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Anne has breach of fiduciary duty and corporate waste claims against John, a former 50 percent stockholder in JoAnne Corp., a closely held corporation that Anne and John formed. Anne’s attorney was all ready to assert those claims in an arbitration proceeding because the shareholder agreement between Anne and John had a clear and unambiguous arbitration provision. However, Anne’s attorney also wants to assert claims against John’s newly formed company. That is the company that is competing with JoAnne Corp.; that is the company that stole all of JoAnne Corp.’s customers; and that is the company that has the assets to pay the sizeable arbitration award that Anne’s attorney seeks to recover. But here is the rub: Pennsylvania courts repeatedly have held that you cannot force a party to arbitration if that party has not contracted to go to arbitration. Because John’s newly formed company was not a party to the arbitration agreement, Anne is not entitled to arbitrate her claims against this company. To make matters worse, if Anne files a lawsuit against both John and JoAnne Corp., you can bet that John will object and seek to arbitrate Anne’s claims against him. Even if Anne manages to keep alive the lawsuit against John and his newly formed company – and that is a long shot – there will be delays and legal fees that will be costly in every sense of the word. Before fighting on two fronts, however, there is a third option that Anne’s attorney could try: negotiating with John and his newly formed company in an attempt to convince them voluntarily to proceed in one arbitration proceeding. As part of her pitch, Anne could tout the benefits, not to her, but to John and his company, of arbitrating all claims (and counterclaims, if any) in one proceeding: It would be efficient to resolve, in one arbitration proceeding, all disputes involving the parties who have claims arising out of the same set of facts. Eliminating two distinct adjudications, in arbitration and in court, will avoid the risk of inconsistent determinations and rulings from two different fact finders. It will avoid forcing John and his company to present their respective cases more than one time, which is not an insubstantial concern because, as a practical matter, John and his company are one and the same. This will save time for John, his fact witnesses and his experts since they only will have to attend and testify once. There are several reasons why John and his newly formed company would prefer to avoid a consolidation of all claims into one arbitration proceeding. By anticipating these arguments in her negotiations, however, Anne may well be able to convince John and his company that they should agree with Anne’s proposal. Anticipated Objection No. 1 If numerous parties present their claims and defenses in a consolidated arbitration proceeding, there would be delays and additional expenses caused by scheduling problems. These problems will be exacerbated for those parties who have insubstantial claims or interests in the dispute. Anne’s response to this objection: This objection may well make sense where lots of parties (and hence witnesses and attorneys) are involved. Here, however, the presentation of Anne’s claims will be virtually the same against John and John’s newly formed company: same evidence, same documents and, most importantly, same witnesses. So having one arbitration, against John and his company, would not incrementally increase the delays, if any, arising out of an arbitration proceeding against John alone and a lawsuit against John’s company alone. To sweeten the pot, Anne could defer to John and his newly formed company when it comes to scheduling and other matters. She could offer to hold the hearing on dates and in locations that are convenient for John and his company. Is that fair? Perhaps not. Is Anne giving up something? Of course she is. But the alternative, arbitration against John and a separate lawsuit against John’s newly formed company, would involve extra expenses, extra delays and extra aggravation. Measured against these added costs, Anne’s incentives could be worth their cost many times over. Anticipated Objection No. 2 Presenting numerous claims and defenses in a consolidated proceeding could be so complicated that the parties and fact finder will spend extra time and energy in sorting everything out. Anne’s response to this objection: This theoretical objection has little practical significance where, as here, Anne’s claims will involve virtually identical evidenced, witnesses and arguments. Neither John nor his newly formed company is a bystander to this dispute; each eventually will be forced to defend against Anne’s claims. The bottom line is that, as in most aspects of dispute resolution, it pays not only to understand the governing law. It makes even more sense to seek a win-win situation by making your adversary understand that agreeing on the procedures to resolve the dispute can allow all sides to save time, money, aggravation and energy.
Charles F. Forer is a member in the Philadelphia office of Eckert Seamans Cherin & Mellott, where he is engaged in all types of alternative dispute resolution. He is a former co-chairman of the Philadelphia Bar Association’s alternative dispute resolution committee, and he is a frequent lecturer and writer on the use of ADR in a variety of settings. He can be reached at 215-851-8406 and by e-mail at [email protected].

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