Drafting Clauses for International Arbitration

By E. Charles Routh

Arbitration Clauses/Forum Selection

1. The Problem.
Typically the parties are little concerned about a dispute resolution clause. Some
clause may be picked from another unrelated and dissimilar contract and inserted.
Once any dispute occurs this clause can become the most important clause in the
contract. In arbitration, the parties have great flexibility at the outset to fashion a
process which can be adapted to the situation at hand. However once the clause is
drafted and a dispute arises, much of that flexibility is gone. Alternatively, the dispute
resolution clause and governing law clause is the last issue to be resolved and it
becomes a big issue as each side insists that any disputes be resolved in their national
courts and using its law. In an attempt to resolve this, the parties agree to bizarre
clauses such as some issues are resolved under some law and courts and other issues
are resolved under other law and courts. A well drafted arbitration clause can avoid a
lot of problems but a poor clause can cause problems. The following red flags should
be kept in mind.

2. Pitfalls.

A good dispute resolution clause should resolve the following questions:

a. Do we want arbitration, litigation, or some hybrid dispute resolution

mechanism?
b. If we want arbitration, what do we want to arbitrate? The arbitral subject
matter must be clearly defined to avoid subsequent litigation.
c. Do we want institutional arbitration?
d. How many arbitrators shall we have?
e. How shall the arbitrators be selected (replaced)?
f. Where shall we arbitrate?
g. What rules shall apply to the arbitral proceedings?
h. What law (substantive, procedural) shall the arbitrators apply?
i. What language(s) shall be used?
j. Shall costs of the arbitration, including attorneys' fees, be split or
recoverable?
k. Shall there be any limitations on the nationality of the arbitrator(s)?
l. What should happen in the case of a default?

3. Scope of the Arbitration Clause.

a. "Standard" or Broad Clauses

If the parties want to arbitrate everything, they should include a broad clause, such
as the American Arbitration Association recommended basic clause:
 

Any controversy or claim arising out of or relating to this contract, or any

breach thereof, shall be settled by arbitration in Seattle, Washington in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association, and judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof.
Note that in an international case using AAA rules you may want to use either
specialized rules such as the Commercial, Construction, Patent, Securities and other
specialized rules augmented by the Supplementary Procedures for International
Commercial Arbitration or you may prefer to provide for arbitration under the new AAA
International Arbitration Rules.
Alternatively a clause such as the ICC recommended clause could be used:

All disputes arising in connection with the present contract shall be finally
settled under the Rules of Conciliation and Arbitration of the International
Chamber of Commerce by one or more arbitrators appointed in accordance
with the said Rules.
A clause which could be used for UNCITRAL rules is as follows:

Any dispute, controversy or claim arising out of or relating to this contract,

or the breach, termination or invalidity thereof, shall be settled by
arbitration in accordance with the UNCITRAL Arbitration Rules as at present
in force.
b. Narrow Clauses
If the parties want to arbitrate only particular disputes, those disputes should be
specified, e.g.:

All disputes, controversies, or differences which may arise out of or in

relation to the calculation of the royalties due under clause ___ of this
contract shall be settled by arbitration * * *.
Note the use here of a broad term even if the subject of arbitration is fairly narrow.
c. Decisional Folklore
Semantics can be dangerous. Clauses which may appear to you to be broad (e.g.,
"all disputes arising under the contract") have been held by some courts to be
"narrow," e.g., to exclude claims that a party was fraudulently induced to enter into
the contract. It therefore is recommended that the following clauses or phrases be
avoided if a "broad" clause is intended:

Should any dispute arise under this Agreement, the matter in dispute shall
be referred to arbitration;
****
 

Any and all disputes hereunder shall be subject to binding arbitration:

****

In the event of any disagreement between the parties hereto as to the

effectuation of this agreement, or performance thereof, * * *.

4. Institutional Arbitration.

a. Benefits

(1) Case management

(2) Enforcement
(3) History of enforcement of clause
(4) Ease of drafting
The AAA's International Arbitration Rules specify the duties and responsibilities of
the administrator, provide for an early exchange of claims and counterclaims, and deal
with such matters as the appointment and replacement of arbitrators, the
determination of locale issues, the language to be used, communicating the award to
the parties and financial aspects of the arbitration. Unlike other AAA rules, the
International rules require the tribunal to apply the substantive law or laws designated
by the parties. The rules provide that the award must include reasons for the decision
unless the parties agree otherwise. This provision, which is like the requirement for
reasoned awards under ICC rules, reverses the usual presumption that reasoned
awards are the exception.

b. Costs

(1) Time
(2) Money
Even if you decide to use ad hoc arbitration without an administrative body to save
money or time, it may be wise to provide for a known administrator to act as a fall
back position. Thus if the clause provides for each party to designate one arbitrator,
both of which will select the third arbitrator, it is wise to provide that if the system
breaks down, an organization such as AAA appoints the arbitrators if the panel is not
promptly formed. You should also consider that if the arbitrators are to be of a different
nationality, an organization such as ICC may know of people who will be trained and
qualified arbitrators.

