George Judea - Troutman Pepper Locke

I. Introduction

Globalization increasingly fosters complex cross-border transactions and other international business relationships. These transactions and business dealings often give rise to disputes that are commonly resolved through international arbitration.

International arbitration is a private dispute resolution process that largely resides outside of the courts of a particular jurisdiction. Most often, parties to cross-border transactions agree to international arbitration because it provides a neutral forum and renders an award that is enforceable in more than 170 nations across the globe. At the same time, international arbitration protects due process rights, allows procedural flexibility, and ensures that sensitive information remains confidential.

This guide provides an overview of international arbitration: how it works; when you should select it as the dispute resolution procedure; and key considerations when drafting an international arbitration agreement. This guide also briefly introduces a species of international arbitration known as investment arbitration or investor-state arbitration.

While this guide is not a substitute for specialized legal advice, it offers practical guidance on some of the most salient features of international arbitration. Should you need further support with cross-border transactions or disputes, Troutman Pepper Locke’s International Arbitration Group has the requisite experience to meet your legal needs.

II. What is International Arbitration?

International arbitration is a consensual and largely private dispute resolution process where parties from different countries agree to have their disputes decided by one or more arbitrators, without the involvement of the courts of a particular country.

International arbitration procedures can vary dramatically depending on the backgrounds of the parties, arbitrators, and counsel. However, at its core, international arbitration reflects a distinct dispute resolution process that does not follow traditional litigation norms used by the courts of individual jurisdictions or even the norms followed in many domestic arbitration proceedings. Instead, international arbitration procedures represent a blend of legal traditions that, in many ways, bridge the gap between common law and civil law norms.

In the case of cross-border transactions, international arbitration has become the dominant form of dispute resolution because the process affords parties access to a flexible, effective, and neutral dispute resolution forum that avoids the challenges of litigating within a foreign court system. Most importantly, however, international arbitration awards (i.e., the final judgment of an arbitral tribunal) are readily enforceable in countries around the world. The same is not necessarily true for court judgments; indeed, it is typically more difficult to enforce a U.S. court judgment abroad than it is to enforce an international arbitration award.

This unique feature of international arbitration is the product of international conventions, the most important of which is the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). In basic terms, according to the New York Convention, the courts of member states must enforce foreign international arbitration awards unless a party can satisfy one of a relatively few narrow grounds to avoid enforcement.

III. Role of the Courts

While international arbitration proceedings take place outside the purview of national court systems, courts still play a critical role in supporting the arbitration process. How courts interact with arbitration proceedings varies depending on the jurisdiction and court system involved; however, national court systems most commonly address three critical issues:

Interpreting/Enforcing Arbitration Agreements

National courts are commonly called on to enforce the terms of an arbitration agreement or interpret a dispute resolution provision. This typically occurs in one of two scenarios: (1) a party refuses to participate in arbitration despite the existence of a valid arbitration agreement; or (2) a party files a lawsuit in a national court in contravention of an agreement to arbitrate. Although variability exists among jurisdictions around the world, local courts’ consistent enforcement of arbitration agreements is among the bedrocks of the international arbitration system and ensures that parties can confidently enter into arbitration agreements without the risk that they could be forced to adjudicate their dispute in a different forum.

Injunctive Relief

National courts may, subject to the law of the local jurisdiction, be asked to grant provisional or injunctive relief in support of a pending arbitration. In these cases, even if the parties have an enforceable arbitration agreement, parties may still avail themselves of the local courts to preserve the status quo during the pendency of a dispute, freeze assets, preclude dissemination of protected information, or prevent the spoliation of evidence.¹

Award Enforcement

Under the New York Convention, international arbitration awards are regularly recognized and enforced as judgments by national courts in more than 170 countries.² Thus, while procedures can vary depending on the applicable jurisdictions, should a losing party fail to honor an award, the prevailing party may generally enforce the award in any country that is a signatory to the New York Convention.

