Unearthing Squandered Potential in Venezuela’s Oil Industry: A Tripartite Contractual Approach

Venezuela is reeling from a multitude of woes. Vast swathes of the population have fled to neighboring countries as a humanitarian crisis flares out of control. The Venezuelan oil industry – the economy’s frail linchpin – has not escaped the morass. PdVSA, the state-owned oil company, is crippled by chronic operating mismanagement and resource nationalism.

However, political pressure is mounting for the country’s corruption-smeared leader, Nicolás Maduro. Russo-Cuban good-will and a pseudo-loyal military provide only a slim reed for him to lean on. Furthermore, Juan Guiadó – the constitutionally recognized interim president – has galvanized popular support for a democratic re-boot in Venezuela.

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Colorado Supreme Court Rules in Favor of Condominium Developers in Construction Defects Cases

On June 5, 2017, the Colorado Supreme Court issued a decision in Vallagio at Inverness Residential Condo. Ass’n v. Metro Homes, Inc., 2017 CO 69, June 5, 2017 (“Vallagio”) that will likely benefit condominium developers in Colorado by helping to alleviate litigation costs related to construction defects claims, thereby incentivizing new construction of condominiums along the Front Range.

For the past several years, the Colorado General Assembly has ardently debated construction defects reform. Senate Bill 156, introduced earlier this year, was intended to make arbitration mandatory for construction defects claims, but failed to pass. House Bill 1279 requiring the consent of the majority of condominium unit owners to bring a claim, as opposed to just the HOA board, passed this session. Developers supported both of these bills as a means to decrease the amount of construction defects claims that would be brought, thereby spurring more condominium projects in Colorado.

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Don’t Risk Litigation Over the Arbitration Clause in Your Oil and Gas Lease

The arbitration clause in an oil and gas lease is likely not the most hotly negotiated term or even one that the parties think twice about. However, recent litigation in Pennsylvania should serve as a reminder to lessors and lessees to be aware that a poorly drafted arbitration clause may lead to unwanted litigation.

Recently, the United States Supreme Court denied a petition to review Chesapeake Appalachia, LLC v. Scout Petroleum, LLC, 809 F.3d 746 (3d. Cir. 2016) cert. denied (Oct. 3, 2016), a case addressing whether an arbitration clause used in numerous oil and gas leases covering lands in the Marcellus Shale region of Pennsylvania permitted class arbitration and whether the issue of class arbitrability is one for the courts or for the arbitrators to decide. The leases contained identical gas royalty clauses (except for some differing royalty percentages). The clauses provided that Chesapeake shall pay the lessor-royalty owners a certain percentage of the proceeds Chesapeake received from the sale of gas less four specific charges: transportation, treatment, processing and volume deduction to the point of measurement. All of the leases also included the following identical arbitration provision, which was silent as to both the availability of classwide arbitration and whether the question of classwide arbitrability should be submitted to the arbitrators or the court:

ARBITRATION. In the event of a disagreement between Lessor and Lessee concerning this Lease, performance thereunder, or damages caused by Lessee’s operations, the resolution of all such disputes shall be determined by arbitration in accordance with the rules of American Arbitration Association. All fees and costs associated with the arbitration shall be borne equally by Lessor and Lessee.

Without clear language on classwide arbitration the clause resulted in opposing interpretations. Scout sought to commence class arbitration on behalf of itself and a putative class of thousands of similarly situated lessor-landowners, claiming that Chesapeake breached the leases by deducting charges for compression, gathering, and other charges not authorized by the leases, resulting in the underpayment of royalties to itself and the other class members. Chesapeake disagreed that class arbitrability was available under the leases and initiated the litigation in the Middle District of Pennsylvania, arguing that the issue was one for the courts. The District Court agreed with Chesapeake and held that the issue of arbitrability was one for the courts, and not the arbitrators, to decide. Scout appealed the District Court decision.

On appeal, the Third Circuit reiterated that there is a presumption that courts (not arbitrators) must decide questions of arbitrability, including whether a contract contemplates class arbitrability. The court stated that the burden of overcoming the presumption that the issue of arbitrability is for judicial determination is “onerous [and] requires express contractual language unambiguously delegating the question of arbitrability to the arbitrator.” Ultimately, although the court was highly critical of Chesapeake, stating that “[a]s a sophisticated business, it could have, and, at least in retrospect, should have, drafted a clearer arbitration agreement,” it held in favor of Chesapeake that the leases “do not clearly and unmistakably assign to an arbitrator the question whether the agreement permits classwide arbitration.” Scout appealed to the United States Supreme Court, which denied the petition to hear the case.