5. Negotiation, Conciliation or Mediation Before Arbitration.

The parties may wish to require an attempted negotiation of the dispute prior to
arbitration. This clause may be as complex as the clause attached as Attachment A or
as simple as the following:
 

In the event of any dispute, claim, question, or disagreement arising out of

or relating to this Agreement or the breach thereof, the parties hereto shall
use their best efforts to settle such disputes, claims, questions, or
disagreement. To this effect, upon the written request of any party, they
shall consult and negotiate with each other, in good faith in an attempt to
reach a just and equitable solution satisfactory to both parties. If they do
not reach such solution within a period of 60 days...
Alternatively the parties may desire to write in a provision calling for mandatory
mediation or conciliation, either on an ad hoc basis or using an established system
such as the Commercial Mediation Rules of the AAA or the Administrative Commission
for Conciliation established by the ICC.

6. How Many Arbitrators?

Unless the arbitration agreement specifies otherwise, all AAA rules provide for one
arbitrator unless the Administrator decides that three arbitrators are appropriate
because of the size, complexity or other features of the case. ICC also has a
preference for a sole arbitrator, although in large size cases where there are different
nationalities, both ICC and AAA would probably tend toward three arbitrators. AAA
appoints all three arbitrators, while ICC rules provide that the parties each nominate
one arbitrator for confirmation by the ICC Court of Arbitration. The factors to consider
in determining whether to opt for one or three arbitrators are as follows:

a. Costs
b. Independence
c. Scheduling
d. Reasoned award
e. Enforcement considerations
f. Comfort level for foreign companies

7. Selection Process.

Some rules provide for the appointing authority to select all arbitrators. Other rules
provide for party appointed arbitrators, with some rules providing for party
nominations, who must be neutral, to be confirmed by the appointing authority. Note
that the new AAA/ABA Code of Ethics for Arbitrators in Commercial Disputes, effective
March 1, 2004, provides for a neutral party appointed arbitrator, which is different
from the previous international standard which did not require neutrality from party
appointed arbitrators. See the discussion at
http://www.abanet.org/intlaw/divisions/business/intl_comm/winter0304.pdf. The
following factors and issues may be involved in selecting the arbitrators:

a. Institutional factors;
b. Appointing authorities;
c. That the Parties agree on certain arbitrators in advance;
d. Party chosen arbitrators with a neutral third arbitrator;
e. Replacement considerations; and
f. Special expertise or nationality requirements for the arbitrators.

8. Venue.
 

The venue issue is critical for two reasons:

a. The arbitration venue will generally determine the law under which
the arbitration is conducted and possibly the arbitral procedures
themselves. Questions of arbitrability, procedure, court intervention and
enforcement should not be left to chance.
b. If the venue selected is hostile to arbitration (e.g., the host country
has not ratified the New York Convention of 1958), the arbitration may be
subject to judicial interference and the final award may be difficult or
impossible to enforce. Consider use of an agreement if no resolution on
venue can be reached in negotiations. Use, for example, "arbitration
pursuant to the Japan-America Trade Arbitration Agreement of September
16, 1952." In such case the AAA and Japan Commercial Arbitration
Association get together and jointly decide on venue. It adds time, but can
resolve negotiations if both parties want arbitration in their country. In
addition the AAA International rules provide that the Administrator initially
determines the place of arbitration, "subject to the power of the tribunal to
determine finally the place of arbitration within 60 days after its
constitution." ICC rules provide for the place of arbitration, if not
determined by the parties, to be decided by the Court of Arbitration.
If at all possible, avoid a provision that arbitration must take place in the home
country of the respondent. Although the intent of the provisions is to discourage
adversary proceedings and encourage early settlement, the result frequently is to
have arbitration in an entirely inappropriate locale. If you want to encourage
settlement, do it through preliminary procedures requiring early consultations or
mediation, not in the venue clause of the arbitration.

9. Applicable Law.

a. Substantive

This question must be answered. Otherwise, arbitrators from different

jurisprudential backgrounds will have to choose, not only among
substantive principles, but preliminarily among diverse rules of conflicts of
law. Such "conflicts of the second degree" can raise exquisitely complex
theoretical problems, which will be hotly contested even if the parties
cannot accurately gauge their bearing on the outcome. In practical terms,
this translates directly into delay, uncertainty and expense. The law chosen
need not have a clear nexus to the contract, but as counsel you should
have some confidence that the chosen law will not disappoint the parties'
principal expectations. Obviously, this argues for having the contract
reviewed before execution by counsel in the country whose law is chosen.

b. Procedural.

The U.S. Supreme Court in Volt Information Sciences, Inc. v. Board of

Trustees, 489 U.S. 468, 109 S.Ct. 1248 (1989) refused to upset a state court
decision that held that the choice-of-law provision incorporated the
California arbitration laws even though they were not mentioned. As a
 

result some commentators suggest that the choice of law provision should
explicitly designate the Federal Arbitration Act to avoid the possibility of a
stay of arbitration such as happened in Volt. However most post-Volt
authority has rejected the need of this distinction. See Todd Shipyards Corp.
v Cunard Line Ltd., 943 F.2d 1056 (9th Cir. 1991).

10. What Language Should Be Used?

If different languages are involved, a choice of language provision is advisable. This
has an impact on choice of arbitrators and can save time and money. Bilingual
arbitrators are helpful in determining if the interpreters used are accurate. In the
absence of agreement, institutional rules may dictate the answer here. See rules of
the Japan Commercial Arbitration Association. Note that the International Rules provide
for the language of the arbitration to be the language of the documents containing the
arbitration agreement, subject to the power of the tribunal to decide otherwise in
certain circumstances.