IV. Role of Arbitral Institutions

International arbitration institutions are independent bodies responsible for, among other things, (1) promulgating general procedural rules that parties may select as part of their arbitration agreement to govern the arbitration proceedings, and (2) providing administrative services to facilitate the arbitration process, including the appointment of the presiding arbitrator(s), for a fee. While each set of institutional rules may vary in subtle ways, the most common rules implement similar procedures related to the management of an international arbitration. For example, institutional rules identify the requirements to initiate an international arbitration, the guidelines for arbitrator appointment, the authority of the arbitrators to control the proceedings, and the timeline and format of any eventual award.

Some of the most common arbitral institutions used in connection with international arbitration proceedings are:

International Chamber of Commerce (ICC)
International Center for Dispute Resolution (ICDR)
London Court of International Arbitration (LCIA)
Hong Kong International Arbitration Center (HKIAC)
Singapore International Arbitration Center (SIAC)
Stockholm Chamber of Commerce (SCC)
Dubai International Arbitration Centre (DIAC)
China International Economic and Trade Arbitration Commission (CIETAC)
Saudi Center for Commercial Arbitration (SCCA)

Alternatively, parties can elect not to utilize the rules or services provided by an arbitral institution in favor of what is known as ad hoc arbitration. The principal advantage of ad hoc arbitration is that it enables parties to avoid the fees charged by many arbitral institutions for administrative services. When opting for ad hoc arbitration, parties frequently adopt an existing set of ad hoc arbitration rules, such as the United Nations Commission on International Trade Law rules (UNCITRAL rules). Ad hoc arbitrations are theoretically more flexible, but sometimes risk becoming more costly and time-consuming, as parties may be drawn into national court litigation to resolve procedural issues, such as the appointment of a replacement arbitrator.

V. Key Features – Why Choose International Commercial Arbitration?

A. When Parties Must Use International Arbitration

Parties select international arbitration for two principal reasons.

First, international arbitration ensures that the prevailing party will receive an award that can be enforced in nearly any jurisdiction in the world, as a result of the New York Convention (as well as other similar international conventions). As explained above, the same is not necessarily true for court judgments. As a result, parties to cross-border transactions — particularly those located in different jurisdictions — almost always utilize international arbitration because court judgments cannot be as widely enforced to collect payment from the losing party.

Second, international arbitration affords the parties a neutral forum for resolution of disputes and avoids the risk that one party may have a “home-court advantage” against their adversaries in a foreign jurisdiction. Indeed, the appointment of neutral arbitrators theoretically diminishes the risk that a local court may be biased against a foreign litigant. Relatedly, international arbitration norms and procedures are intended to be relatively universal in nature and avoid the procedural challenges and barriers that many national court systems may impose. This theoretically levels the playing field for international parties who may not have experience litigating in foreign jurisdictions.

B. When Parties May Prefer International Arbitration

Additionally, international arbitration has become a preferred means of dispute resolution for parties for many other reasons:

Arbitrator Selection

International arbitration provides parties with greater freedom to select the adjudicator(s) of their dispute. This includes not only the identity of the arbitrators themselves, but also the number of arbitrators who will oversee the dispute. While there are many methods for the appointment of arbitrators, the parties’ ability to control who ultimately decides the dispute is commonly viewed as one of the most significant advantages of international arbitration. This is particularly true for technically complex or industry-specific cases, where an arbitrator’s specialized background in the subject matter of the dispute can greatly improve the efficiency of proceedings and credibility of the outcome.

Streamlined and Flexible Procedures

Most rules governing international arbitration proceedings impose relatively flexible procedures as compared to the stiff rules of civil procedure and evidence found in local courts. The parties can readily develop schedule procedures and submission requirements (with the tribunal’s approval) to create a tailored process that fits the needs of their case. While international arbitration proceedings can still be lengthy, this flexibility commonly enables parties to resolve complex disputes in a more timely and cost-effective manner when compared to litigation before the courts of many jurisdictions.

