Pros & Cons of Arbitration and Dispute Resolution Clauses

Posted by: Andrea Henneman | Posted on: April 15th, 2014 | 0 Comments

There are pros and cons to arbitration and alternative dispute resolution clauses, which are prevalent in contracts of all descriptions.  Both processes are intended to provide a less costly and time-consuming way of resolving disputes using a neutral party.  There are some significant caveats, however.  The quicker and less formal factual discovery process is largely within the discretion of the umpire or arbitrator, and court rules of evidence and procedure don’t apply.

While the ADR Act allows a decision to be set aside on the basis of an error in applying the law, this is not the case with arbitration awards unless the arbitration clause so provides.  The qualifications and knowledge of the umpire or administrator are important and unless addressed in the arbitration clause the parties may not have control over this issue.

In New Jersey, there are two separate statutes governing alternative dispute resolution and arbitration. There is also a Federal Arbitration Act which is intended to provide maximum enforceability of arbitration agreements.  The ADR Act, as described below, was passed in 1987 in an attempt to correct some of the shortcomings of arbitration.  See Comment, Alternative Dispute Resolution,
The New Jersey Alternative Procedure for Dispute Resolution Act (N.J.S.A. 2A:23A-1 et seq.) (“ADR Act”) applies in two circumstances:  (i) where a written contract includes an advance agreement to settle disputes under the ADR Act or (ii) where the parties to a dispute agree in writing to use ADR, whether the controversy arose under a contract or not.   Such an agreement constitutes a waiver of trial by jury and a waiver of rights to appeal, except as the ADR Act allows.  An “umpire” is designated in accordance with the means specified in the contract, or if no such means is specified, by initiating a summary action in Superior Court to have an umpire appointed,  The umpire has complete authority to decide all issues of fact and law. The courts will not consider any intermediate appeals unless there is a showing of manifest denial of justice or a party’s interests will be irreparably harmed.
Following a 60-day discovery period, the parties submit a written statement of their factual and legal position.  The umpire holds a hearing.  The rules of evidence that govern court actions do not apply and umpires are charged with “assuring the informality of the proceedings.”  The umpire also can decide whether any expert witnesses are necessary. An award is issued by the umpire within the time set by the agreement or is no such time is set, by the Superior Court.   Within 45 days thereafter, a party can apply to Superior Court for the award to be vacated, modified or corrected.  There are very limited grounds for court review of the facts as determined by the umpire.  If the Court finds that the umpire incorrectly applied the law, the court has the power to modify the award.
The Arbitration and Award Act (N.J.S.A. 2A:23B-1 et seq.) became applicable to all agreements to arbitrate dated after 2003.    It applies to all agreements to arbitrate contained in a “record.”   If there is a dispute over whether an agreement to arbitrate existed, the Superior Court makes the determination; however, the Court cannot refuse to order arbitration due to a claim lacking merit or failing to state a valid claim.  An arbitrator may award “such remedies as the arbitrator deems just and appropriate under the circumstances”, and the award cannot be appealed on the basis that a court could not or would not grant the same relief, except for punitive damages or other “exemplary relief” and attorneys fees which can only be awarded if they could be awarded in a similar legal action.

There is no formal discovery in an arbitration; this is within the discretion of the arbitrator.  While pre-trial discovery can be frustrating, the intent is to allow a full development and sharing of the factual background between the parties (which in itself facilitates settlement) rather than having the parties have to guess at the evidence that will be presented by the other party, without an opportunity to prepare.

New Jersey’s Revised LLC Act Makes Dramatic Changes

Posted by: Andrea Henneman | Posted on: April 15th, 2014 | 0 Comments

There are some dramatic changes to the way LLC agreements are interpreted and enforced under the Revised Uniform Limited Liability Company Act (the “Revised Act”), which became effective in March 2013 for newly formed New Jersey LLCs and will apply to all New Jersey LLCs as of March 2014.   N.J.S.A. 42:2C-91.   A few highlights are provided below.

The Revised Act may “change the deal” among members even in existing LLCs, especially if there is no written operating agreement in place.  For example, an LLC is presumed to be member-managed, and every member has equal rights in management unless the operating agreement provides otherwise.

It would be fair to say that one of the reasons LLCs have become so popular for small businesses is that they require fewer of the formalities required for corporations – shareholder meetings, elections of directors, and so on.  On the other hand, lack of formalities and the very flexibility allowed by the Revised Act could make any disagreements among members more difficult and expensive to sort out. The Revised Act includes default provisions that make all members “equal” regardless of what percentage of capital they contributed to the company.

Oral and Implied Terms of Operating Agreements
As noted in other posts, the operating agreement among the members is the key governing document of an LLC.  Until adoption of the Revised Act, “operating agreement” meant a written agreement. Now, it means “the agreement, whether oral, in a record, implied, or in any combination thereof.”

There are good practical reasons for the traditional requirement for agreements to be in writing, and to interpret a written agreement as expressing the final terms of agreement – replacing negotiations, prior incomplete drafts and so forth.  Otherwise, the terms of an agreement might have to be reconstructed from many different records (visualize paying an attorney to pore over all of the e-mails between the parties), testimony, and whatever evidence would show an “implied” agreement (such as a pattern of conduct between the parties).   It would seem that proving the terms of an agreement  could be far more complicated now, especially with the “combination” language in the Revised Act, unless the agreement includes an express “merger” clause stating that it represents the final and complete agreement of the parties and only can be amended in writing signed by all parties.  (This is an example of language that non-lawyers would not necessarily recognize as important.)

Member-Managed LLCs Have “Equal Rights” in Management Regardless of Ownership Percentage
A key section of the Revised Act is “Management of Limited Liability Company” (N.J.S.A. 42:2C-37). LLCs are presumed to be managed by the members – and every member has “equal rights in management”, per capita rather than by percentage ownership. In the former statute, members had the right to participate in management according to their percentage interest in the company.  If you contributed 75% of the capital, you would be entitled to 75% vote on decisions and 75% of the distributions of profits.

Other language in the same section of the law may have been intended to clarify things by stating: “A difference arising among members as to a matter in the ordinary course of the company’s activities may be decided by a majority of the members.”  Note, this does NOT say a majority of capital contributed.  If you have an even number of members – say, two – even if you contributed different percentages, there will not necessarily be a “majority of members” to resolve disagreements.

Unanimous Agreement Required for Decisions Outside Ordinary Course of Business
Under the Revised Act, unanimous agreement by members is needed for decisions “outside the ordinary course of business,” again regardless of ownership percentage (in comparison, if certain decisions had to be approved by the shareholders of by a New Jersey business corporation, the presumption is that a majority of shares would decide the vote unless the Certificate or By-Laws expressly provide otherwise.)

Members have Equal Rights to Distributions Regardless of Percentage of Ownership
The Revised Act also changed the presumptions about sharing of profit distributions, if no written operating agreement is in place.  Distributions are to be made equally to members, regardless of their capital contributions.

Review and Clarification of Operating Agreements is Strongly Advised
The items noted above are only a portion of the changes put into effect under the Revised Act.  We strongly recommend that clients have their LLC agreements put into writing – or, if there is already a written agreement, have the agreement reviewed in light of the Revised Act.

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