11. Interim Relief.

There will always be some circumstances where interim relief from a court is
required. This may involve enforcement of protective orders or injunctions, relief
against third parties or cases where protection is necessary before the arbitral tribunal
is formed. Courts have generally come to realize that such circumstances encourages
arbitration rather than interfere with arbitration. However there have been some
conflict in cases involving attachment prior to arbitration. No court to my knowledge
has refused such relief where the parties expressly provide for it in their agreement.
Therefore something like the following clause may be appropriate:

Either party may, without inconsistency with this agreement to arbitrate,

seek from a court any provisional remedy that may be necessary to protect
trademark or other rights or property [prevent the disposal of assets, etc.]
pending the establishment of the arbitral tribunal or its determination of
the merits of the controversy.

12. Discovery.
Most arbitration rules provide for resolution of discovery issues by the arbitral
panel. The ICC rules give the panel substantial authority and provide for an early
exchange of documents in the Request for Arbitration, shortly followed by the Terms of
Reference. AAA provide for the possibility of later discovery. However as a practical
matter, the availability of discovery may depend on the nationality of the arbitrator
and his or her familiarity with discovery. Parties frequently impose limits on the scope
and time of discovery to avoid undue delay and expense. Although various people
differ, I am reluctant to provide for a wholesale incorporation of the Federal Rules into
the arbitration agreement. Some arbitration panels have utilized the Hague Evidence
Convention as a way of enforcing discovery, even though by its terms it does not
appear to apply to arbitrations.

13. Government Agency as Party.

 

The U.S. Sovereign Immunities Act, 28 USC § 1602, has now been amended to
clarify that an agreement to arbitrate is an explicit waiver of sovereign immunity. Most
countries which are parties of either the New York or the Inter-American Arbitration
Conventions now recognize such waivers.

14. "No Compromise" or "Baseball" Clauses.

You may want to consider using a "professional baseball" type clause such as the
following:

The arbitration procedure shall be conducted by a single arbitrator in the

manner described in this Section. Within twenty (20) days after either party
elects in writing to arbitrate an issue hereunder, the parties shall select a
single arbitrator with experience in ___. In the event the parties are unable
to agree upon the arbitrator within said twenty (20) day period, then either
party, on behalf of both, may request appointment of such a qualified
person by the American Arbitration Association pursuant to the Commercial
Arbitration Rules then in force and the other party shall not raise any
question as to such person's full power and jurisdiction to entertain the
application therefor and make the appointment. Within fifteen (15)
business days following the appointment of the arbitrator, each party shall
state in writing its position concerning the dispute supported by the
reasons therefor with counterpart copies delivered to the arbitrator. If either
party fails timely to submit its position, the position submitted by the other
party shall be deemed correct, and the arbitration shall be deemed
concluded. The arbitrator shall arrange for a simultaneous exchange of
positions. The parties shall then have ten (10) days to respond to the
position of the other party with counterpart copies delivered to the
arbitrator and exchanged in the same manner. The arbitrator shall select
which of the two proposed positions most closely approximates his
determination of the correct position and shall have no right to propose a
middle ground or any modification of either of the two proposed positions.
The position he chooses as most closely approximating his determination
shall constitute the decision of the arbitrator and be final and binding upon
the parties. In the event of a failure, refusal or inability of the arbitrator to
act, his successor shall be appointed by the American Arbitration
Association. The arbitrator shall attempt to decide the issue within ten (10)
business days after his receipt of the proposed positions. The arbitrator
shall have the right to consult experts and competent authorities with
factual information or knowledge concerning the dispute and the fees of
such authorities shall be an expense of the arbitration. The unsuccessful
party in such arbitration shall bear all expenses of such arbitration,
including the reasonable attorneys' fees and costs of the prevailing party.

15. Exchange Rates.

In these days of rapidly fluctuating exchange rates, the method of determining the
applicable exchange rate or currency of an award may cause a great fluctuation in the
amount finally received after conclusion of an arbitration. The alternatives are breach
date, judgment date or payment date. There is also the alternative of giving an award
in the currency in which the obligation is denominated or the loss is incurred. See ALI,
 

Restatement of the Foreign Relations Law of the United States, § 823 (1987).
The following provision based on the Restatement provisions should be considered:

Upon request by the prevailing party, the tribunal may give an award in the
currency in which the obligation is denominated or the loss is incurred. If
the award is in U.S. dollars and the obligation in a foreign currency, the
conversion from foreign currency to U.S. dollars is to be made as such rate
as to make the prevailing party whole and to avoid rewarding a party who
has delayed in carrying out the obligation.

16. Bibliography.
The following articles are helpful in drafting arbitration clauses and evaluating
merits of various arbitration tribunals:

a. American Arbitration Association, Survey of International Arbitration Sites

(1984);
b. Stein & Wotman, International Commercial Arbitration in the 1980's: A
Comparison of the Major Arbitral System & Rules, 38 The Business Lawyer
1685 (1983);
c. Baker & Davis, Establishment of an Arbitral Tribunal under the UNCITRAL
Rules: The Experience of the Iran-United States Claims Tribunal, 23 The
International Lawyer 81 (1989); and
d. Rowe, Arbitration - getting the best deal, International Financial Law
Review, March 1988 at 26.
e. M. Hoellering, How to Draft an AAA Arbitration Clause of International
Business, Arbitration Journal 44, March, 1992.
f. AAA, Drafting Dispute Resolution Clauses: A Practical Guide (1992).
g. The International Arbitration News, from the International Commercial Dispute
[Deleted in Original] Resolution Committee of the ABA Section of International Law.
See http://www.abanet.org/intlaw/divisions/business/intl_comm/winter0304.pdf
Attachment A
Sample Long Mediation and Arbitration Clause

All disputes arising under or relating to this Subcontract shall be finally settled by the
procedure set forth in the paragraphs below.

