal arbitration under ICC Rules”? Certainly not what the Plaintiff here did — to send an E mail to opposing counsel purporting to request arbitration. In the context of ICC arbitration, the good faith effort (the “old grandes écoles try”?) “requires, at a minimum, sending a request to the ICC Secretariat to initiate arbitration and continuing to act in good faith to complete the arbitration process.” (Best efforts buffs will find some interesting  research results here concerning what it means to “try in good faith” to accomplish a task).

Seriously, young and aspiring arbitration lawyers, do not draft a clause like this one, lest someone try in good faith to channel your legal career in another direction. For online guidance to stumble-free step clauses, see, e.g., AAA International Centre for Dispute Resolution, Guide to Drafting International Dispute Resolution Clauses, www.adr.org/aaa/ShowPDF?doc=ADRSTG_002539 (last visited July 1, 2016).