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Baseball Arbitration

Now that Spring Training is in full swing, let’s talk some baseball! Okay, not that kind of baseball, but another topic in our series on arbitration - “baseball arbitration.”

Some parties are reluctant to submit disputes to arbitration because they worry about “split the difference” awards. Arbitrators are generally selected, directly or indirectly, and paid by the parties. This leads to a perception that arbitrators have an interest in rendering decisions that will maximize the chances that they will be chosen again in future disputes by “splitting the difference” between the parties to avoid offending either side. For parties who are reluctant to submit disputes to arbitration for these reasons or for parties who may want more control over how a compromise is reached, “Final Offer Arbitration,” also known as “baseball arbitration,” is an option worth exploring.

Final Offer Arbitration requires an arbitrator to view all of the unresolved issues as a package and select one party’s package over the other party’s package. It is known as “baseball arbitration” because each side submits a figure or proposed remedy and the arbitrator is required to select one offer or the other. The arbitrator cannot formulate a compromise or choose the midpoint between the two.

The idea behind Final Offer Arbitration is that each party, conscious of the risk that an unreasonable proposal will have little chance of acceptance by the arbitrator, will make concessions in order to submit what it believes is the most reasonable offer. If one of the two proposals is too extreme, the other side essentially wins by default. The two sides are more likely to bargain in good faith in hopes of reaching a settlement if they fear that the arbitrator may view the other side’s offer as more reasonable. Unlike conventional arbitration where parties may take aggressive positions designed to influence the arbitrator’s compromise, Final Offer Arbitration has the advantage of incentivizing the parties to move toward the middle. If the final offers are close, it may not matter that much which of the two proposals the arbitrator chooses. If the offers are far apart but one side has submitted a ridiculous offer, the arbitrator’s decision is relatively easy. The disadvantage in removing an arbitrator’s flexibility is, of course, that if both offers are far apart and equally ludicrous, the arbitrator’s hands are tied.

Final Offer Arbitration has advantages, but there are a number of issues that should be carefully considered before electing this route. The provisions of the arbitration agreement should be tailored to the nature of potential disputes and the parties’ desires. The arbitration agreement should clearly spell out, among other matters, when and how offers may be made, the deadline for modifying offers, when the offers are shown to the arbitrator, and the type of relief that may be included in an offer. The parties may provide, for example, that at any time prior to the close of the arbitration hearing, the parties may exchange revised written proposals or demands, which shall supersede all prior proposals. Or they may provide that final offers must be submitted within a certain number of days before the arbitration hearing commences. In some instances, the process of submitting the offers moves the parties so close together that the dispute is settled before the hearing or before the arbitrator makes a decision. There are also variations the parties might want to explore, such as “night baseball” arbitration, which requires the arbitrator to make a decision without the benefit of seeing the parties’ proposals and then to make the award to the party whose proposal is closest to that of the arbitrator. Another variation is to have Final Offer Arbitrations on an issue-by-issue or claim-by- claim basis.

Final Offer Arbitration works well where the parties are only seeking monetary relief or where the dispute involves pricing or valuation disputes. It can also be used for non-monetary awards in the nature of specific performance, declaratory relief or injunctive relief, but in such cases extra scrutiny should be exercised when drafting the arbitration agreement. Parties should always consult with experienced counsel when drafting Final Offer Arbitration agreements and before signing such agreements to make sure the arbitration agreement will achieve the intended results and benefits. Properly drafted, Final Offer Arbitration provides a powerful incentive for the parties to move toward the middle and expeditiously resolve their disputes.
For more on arbitration, see our earlier posts.

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Arbitration Pitfalls – Broad or Narrow Scope

Arbitration Series - Part 3 of 3:  When drafting an arbitration provision, careful attention should be given to the language describing the scope of disputes to be arbitrated. Unless the parties intend to arbitrate all disputes that may touch on or collaterally relate to the contract, the arbitration clause should contain express language specifically identifying and narrowly describing the scope of disputes to be arbitrated. In determining whether a given dispute falls within the scope of a contractual arbitration provision, courts first determine whether the arbitration clause is broad or narrow. Chelsea Family Pharmacy, PLLC v. Medco Heath Solutions, Inc., 567 F.3d 1191, 1196 (10th Cir. 2009). “Under a narrow arbitration clause, a dispute is subject to arbitration only if it relates to an issue that is on its face within the purview of the clause, and collateral matters will generally be beyond its purview. “ Id., at 1262. In contrast, where an arbitration clause is broad, “there arises a presumption of arbitrability and arbitration of even a collateral matter . . .if the claim alleged implicates issues of contract construction or the parties' rights and obligations under it.” Id. The precise wording of an arbitration clause does matter and should be carefully considered.