A. [Deleted].

B. Management Escalation.

(1) The parties shall first attempt to resolve all disputes through normal
contract administration procedures and practices. Thereafter, the parties
shall attempt to resolve all disputes through negotiations between
ascending levels of management up to the Senior Division Executive level.
For buyer, Senior Division Executive, as used herein, means the General
Manager of the Division responsible for performing the prime contract
under which this Subcontract is issued. For Seller, Senior Division Executive,
 

as used herein, means the President of that Division principally responsible

for performing this Subcontract.

(2) After negotiations between ascending levels of management up to, but

not including, the Senior Division Executive level, any dispute not yet
resolved shall be submitted in writing by the party who wishes to pursue a
dispute to the Senior Division Executives identified in paragraph B(1) who
shall attempt to resolve the dispute within sixty (60) calendar days of the
date the dispute is submitted to them in writing referring to this paragraph
B(2), or such later time as the parties mutually agree upon in writing.

(3) If the Senior Division Executives identified in paragraph B(1) are unable
to resolve the dispute within such time period and either party wishes to
pursue such dispute, that party shall submit the dispute in a writing
referring to this paragraph B(3) to the following Senior Corporate Executives
for resolution, and such Senior Corporate Executives shall attempt to
resolve such dispute within thirty (30) calendar days after such submittal,
or such later time as the parties mutually agree upon in writing. For Buyer,
Senior Corporate Executive, as used herein, means the President of Buyer.
For Seller, Senior Corporate Executive, as used herein, means the Senior
Vice President with managerial responsibility for that Division principally
responsible for performing this Subcontract.

(4) If the Senior Corporate Executives identified in paragraph B(3) are

unable to resolve the dispute within such time period, and either party
wishes to pursue such dispute, that party shall submit the dispute in a
writing referring to this paragraph B(4) to the parties' Chief Executive
Officers ("CEOs") for resolution, and the parties' CEOs shall attempt to
resolve such dispute within thirty (30) calendar days after such submittal,
or such later time as the parties mutually agree upon in writing.

(5) Escalation of the dispute to the Senior Division Executives, to the Senior
Corporate Executives, and then to the CEOs pursuant to paragraphs B(2),
B(3) and B(4) above is a precondition to submission of the dispute to a
reference under the California Reference Statute (Code of Civil Procedure
sections 638 through 645.1) as modified herein, to litigation, or to ___ in
accordance with the following provisions. While it is contemplated that the
respective management representatives will engage in face-to-face
negotiations to attempt to resolve the dispute, the escalation provisions
shall be deemed satisfied if within the time provided in paragraphs B(2),
B(3) and B(4), the Senior Division Executive, Senior Corporate Executive
and CEO, as applicable, of the party wishing to submit the dispute to a
reference, to litigation, . . . . each make a good faith effort to initiate a
communication by telephone or in person with his counterpart for the
purpose of attempting to resolve the dispute following the submission in
writing described in paragraphs B(2), B(3) and B(4) above.

C. General Reference of Dispute.

 

(1) If the CEO's are unable to resolve the dispute within such time period,
and either party wishes to pursue such dispute, then unless otherwise
agreed by the parties, such party shall submit the dispute to a panel of
three referees, under an Order of General Reference pursuant to the
California Reference Statute (Code of Civil Procedure sections 638 through
645.1) as modified herein. Such panel shall hear and determine all issues
involved in such dispute and shall render a Statement of Decision. The
parties agree that the qualifications and manner of selection of the panel of
referees shall be in accordance with the procedures set forth below. The
jurisdiction and powers of the referees, the venue of the proceedings and
rights of discovery and rules of evidence in any such proceedings shall also
be in accordance with the California Reference Statute, as modified herein.
If the California Reference Statute is revoked, declared invalid or otherwise
becomes of no force and effect after the date of this Agreement, then
unless the parties substitute an alternative procedure by an amendment to
this Agreement, disputes covered by this paragraph C(1) shall be governed
by paragraph C(2) below. Any Notice of Motion for General Reference of a
Dispute or other document filed with the court to obtain an Order of
General Reference hereunder must be served on the other party by
personal delivery on its General Counsel and on the person designated in
the Subcontract to receive notices.

(2) In the event the dispute cannot be referred under the California
Reference Statute as modified herein for any of the reasons cited in
paragraphs C(1), D(3), or D(4) hereof, the sole remedy of the party who
wishes to pursue such dispute shall be to file an action in a court of
competent jurisdiction located in Los Angeles County, California. The parties
agree that neither party shall seek punitive damages, double or treble
damages, or any other damages which are in the nature of a penalty or
punishment in such action.

(3) Each of the parties agrees that it will, in good faith, undertake all
reasonable and cooperative steps to have the dispute resolved by the
referees in accordance with paragraph C(1) or by a court of competent
jurisdiction in accordance with paragraph C(2), as applicable.

D. Selection of Panel Referees.

(1) Notwithstanding any provision elsewhere herein, the parties may wish to
consider utilizing only one referee on a case-by-case basis. Absent an
express agreement to utilize only one referee, there shall be three referees
selected in accordance with the following provisions.