Due Process Protections

The flexibility and efficiency of arbitration are not at the expense of necessary due process safeguards. For example, arbitration procedures permit multiple rounds of pleadings, a formal hearing, oral argument, and cross-examination. These procedures give the parties sufficient opportunity to present and argue their case, thus minimizing the risk that a party could be hauled into an arbitration proceeding without the ability to fairly mount a defense.

Confidentiality

International arbitrations are, in most instances, confidential proceedings. This can be an important advantage in cases of particularly sensitive disputes or possible reputational harm. Importantly, however, confidentiality in arbitration is not absolute. Parties can be required to disclose information gathered during the proceedings if ordered to do so by a court, otherwise required by law, or if a party is required to enforce the award in a local court.

Narrow Discovery

Unlike litigation, which (at least in the U.S.) often involves expansive (and expensive) pre-trial discovery, discovery in international arbitration is limited. For example, international arbitrations do not commonly involve typical U.S. discovery devices, such as depositions, interrogatories, or requests to admit. Moreover, while document exchange is relatively common (often referred to as “disclosure”), it is far more narrow and restricted than the practice seen in the U.S.

Finality

After an award is issued by the tribunal, it is typically final. Parties can challenge the award only on very narrow grounds, such as fundamental procedural deficiencies. As a result, the parties can avoid prolonged debates in appellate courts that typically follow a court judgment. Moreover, given the limited grounds for appeal, the parties do not spend substantial time or effort preserving issues for appeal during the hearing. Relinquishing the right to appeal is a significant concession, but often allows for a more streamlined, efficient, and economical dispute resolution process.

Cost Shifting

As a default, most international arbitration procedures permit cost shifting and allow the “prevailing party” to recover its costs and attorneys’ fees. This is in contrast to the default rule of the U.S., where cost shifting is not the norm unless permitted by statute or agreed by the parties.

C. How Parties Use Arbitration in Special Circumstances

In addition to the features described above, most institutional international arbitration rules contain provisions that afford parties additional procedures to streamline the proceedings:

Emergency Arbitrations

Most institutional arbitration rules afford parties the right to initiate emergency arbitrations to secure some form of preliminary or injunctive relief. This process is usually an alternative to seeking interim or injunctive relief from the local courts. While procedures can vary, emergency arbitrations typically consist of a very short proceeding, during which a sole arbitrator renders a determination on a matter that cannot await the formal appointment of an arbitral tribunal.

Some recent institutional developments have expanded emergency arbitration capabilities. For example, the 2025 SIAC Rules now permit emergency arbitrators to grant ex parte relief — protective preliminary orders issued before notifying the opposing party — making SIAC one of the first major institutions to offer this mechanism. Similarly, the 2024 HKIAC Rules expressly confirm that emergency arbitrators may issue “interim-interim measures” — preliminary or interim orders prior to their main emergency decision.
Parties should also be aware that enforcement of emergency arbitrator decisions remains uncertain in many jurisdictions. While the New York Convention applies to arbitral awards, there is some debate over whether emergency arbitrator decisions — which are typically interim in nature — qualify as enforceable awards under the Convention. A few jurisdictions have enacted legislation expressly permitting enforcement of emergency arbitrator decisions. However, in most other jurisdictions, the legal framework remains undeveloped. Anecdotal evidence suggests that parties voluntarily comply with emergency arbitrator decisions in most cases, in part because noncompliance may reflect poorly during the merits phase before the full tribunal. Nevertheless, where enforcement against a recalcitrant party is anticipated, parties may need to consider seeking parallel relief from local courts.