“Arising Out Of” “Relating To” or “Connected With:” The arbitration clauses recommended by the American Arbitration Association (“AAA”) call for arbitration of “any controversy or claim arising out of or relating to this contract, or the breach thereof.” Such language has universally been construed to be a broad arbitration clause. C & L Enters., Inc. v. Citizen Band Potawatomi Indian Tribe of Okla., 532 U.S. 411, 415 (2001); Oracle Am., Inc. v. Myriad Group A.G., 724 F.3d 1069, 1071 (9th Cir. 2013); Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 674 (5th Cir. 2012); Fallo v. High-Tech Inst., 559 F.3d 874, 876 (8th Cir. 2009); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1369 (Fed. Cir. 2006); Terminix Int'l Co. v. Palmer Ranch Ltd. P'ship, 432 F.3d 1327, 1329 (11th Cir. 2005); Getzelman v. Trustwave Holdings, Inc., No. 13-cv-02987-CMA, 2014 WL 3809736 *3 (D.Colo. Aug. 1, 2013). The use of such terms as “related to” or “connected with” extends the scope of the arbitration provision beyond claims under the contract. Julian v. Julian, No. 4137-VGP, 2009 WL 2937121 at *5 (Del. April 23, 2009) (“related to” language “explicitly extends the scope of the arbitration provision ‘beyond the four corners of’” the agreement); Brown v. Coleman Co., Inc., 220 F.3d 1180, 1184 (10th Cir. 2000) (arbitration clause encompassing “all disputes or controversies arising under or in connection with this Agreement” constituted “a broad arbitration clause as it covers not only those issues arising under the employment contract, but even those issues with any connection to the contract.”). Similarly, contracts that call for arbitration of “any dispute between the parties” without limiting language have also been construed to be broad arbitration clauses. Qwest Corp. v. New Access Communications, LLC, No. 03-N-1278, 2004 U.S. Dist. LEXIS 28523, * 3 (D. Colo. Mar. 31, 2004) (arbitration clause covering “any claim, controversy or dispute between the parties” with no restriction found to be broad)

Disputes “Under” or “Arising Under” the Agreement: Courts have split over the interpretation of arbitration clauses limiting arbitration to disputes “under” or “arising under” an agreement. Some courts construe such clauses to be relatively narrow. See Cape Flattery Ltd. v. Titan Mar., LLC, 647 F.3d 914, 924 (9th Cir. 2011) (“arising under” language signals a narrow arbitration clause); Mediterranean Enters., Inc. v. Ssangyong Corp., 708 F.2d 1458, 1464 (9th Cir.1983) (phrase “arising under” deemed relatively narrow); Carro Rivera v. Parade of Toys, Inc., 950 F. Supp. 449, 453 (D.P.R. 1996) (because tort claims did not relate to contract interpretation and performance, they did not “arise under” the agreement); B.C. Rogers Poultry, Inc. v. Wedgeworth, 911 So.2d 483, 488 (Miss. 2005) (arbitration of disputes “arising under this agreement” is narrow and focused only on those disputes actually “under” the agreement). Many other courts, however, have found clauses requiring arbitration of any dispute “arising under” the agreement to constitute a broad arbitration clause. Cook v. PenSa, Inc., No. 13-CV-03282-RM-KMT, 2014 WL 3809409 *13-14 (D. Colo. Aug. 1, 2014) (determining that “the Tenth Circuit would follow the majority of federal circuits and give the phrase ‘arising under’ a broad construction based on strong federal policy in favor of arbitration.”); Viaero Wireless v. Nokia Solutions Network U.S. LLC, No. 13-CV-00866-RM-CBS, 2013 WL 5366402, at *5 (D. Colo. Sept. 25, 2013) (unpublished) (noting that “arbitration provision extends to ‘any dispute under this Agreement . . . ,’ and therefore, the presumption in favor of arbitration extends to peripheral matters relating to the parties' obligations”); Dialysis Access Center, LLC v. RMS Lifeline, Inc.,638 F.3d 367, 382 (1st Cir. 2011) (giving broad construction to provision requiring arbitration of “any dispute that may arise under this [Master Service] Agreement”); Consol. Brokers Ins. Servs., Inc. v. Pan-Am. Assur. Co., Inc., 427 F. Supp. 2d 1074, 1083 (D. Kan. 2006) (finding arbitration clause, which encompassed “[a]ny dispute arising between the parties under this Contract,” to be “a broad provision”).