(2) The panel of three referees shall be attorneys who are experienced in
federal procurement law. Such referees shall not have any present direct or
indirect association or financial interest in either or both of the parties or in
the subject matter of the dispute, nor shall such referees have any past
direct or indirect association or financial interest in either or both of the
parties within five years of the date of their appointment. The referees shall
have no past direct or indirect association with the subject matter of the
 

dispute. Each party shall promptly disclose to the other party any
circumstances set forth above known to it regarding an individual under
consideration or appointed as a referee. Upon acceptance of the
appointment as referee, the referees shall represent in writing that they
satisfy the foregoing requirements, or, if applicable, disclose all such
requirements not satisfied. If any such requirements are not satisfied, the
individual shall not serve as referee unless all parties agree. For purposes of
this clause, the association, past or present, with a law firm who has
provided or is providing legal advice to one party or the other shall not be
considered a direct or indirect association or financial interest in either or
both of the parties, provided such referee is not and has not been
personally providing such legal advice. Similarly, for purposes of this clause,
the ownership of five hundred (500) or less shares of stock in either or both
of the parties shall not be considered a direct or indirect association or
financial interest in either or both of the parties or in the subject matter of
the dispute.

(3) Within thirty (30) calendar days of service of a Notice of Motion for
Order of General Reference of a Dispute by personal delivery on the
General Counsel of the other party and on the person designated in the
Subcontract to receive notices, each party shall designate one referee to
act as a member of the panel. Each party may unilaterally make preliminary
contact with the potential candidates it may wish to consider designating as
a referee for the limited purpose of determining any potential conflict of
interest and determining his qualifications and availability to serve as a
referee, provided, however, that such preliminary contact shall not include
any discussion as to the merits or nature of the dispute. Each designee shall
then be contacted by both parties by conference call to determine his
willingness to serve as a referee. If one party's designated referee is
unwilling or unable to serve, within two (2) business days thereafter, that
party shall designate another referee who shall promptly be contacted by
both parties by conference call. This process shall be repeated until both
party-designated referees have agreed to serve. If one party fails to
designate a referee within such initial thirty (30) calendar day period, fails
to designate a replacement referee within the required time period after the
designated referee is unable or unwilling to serve, or fails to participate in
the conference calls associated therewith, the other party may serve a
written notice by certified mail, return receipt requested, on the General
Counsel of the delinquent party and on the person designated in the
Subcontract to receive notices for that party. The notice shall refer to this
paragraph D(3) and state that unless the delinquent party designates its
referee, or participates in the conference call associated therewith, as
applicable, within ten (10) calendar days of receipt of the notice, the party
serving the notice shall select the referee for the delinquent party. If the
party receiving such notice fails to designate its referee or participate in the
conference call associated therewith, as applicable, within the ten (10)
calendar day period provided in the notice, the other party shall select that
referee within ten (10) calendar days following the expiration of the period
provided for in the notice. If neither party is able or willing to designate the
party-designated referee(s), after following the procedure prescribed above,
 

___ shall designate the referees. If ___ is unable or unwilling to so act, the
Chief Judge of the Federal District Court sitting in Los Angeles County,
California, or such other Los Angeles Federal District Court Judge as she
shall designate, shall so act. If the Chief Judge of the Federal District Court
sitting in Los Angeles County, California, or his designee is unable or
unwilling to so act, the Presiding Judge of the Superior Court of Los Angeles
County, California, or such other Los Angeles California Superior Court Judge
as he shall designate, shall so act. If the Presiding Judge of the Superior
Court of Los Angeles County, California, or his designee is unable or
unwilling to so act, the dispute shall be resolved in accordance with
paragraph C(2) above. After the party-designated referees have agreed to
serve, . . . .

(4) Within fifteen (15) calendar days after each of the two party-designated
referees have agreed to serve, the parties shall mutually agree to a list of
five or more nominees to act as chairperson, and shall prioritize the list in
order of preference. The nominees shall then be contacted by conference
call in order of preference agreed upon by the parties until a referee has
agreed to serve as chairperson. If the parties are unable to agree upon such
a list and the priority of the nominees thereon within fifteen (15) calendar
days, the two party-designated referees shall select a chairperson, and shall
jointly contact the selected chairperson to secure his agreement to serve as
chairperson. If the party-designated referees are unable to obtain the
agreement of a mutually selected person to serve as chairperson within
fifteen (15) calendar days of the expiration of the prior fifteen (15) calendar
day period, the chairperson shall be selected by ___. If ___ is unable or
unwilling to select a chairperson, the chairperson shall be appointed by the
Chief Judge of the Federal District Court sitting in Los Angeles County,
California, or such other Los Angeles Federal District Court Judge as he shall
designate. If the Chief Judge of the Federal District Court sitting in Los
Angeles County, California, or his designee is unable or unwilling to select a
chairperson, the chairperson shall be appointed by the Presiding Judge of
the Superior Court of Los Angeles County, California, or such other Los
Angeles Superior Court Judge as he shall designate. If the Presiding Judge of
the Superior Court of Los Angeles County, California, or his designee is
unable or unwilling to select a chairperson, the dispute shall be resolved in
accordance with paragraph C(2) above.

