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The legal profession is witnessing an explosion of alternatives to traditional court litigation to resolve serious disputes in a more cost-effective, timely and less acrimonious fashion. This phenomenon is most profound in the international business setting, where various forms of mediation, conciliation and arbitration are in play. International business agreements for years have required arbitration if disputes develop — and now the concept is finding its way into international insurance agreements. Further, the use of nonbinding mediation as a mandatory condition to instituting final and binding arbitration proceedings has become a norm in international dispute resolution. This bifurcated procedure can be an excellent approach, particularly in the insurance industry. But it can also set traps for the unwary. In response to this emerging international dispute resolution standard, in June 2001, the International Chamber of Commerce published ADR rules designed to be more user-friendly and adaptable to today’s business context than the previous rules, which had been in force since January 1988. Interestingly, the ICC refers to its new ADR rules as standing for “amicable dispute resolution” rather than “alternative dispute resolution.” These ADR rules only apply to proceedings that do not result in a decision that can be enforced at law. They deal with recommended compromise resolutions as opposed to an enforceable arbitral decision. The ADR proceedings are intended to be “party-controlled to the greatest extent possible” — rapid, inexpensive and relying on an experienced and impartial neutral. The new rules set forth four possible standard clauses for inclusion in international business agreements. The first provides for the possibility, without any commitment, that the parties might submit their dispute to the rules. The second suggested clause requires the parties at least to discuss the possibility of submitting a dispute to ADR under the ICC rules. We suspect these clauses will not see much action, as they appear unlikely to lead parties towards mediation. The third clause obligates the parties to submit any dispute to an ADR proceeding under ICC rules, if the dispute “arises in connection with the underlying contract.” The fourth clause provides for the same, but also requires submittal to binding ICC arbitration if the dispute has not been resolved within 45 days after the filing of the request for ADR (unless the parties have agreed to extend the time period). This provision, which comports with what most practitioners would have done anyway, is being most consistently used. It will, we believe, see the most action in years to come. Let’s look at issues that will arise under this approach. First of all, international mediation is by definition more complex than the domestic variant. In a dispute involving parties from two different countries, the commercial norm is to choose a neutral from a third country who is familiar with the law that governs the contract — whether that law is determined through choice of the parties or application of a conflict of laws analysis. At that point, there are three cultures at work. The neutral, accordingly, must be able to cross multiple cultural, legal and language boundaries. Second, the practitioners assisting the process must be experienced in international ADR and must understand the nuances associated with it. Third, there must be a strict adherence to tight time limits on the process; otherwise the process may likely drag on to an inconclusive result. This is particularly important for the potential claimant when nonbinding ADR is a condition to instituting binding arbitration. Fourth, we have to consider whether the neutral will play any role in the subsequent arbitration if the preliminary mediation fails, and whether any oral or written submission in the mediation can be introduced in the arbitration. We believe the better approach here is to split the two absolutely and place a veil of confidentiality over the unsuccessful mediation. This will protect the parties in an arbitration, and also encourage frankness in the mediation, without which that process may be hamstrung. The ICC’s ADR rules suggest alternative ADR approaches yet permit the parties to tailor anything they like, either in the ADR clause itself, or after the ADR process has begun. The rules address traditional mediation, where the neutral may hear from both parties at an introductory meeting; request and receive statements; and hold a session where the neutral listens to each party alone and together and attempts to work out a compromise. “Neutral evaluation” also helps, where the neutral tells the parties what he or she thinks a final arbitral decision likely would yield. Finally, the ICC provides for the possibility of a “mini-trial,” in which each party nominates a manager with no contact with the dispute to sit on a panel, chaired by the neutral, which will listen to presentations and make settlement recommendations to the parties. DEVIL IN THE DETAILS The global trend to international ADR and arbitration has extended to resolution of disputes involving insurance rights and obligations, and the foregoing processes and principles are applicable to insurance industry ADR. Dangers, however, may await the unaware policyholder. Foreign insurance companies do not generally like being hauled into U.S. courts. Accordingly, particularly for offshore insurance products for American multinationals, insurance carrier draftsmen are including standard-form international commercial arbitration clauses for the resolution of coverage disputes. Conceptually, this development may not be disconcerting, but, as they say, the devil is in the details. For example, in the insurance carrier’s standard-form arbitration clause there may be no mention of nonbinding ADR as a condition to binding arbitration — but there should be. It can be a useful tool to resolve “knee-jerk” positions on coverage quarrels. Further, favorite insurance company standard-form locations for arbitrations are Bermuda and London, with English or Bermuda law (which is essentially English law) chosen to govern the dispute. English law, developed over hundreds of years in the London insurance market, tends to favor the insurance carrier. Similarly, standard-form provisions may call for resolution by a panel composed of insurance company professionals — individuals clearly tending to favor the insurance carrier. Accordingly, it is important for the insured company to negotiate these clauses. Consider starting by suggesting the standard ICC clause providing for preliminary ADR followed, if necessary, by binding arbitration. Parties to a contract, insurance or otherwise, often find it easier to agree on “standard” language such as the ICC’s, insofar as the structure of the process is considered at all, at least as a starting point. Then, tailor the ICC’s suggested language to add, for example, the “mini-trial” concept in the ADR phase. We like this mechanism. With both parties sitting with the neutral, there is an added impetus to come to a reasonable resolution of a coverage dispute. We also recommend that the insured and the carrier try to agree upon a choice of law that is “insurance neutral,” regardless of the actual site of the proceedings. Likewise, try to incorporate a selection process for the neutral and for the arbitral panel that is fair to both parties, rather than to the insurance carrier alone, which may be the case in the standard policy language. It also may be possible and useful to specify discovery procedures that would bind the panel in any ensuing final and binding arbitration. GOOD FOR ALL It is important for policyholders to remember that it is in their own interest, as well as in the insurance carrier’s, to include an ADR/arbitration clause in an insurance contract. If properly structured, ADR and, if necessary, arbitration can be of enormous benefit to multinational policyholders. This is especially so when the risk insured is in more than one country, or the carrier is not a U.S. insurer. We have noted a marked increase lately in the filing by certain London market insurers of “pre-emptive” suits to avoid coverage, particularly in the London High Court. London courts will often assume jurisdiction because, under the medieval guild hall fashion in which Lloyds syndicate policies are subscribed, the policy will be considered to be “written” in London, a sufficient jurisdictional “hook” for the London courts. Under English law, however, the court generally must defer to any agreement to arbitrate coverage disputes that are contained in the policy. Indeed, an agreement to arbitrate will even take precedence in most jurisdictions over a judicial forum selection in a particular country. In sum, international ADR and arbitration may indeed be the wave for the future of dispute resolution. There are many benefits. There are also dangers, and it is important to guard against them through thoughtful negotiation. David W. Steuber and Allen B. Green are partners at Howrey Simon Arnold & White. Steuber, in the Los Angeles office, is a partner in the global litigation practice group and is co-chair of the insurance recovery practice. Green, in the Washington, D.C., office, is also a partner in the global litigation practice group and is chair of the international arbitration and litigation practice. They can be reached at [email protected]and [email protected]com.

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