Third Circuit advises parties to use plain language when drafting arbitration agreements

By Christopher Reese

The Third Circuit recently affirmed the United States Bankruptcy Court for the District of Delaware’s denial of a motion to compel arbitration in In re Nortel Networks, Inc.  In doing so, the Third Circuit advised parties wishing to arbitrate their disputes to make that intent clear by “reducing agreements to arbitrate to plain language that can be recognized and enforced by courts examining only the text of the agreement,” and to avoid “hid[ing] their intent to [arbitrate their disputes] in the shadows of the text.”

In 2009, the multinational telecommunications firm Nortel Networks declared bankruptcy.  Nortel entities around the world filed petitions in U.S., Canadian, English, and French courts to begin insolvency proceedings.  Nortel’s bankruptcy was quite complicated, since it had “numerous subsidiaries located in multiple jurisdictions,” and “multiple Nortel entities owned the business lines and intellectual property that comprised the global Nortel brand.”  Because the value of Nortel’s assets would diminish over time, a plan to sell Nortel’s assets had to be devised quickly to maximize the return on the sale.

Nortel debtors from around the world entered into an Interim Funding Agreement, which “created a framework for Nortel debtors to sell assets without first agreeing how to allocate the proceeds of any sale among the relevant debtors.”  The Agreement required the debtors that signed it to place the proceeds of any sales of assets into escrow and to negotiate in good faith in an attempt to reach agreement on how to allocate the proceeds.  The Agreement did not contain the words “arbitrators” or “arbitration” or identify any arbitral association.

After the Agreement was approved by the necessary courts, the Nortel debtors held nine auctions, which raised approximately $7.5 billion in proceeds.  The parties then negotiated as required by the Agreement but were unable to agree on a protocol to allocate the proceeds of the auctions.  The U.S. Nortel debtors moved the Bankruptcy Court to resolve disputes about asset allocation.  Nortel debtors from other countries cross-moved to compel arbitration. The Bankruptcy Court denied the cross-motion to compel arbitration and approved a judicial allocation protocol.  An appeal to the Third Circuit followed.

The Third Circuit had little trouble affirming the Bankruptcy Court, finding that the “dispute begins and ends with the text of the Interim Funding Agreement,” “which does not reveal an intent to arbitrate disputes about the allocation of the auction funds.”  Rather, the Third Circuit explained, the language of the Agreement provided only that the debtors “would negotiate the procedure by which to divide the funds.”  Applying New York law on contract arbitration (the Agreement contained a New York choice-of-law clause), the Third Circuit refused to consider any extrinsic evidence suggesting that the parties intended to arbitrate because the Agreement was not ambiguous.

The most interesting part of the Third Circuit’s decision is its admonition that parties wishing to arbitrate disputes take care to “not hide their intent to do so in the shadows of the text.”  The Third Circuit noted that parties may agree to arbitration without using the word “arbitration” in their agreement, but also stated that “the absence of common signal words” makes it more difficult to determine that the parties intended to resolve their disputes in arbitration.  Parties wishing to arbitrate their disputes should heed the advice of the Third Circuit and ensure that their arbitration agreements indicate as clearly as possible their intent to resolve any disputes in arbitration.  Doing so will pull such intent out of the “shadows of the text” and significantly increase the likelihood that a motion to compel arbitration will be granted.

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