(5) If any referee shall resign, die, withdraw, refuse, be disqualified or be

unable to perform the duties of his office, a new referee shall be selected in
accordance with the procedures set forth in paragraphs D(2) through D(4)
above. The parties agree that the proceedings should be stayed while the
replacement referee is being selected and cleared, and agree that the
referees may adopt such procedures as they deem appropriate, such as
recalling of witnesses and rehearing issues, to permit the replacement
referee to fully understand the proceedings.

E. Final Management Escalation.

 

With ten (10) calendar days after the close of discovery, and as a condition
precedent to the commencement of the trial, the parties shall attempt to
establish a written alternative dispute resolution (ADR) procedure which
utilizes appropriate executives from each of the parties for resolving the
dispute. If the parties are able to establish a written ADR procedure, the
dispute shall not proceed to trial hereunder until the ADR procedure has
been completed and then only if and to the extent not prohibited by such
written ADR procedure. If the parties are unable to agree to a written ADR
procedure within the ten (10) calendar day period, the matter shall be
submitted to the CEOs, who shall attempt to resolve the dispute. If the
CEOs are unable to resolve the dispute within forty (40) calendar days of
the close of discovery, the dispute may proceed to trial. The requirements
of this paragraph shall be deemed satisfied if a written ADR procedure is
established or, where the parties are unable to agree to a written ADR
procedure, if the CEO of the party wishing to proceed with the dispute
makes a good faith effort following the close of discovery to initiate a
communication by telephone or in person with his counterpart for the
purpose of attempting to resolve this dispute.

F. Venue of the Proceedings.

Venue of any action filed herein under the California Reference Statute shall
be in the Los Angeles County Superior Court, Central District. All hearings of
the panel shall be conducted in Los Angeles County, California, unless the
referees, for good cause, designate a different location or locations.

G. Powers of the Referees.

(1) The referees shall have the judicial powers conferred by the California
Reference Statute, except as modified herein.

(2) The referees shall be empowered to award any relief available at law or
in equity, except that they are not empowered to award punitive damages,
double or treble damages, or any other damages which are in the nature of
a penalty or punishment.

(3) All decisions of the referees, including the Statement of Decision, shall
be by a majority decision.

H. Discovery and Evidence.

(1) Except as noted in paragraph H(2) below the parties shall have full
rights of discovery as set forth in California Code of Civil Procedure,
Sections 1985 et seq. It is the intent of the parties that the referees strictly
and narrowly construe the foregoing discovery to the issues presented by
the dispute. The parties agree that neither of the parties shall assert that
any failure of the referees to correctly apply the discovery provisions
constitutes a basis to challenge the referees' Statement of Decision or any
judgment thereon.
 

(2) If the ownership, right to use or right to disclose (apart from the right to
use or the right to disclose in discovery or at trial) Proprietary Information is
in issue in the dispute, neither party shall have the right through discovery
to request or obtain Proprietary Information from the other party or through
the referees, except pursuant to a judgment. If such issues presented by
the dispute require the use of such Proprietary Information, the referees
shall separately hear, in camera, each party's arguments and evidence with
respect to each issue that requires the use of Proprietary Information. With
respect to issues presented by the dispute, a majority of the referees may
request such Proprietary Information from the parties as they deem
necessary, and the parties shall be obligated to provide the referees with
whatever Proprietary Information the referees request for their use in
connection with reaching their findings. Any findings made by the referees
shall not disclose such Proprietary Information.

With respect to issues in dispute other than those set forth in the
paragraph above. Proprietary Information shall be subject to
discovery within the limits of paragraph H(1) above or subject to
subpoena for production at trial only upon a showing of good
cause by the requesting party establishing that it has a
substantial need for the Proprietary Information in the
prosecution or defense of the dispute, that the equivalent of
such Proprietary Information is relevant to the issues presented
by the dispute. Upon such showing of good cause, the referees
may require disclosure of such Proprietary Information pursuant
to a protective order which shall limit disclosure to the attorneys
of record for the requesting party and one expert designated to
assist the attorneys in understanding and utilizing such
Proprietary Information. Furthermore, any such Proprietary
Information disclosed pursuant to such protective order, or
subpoenaed for production at trial, may be offered at the trial of
the dispute by the requesting party provided that such protective
order remain in effect or be placed in effect and only the owner,
referees, and such persons who are subject to such protective
order may be present during the presentation of such Proprietary
Information. If a party seeks to introduce evidence at the time of
trial, a part of which contains Proprietary Information of that
party, and that Proprietary Information is not essential for
conduct of the trial, that party shall delete the Proprietary
Information and introduce the excised version. Upon application
to the referees by the other party, the referees shall determine
whether the deleted material constitutes Proprietary Information
and has been properly deleted. No representatives of such other
party may be present at any hearing conducted to make such
determination except the attorneys of record and one expert,
provided that they are subject to a protective order which
prohibits disclosure of the Proprietary Information to any other
person. In the event that the Proprietary Information is essential
for the conduct of the trial, and is not being introduced by a
 

party which has obtained the Proprietary Information through

discovery or by subpoena, the Proprietary Information shall be
introduced only under such protective order(s) as the referees
deem appropriate. Apart from the disclosures of Proprietary
Information which may occur in discovery or at the time of trial
pursuant to the protective orders provided in this paragraph
H(2), nothing in this paragraph H(2) is intended to waive or alter
the parties' right to maintain the confidentiality of the Proprietary
Information and protect it from disclosure.