Drafting Narrow Arbitration Clauses: Given the strong presumption in favor of arbitration, unless the parties intend to arbitrate all disputes related to their contract, including collateral and peripheral matters that may merely implicate issues of contract construction or the parties' rights and obligations under it, extreme care should be taken to limit the arbitration clause to specific, narrowly defined types of disputes. The parties should include express language identifying with specificity the type of disputes they agree to arbitrate. The parties also may want to recite their intention that the arbitration clause is intended to be narrow, that the agreement to arbitrate only covers those categories of disputes specifically listed, and the parties do not intend to arbitrate statutory, tort or other claims that merely touch on or collaterally relate to the agreement.

In addition, where the parties intend to arbitrate only a limited category of disputes but want those disputes, but only those disputes, to be resolved under an arbitration organization’s arbitration rules, those rules should be carefully reviewed, specifically identified in the contract, and express language should be included in the arbitration clause excluding the application and operation of any arbitration rule that would otherwise extend the scope of arbitrable disputes beyond what the parties intend. Arbitration rules adopted by an arbitration association such as the AAA, for example, typically provide that: (1) the parties shall be deemed to have made such rules a part of their arbitration agreement whenever they have provided for arbitration under such rules; (2) the arbitrator shall have the power to determine disputes over the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim; and (3) the arbitrator shall have the power to determine the validity of a contract of which an arbitration clause forms a part, and that such arbitration clause shall be treated as an agreement independent of the other terms of a contract. See, e.g., AAA Commercial Arbitration Rules R-1 and R-7. While courts recognize that arbitration is purely a matter of contract, any ambiguities will be construed in favor of arbitration. Parties should draft their arbitration clauses accordingly.

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Arbitration Pitfalls – Failing to Specify Duration

Arbitration Series - Part 2 of 3:  Arbitration clauses are often contained in purchase and sales agreements, underwriting agreements, earn-in agreements, and other contracts covering specific transactions or limited to a specific performance period. See prior post. Parties may have intended the arbitration clause to only cover disputes concerning the performance or interpretation of the contract. However, parties who incorporate broad arbitration clauses in their contracts, such as clauses calling for arbitration of any dispute “arising out of,” “related to” or “connected with” the agreement, may be forced to arbitrate post-contract disputes they did not intend to arbitrate.

Federal courts have held an arbitration clause in a contract is presumed to survive the expiration of the contract. Newmont U.S.A. Ltd. v. Insurance Co. of North America, 615 F.3d 1268 (10th Cir. 2010); Riley Mfg. Co., Inc. v. Anchor Glass Container Corp., 157 F.3d 775 (10th Cir. 1998). The Tenth Circuit governing most of the Rocky Mountain states has held that this presumption in favor of continuing arbitrability will only disappear in two situations:

     1) if the parties expressly or clearly imply an intent to repudiate post-expiration arbitrability, or
     2) if the dispute cannot be said to arise under the previous contract.

In Riley, the Tenth Circuit held that to “arise under” a contract means the dispute involves rights which “to some degree” have vested or accrued during the life of the contract and merely ripened after termination, or the dispute relates to events which have occurred “at least in part” while the agreement was still in effect. 157 F.3d at 781.

Given the strong presumption in favor of arbitration, any implied intent to repudiate post-expiration arbitrability must be clear. Several courts, for example, have found the presumption in favor of arbitration applies even though only certain provisions in the contract survive closing or termination of the contract and the arbitration clause is not listed as one of the provisions that survive. In Huffman v. Hilltop Companies, LLC., 747 F.3d 391 (6th Cir. 2014), for example, the court held an arbitration clause covering any claim arising out of or related to an agreement was broad and gave rise to the presumption of arbitrability, even though the arbitration clause was not listed among those provision that survived the termination of the contract. The court ruled the strong presumption in favor of arbitration applied absent an indication that the parties clearly intended for the survival clause to serve as an exhaustive list of the provisions that would survive expiration of the agreement. See also, W. Liberty Foods, L.L.C. v. Moroni Feed Co., 753 F.Supp.2d 881, 885 (S.D.Iowa 2010) (holding that an arbitration clause did not expire despite the fact that it was not listed in the contract's survival clause). These courts have reasoned that if the parties had intended to extinguish the arbitration provision upon the termination of the agreement they could have done so expressly.