For purposes of this paragraph H(2), Proprietary Information

means . . ., know-how or business or financial data that the
disclosing party, pursuant to its own internal procedures, seeks
to protect from disclosure, release or dissemination, and (1) is
not and does not become available from public or other lawful
sources of information, (2) is not already known to the receiving
party, (3) is not and does not become generally known in the
industry, (4) has not been or is not independently developed by
the receiving party, and (5) is not required by the receiving party
in order to perform the obligations required by the Subcontract.

(3) It is the intent of the parties that the referees apply the California
Evidence Code in determining the admissibility of evidence. The parties
agree that neither party shall assert that any failure of the referees to
correctly apply the California Evidence Code constitutes a basis to challenge
the referees' Statement of Decision or any judgment thereon.

(4) Should any part of either of paragraphs H(1) or H(3) be determined by

any court to be illegal or invalid, the validity of the remaining terms shall
not be affected thereby and the illegal or invalid part shall be deemed not
to be a part of this disputes clause.

I. Statement of Decision.

It is the expectation and desire of the parties that the referees conduct the
proceedings in the most expeditious and cost-effective manner possible.
The dispute shall be resolved by a Statement of Decision, issued by the
referees within the time constraints set forth in California Code of Civil
Procedure Section 643 or such later time as the parties mutually agree
upon in writing, which explains the factual and legal basis for its decision
pursuant to California Code of Civil Procedure Section 632 and which does
not disclose classified information. If deemed necessary by the referees, or
requested by either party, the panel shall further explain its Statement of
Decision by providing to the parties an addendum to the Statement of
Decision, which addendum may disclose classified information. Such
addendum will not be filed with the court as part of the Statement of
Decision if security requirements of this Subcontract would preclude such
filing, but is deemed by the parties hereto to be binding on them as though
it were part of such Statement of Decision and it shall be subject to the
 

same appellate review, security permitting; provided, however, that if the

security requirements of this Subcontract do not permit review of such
addendum, any review or appeal shall proceed based solely on the referees'
Statement of Decision, without the addendum.

J. Finality of Statement of Decision.

(1) That Statement of Decision of the referees shall have that finality upon
entry of judgment as provided by applicable California law.

(2) The parties further agree that the following stipulation will govern the
conduct of any appeal from such judgment. Upon the filing of a notice of
appeal, the appellant shall identify any and all potential facility and
personnel clearance requirements due to the security requirements then
applicable to this Subcontract or the subject matter of the dispute, and shall
promptly initiate all necessary and appropriate actions to eliminate any
such security obstacles to the expeditious resolution of the appeal. In the
event that all such security obstacles (including the clearance of the
appropriate appellate court personnel) to the expeditious resolution of the
appeal have not been eliminated within 270 calendar days after the filing of
said notice of appeal, the appellant shall either:

(a) Dismiss its appeal with prejudice; or

(b) Satisfy the judgment as entered by the Superior Court as a

condition precedent to pursuing its appeal. Upon such
satisfaction, any undertaking posted pursuant to California Code
of Civil Procedure Section 917.1 shall be exonerated. In the event
and to the extent the judgment is reversed on appeal, or on
remand after appeal, any satisfaction by the appellant shall be
promptly refunded, consistent with the extent of such reversal,
by the appellee with interest at the rate provided in paragraph K,
measured from the date the judgment was satisfied by the
appellant.

Each of the parties agrees that it will, in good faith, cooperate to eliminate
all security obstacles to an expeditious resolution of the appeal.
Furthermore, to the extent that classified information is necessarily part of
the appellate record, the parties shall cooperate to attempt to have such
classified information declassified.

K. Interest.

Interest on any amount due under the referees' Statement of Decision of

judgment of the court shall be awarded. Such interest shall be measured
from the date of the associated written demand or assertion pursuant to
this Subcontract by the claiming party seeking as a matter of right the
payment of money, adjustment, or interpretation of this Subcontract, or
other relief arising under or relating to this Subcontract, or in the case of
 

such demands or assertions that must be certified in accordance with the

General Provision hereon entitled ". . . ." from the date of such certification,
and shall be calculated using the rate or rates established by the Secretary
of the Treasury pursuant to Public Law 92-41 (85 Stat. 97) for the
Renegotiation Board or the equivalent rate(s) so established in
implementation of the Contract Disputes Act of 1978.

L. Parties.

Except the respect to security matters (which in all cases shall be governed
by the security regulations applicable to this Subcontract), both parties
agree that the United States Government shall not be an indispensable
party in the resolution of any such dispute arising out of or in connection
with this Subcontract.

M. Performance of Subcontract.

Seller agrees to proceed diligently with performance of the Subcontract

pending final resolution of any dispute and shall comply with any decision
of the Buyer with regard to Seller's performance.
Attachment B
Sample Shorter Arbitration Clauses

Consultation/Partial Arbitration

In the event of any dispute arising among the parties hereto, or the failure of the
parties hereto to agree as to any matter or thing arising out of or relating to this
Agreement or any provision hereof, the parties hereto shall consult with each other, in
person if reasonably requested by any party, and shall undertake in good faith to
settle all such disputes among themselves. Failing such settlement [within ___ days of
one party giving notice to the other(s) of a desire for consultation hereunder], [if the
dispute or failure to agree arises under Sections ___], such dispute shall be referred to
arbitration under the provisions set forth in this Section; otherwise, the parties shall
have all remedies available at law or in equity.
STANDARD ARBITRATION CLAUSE OF THE AMERICAN ARBITRATION ASSOCIATION