When parties negotiate the terms of an arbitration clause, they should consider whether they want to arbitrate disputes between them after the contract is completed or terminates. If the parties intend to limit arbitration to disputes that arise during contract performance, they should pay careful attention to the language of their arbitration clause and include express language narrowly describe the scope of disputes that will be subject to arbitration and specifying any durational limitation on their agreement to arbitrate.

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Arbitration Pitfalls – Failing to Specify Who Decides Arbitrability

Arbitration Series - Part 1 of 3:  Agreements to arbitrate are often viewed favorably during contract negotiations as way to avoid litigation and minimize costs and expense should a dispute arise between the parties. Frequently, however, arbitration may be just as expensive and lead to uncertainties and consequences never contemplated. A party should carefully consider and understand the terms of any arbitration clause and avoid rubber stamping general arbitration clauses, such as those calling for the arbitration of any dispute arising under or relating to the contract under the Rules of the American Arbitration Association (“AAA”). One threshold issue the parties should clearly understand and address is who will have jurisdiction to resolve disputes about whether a given claim falls within the scope of the parties’ arbitration agreement.

The U.S. Supreme Court has ruled that the question of whether a particular dispute is arbitrable is presumptively a question for the court to decide absent “clear and unmistakable” evidence that the parties agreed that the arbitrator would decide this question. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944-45 (1995). Following this decision, arbitration associations amended their arbitration rules to provide that the arbitrator has jurisdiction to decide whether a given dispute is arbitrable. Rule R-7 of the AAA Commercial Arbitration Rules, for example, provides that the arbitrator “shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or the arbitrability of any claim or counterclaims.” All the various sets of arbitration rules promulgated by the AAA now contain a similar rule. A line of cases from federal district and circuit courts subsequently developed (now the majority view) holding that when the parties use a broadly worded arbitration clause incorporating a set of arbitration rules which confers upon the arbitrator the power to determine his own jurisdiction, they “clearly and unmistakably” agree to arbitrate whether a given dispute is arbitrable. Oracle Am., Inc. v. Myriad Group A.G., 724 F.3d 1069, 1071 (9th Cir. 2013); Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 674 (5th Cir. 2012); Fallo v. High-Tech Inst., 559 F.3d 874, 876 (8th Cir. 2009); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366, 1369 (Fed. Cir. 2006); Terminix Int'l Co. v. Palmer Ranch Ltd. P'ship, 432 F.3d 1327, 1329 (11th Cir. 2005); Contec Corp. v. Remote Solution, Co., Ltd, 398 F.3d 205, 208 (2d Cir. 2005). Thus, where a dispute, whether sounding in tort, equity, contract or statute has any arguable connection to the agreement, the arbitrator instead of the courts may have the power to determine if the dispute is arbitrable.

It is important to recognize that arbitrators are usually private practitioners engaged in the business of providing legal services for a fee. They may face significant financial and competitive pressures to earn more money and handle more cases. That is true for many arbitrators suitable for commercial disputes, but is not the case for the judiciary. Most parties would expect that a judge's compensation does not depend on how that judge decides an issue, but they may not appreciate that conferring the power on an arbitrator to determine whether a given dispute is arbitrable or not could have such an effect.

Where parties only intend to arbitrate certain types of disputes but want to have those specific disputes, and only those disputes, resolved by an established arbitration organization and under its established arbitration rules, it is critical that the parties carefully define and narrow what disputes are arbitrable. Unless parties want to arbitrate whether a given dispute is in fact arbitrable, they should also specifically address in the body of the arbitration clause itself the question of who will determine whether a given dispute falls within the scope of their arbitration agreement. The same applies if the parties intend an arbitrator to decide whether a given dispute is arbitrable. Failure to do so may lead to complicated and expensive disputes concerning the scope of the arbitration clause or lead to results the parties never focused on or intended.

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