Any controversy or claim arising out of or relating to this Agreement, or the breach
thereof, shall be settled by binding arbitration in [designate place] in accordance with
the ___* Rules of the American Arbitration Association, and judgment upon the award
rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

*Examples: Commercial Arbitration

Commercial Mediation
Patent Arbitration
Construction Industry Arbitration
 

Construction Industry Mediation

International Arbitration
Securities Arbitration
STANDARD ARBITRATION CLAUSE OF THE INTERNATIONAL CHAMBER OF
COMMERCE

[The parties' free choice of the law governing the contract and of the place and
language of the arbitration is not limited by the ICC Rules of Arbitration. The ICC
recommends that all parties wishing to make reference to ICC arbitration in their
contracts use the following standard clause:]

All disputes arising in connection with this Agreement shall be finally settled by
arbitration in [designate place] under the Rules of Conciliation and Arbitration of the
International Chamber of Commerce by one or more arbitrators appointed in
accordance with the said Rules. Judgment upon the arbitral award may be entered in
any court having jurisdiction over the parties or their assets.
ARBITRATION CLAUSE RECOMMENDED BY UNITED NATIONS COMMISSION ON
INTERNATIONAL TRADE LAW (UNCITRAL)
MODEL LAW OF INTERNATIONAL COMMERCIAL ARBITRATION (UNCITRAL MODEL
LAW)

[UNCITRAL does not appoint arbitrators or administer arbitrations. It only provides

rules. Those rules provide that the tribunal itself shall fix the arbitrators' fees.]

Any dispute, controversy, or claim arising out of or relating to this Agreement, or the
breach, termination or invalidity thereof, shall be settled by arbitration in ___ in
accordance with the UNCITRAL (United Nations Commission for International Trade
Law) arbitration rules.
SAMPLES OF ADDITIONAL ARBITRATION PARAGRAPHS
Selection of Arbitrators

Single

There shall be a single arbitrator selected by agreement of the parties, or if they fail to
agree on the selection of the arbitrator within ten (10) days of notice of intent to
arbitrate from one party, then by the American Arbitration Association.

Three

Matters referred to arbitration shall be referred to three arbitrators as follows: both

parties shall, within seven (7) business days of receipt of notice of intent to arbitrate
from one party, appoint their respective arbitrator and the two (2) arbitrators thus
chosen shall together, within seven (7) business days of their appointment, nominate
a third (3rd) arbitrator. In the event that the two (2) arbitrators shall fail within such
seven (7) business days of their selection to select the third (3rd) arbitrator, then upon
written request of any party hereto involved in the dispute, the third (3rd) arbitrator
 

shall be appointed by the American Arbitration Association. If a party hereto shall fail
to appoint an arbitrator as required under this Article, the arbitrator appointed by the
other party shall be the sole arbitrator of the matter referred to arbitration.

[Note: May wish to include requirements for expertise of arbitrators]

Fees

The prevailing party in any such arbitration and any judicial proceeding related
thereto, shall be entitled to recover its reasonable costs and attorney fees as part of
any award entered therein.
Decision

The decision of the arbitrator(s) shall be made within thirty days of the close of the
hearing in respect of the arbitration (or such longer time as may be agreed to, if
necessary, which Agreement shall not be unreasonably withheld) and the decision of a
majority of the panel (or the single arbitrator, as the case may be) when reduced to
writing and signed by them shall be final, conclusive and binding upon the parties
hereto, and may be enforced in any court, federal or state, having jurisdiction.
Procedures

Except for those procedures specifically set forth herein, the arbitration shall be
conducted in accordance with [the ___ Rules of the American Arbitration Association;]
provided that: (i) each party shall have a right to have its attorneys present at all
proceedings before the arbitrator(s); and (ii) each party shall have any testimony
presented to the arbitrator(s) and all other proceedings before the arbitrator(s)
recorded on recording tape or by a certified court reporter, with the cost thereof to be
equally borne by both parties; and (iii) each party shall be entitled to compel the
attendance of witnesses or production of documents, and for this purpose, the
arbitrator(s) shall have the power to issue subpoenas; and (iv) each party shall have
the right to obtain discovery of the scope and in the manner provided in the Federal
Rules of Civil Procedure as applied by the Federal District Court for the ___ District of
___; and (v) the arbitrator(s) shall have the power to impose on either party such
terms, conditions, consequences, liabilities, sanctions and penalties as deemed
necessary or appropriate (which shall be as conclusive, final and enforceable as the
award on the merits) to compel or induce the appearance of, or production of
documents in the custody of, any officer, director, agent or employee of such party or
its independent contractors or subcontractors or any party which controls, is controlled
by or is under common control with such party or its independent contractors or
subcontractors.

[Note: May wish to provide for a summary judgment procedure.]

Alternative Procedures

Promptly after the initiation of any arbitration hereunder, the parties, directly or
through their counsel, will confer in good faith concerning the extent to which
discovery will be permitted in such proceeding. Except as otherwise agreed, discovery
in any arbitration hereunder shall be limited to discovery of documents and tangible
objects, and entry upon land and other property, within the scope of Rule 34(a) of the
 

Federal Rules of Civil Procedure, and no other discovery shall be permitted. If it

becomes necessary to file suit to compel arbitration hereunder and arbitration is
subsequently ordered by the court, the party instituting such suit shall be entitled to
recover its actual costs and expenses, including, without limitation, attorneys' fees,
incurred in such action.