Expedited Arbitrations

If the amount in controversy falls below a specific threshold, most arbitration rules will call for the parties to proceed according to expedited arbitration rules. These thresholds vary by institution and have steadily increased over time such that more cases submitted to these institutions fall within the scope of these provisions. For example, for arbitration agreements concluded on or after January 1, 2021, that specify the ICC Rules, the ICC’s Expedited Procedure Provisions apply automatically to disputes where the amount in controversy does not exceed $3 million (increased from $2 million for agreements concluded between March 2017 and December 2020). The 2025 SIAC Rules introduced a new two-tier system: a “Streamlined Procedure” for disputes up to SGD 1 million (approximately $780,000) with capped arbitrator fees and an award within three months of tribunal constitution; and an “Expedited Procedure” for disputes up to SGD 10 million (approximately $7.8 million) with an award within six months. Similarly, effective January 1, 2026, the HKIAC’s expedited procedure threshold increased to HKD 50 million (approximately $6.4 million) from HKD 25 million (approximately $3.2 million).
While the features of an expedited arbitration will vary between rules, in general, under an expedited arbitration proceedings will unfold on a truncated timeline and set of procedures that aim to reduce the cost and time required to render an award. In doing so, expedited arbitration theoretically allows parties to resolve lower-value claims in a more cost-effective manner. Expedited arbitration rules typically apply as a default if the amount in controversy does not exceed a certain threshold, so if parties wish to opt out of expedited arbitration, they usually must do so in their arbitration agreement.

Multiparty Issues – Joinder and Consolidation

Many international arbitration rules permit the joinder of parties to arbitration proceedings, or the consolidation of parallel arbitrations, provided that an agreement to arbitrate is in place. The joinder of third parties and consolidation of disputes can avoid duplicative/parallel proceedings and further reduce costs. However, parties should carefully consider the limitations of these mechanisms:

Consent Requirements: While arbitration rules vary, joinder and consolidation generally require that all affected parties have consented to arbitration under compatible arbitration agreements. Joinder of nonsignatories to an arbitration agreement is possible in limited circumstances — such as where a nonsignatory is alleged to be bound by the arbitration agreement through theories like alter ego, agency, or assumption of obligations — but the burden of proof is substantial.
Timing Constraints: Most institutional rules impose timing limitations on joinder and consolidation. For example, under the ICC Rules, joinder requests after the confirmation or appointment of any arbitrator require the consent of all parties (including the party to be joined) unless all parties are bound by the same arbitration agreement.
Multicontract Scenarios: Where related disputes arise under multiple contracts with different arbitration clauses (a common scenario in construction projects involving owners, contractors, subcontractors, and design professionals), consolidation may be difficult or impossible absent express consent provisions in each agreement. Given these limitations, parties to complex transactions involving multiple related agreements should consider incorporating express joinder and consolidation provisions in their arbitration clauses. Such provisions should clearly identify the related agreements and consent to joinder of parties and consolidation of disputes arising under those agreements.

Third-Party Funding

Third-party funding has become increasingly common in international arbitration. While funding structures vary, third-party funders typically pay for all or part of a party’s legal fees, arbitration costs, and expenses in return for a specified share of any damages awarded or a multiple of the funding provided.
Arbitral institutions have responded by implementing disclosure requirements. The ICC and HKIAC Rules both require disclosure of funding arrangements and funder identity. The SIAC Rules are arguably the most comprehensive, mandating disclosure, prohibiting post-constitution funding arrangements that would create arbitrator conflicts, and empowering tribunals to impose sanctions for noncompliance or direct parties to withdraw from problematic agreements.
Parties considering third-party funding should also be aware of potential implications for costs. While funders do not automatically assume liability for adverse costs awards, tribunals may consider funding arrangements when ruling on security for costs applications or apportioning costs at the conclusion of proceedings.

VI. Costs and Time of International Arbitration

The costs and time required to resolve a dispute vary dramatically depending on the complexity of the case and applicable rules. Although often difficult to predict, when selecting an arbitral institution or ad hoc rules, clients should consider the following factors that can drive the costs and time for the arbitration.

A. Costs

The costs a party may incur in connection with an international arbitration typically include some combination of attorneys’ fees, expert fees, arbitrator fees, and administrative fees charged by the arbitral institution (in addition to ancillary expenses).

Attorneys’ fees and expert fees depend heavily on the underlying substance of the dispute and are difficult to estimate without a deeper understanding of the case. Parties should carefully work with counsel to gather information concerning anticipated legal and expert fees.

Arbitral institutions, however, typically regulate arbitrator costs and administrative fees. Arbitrator fees represent the fees paid to the arbitrators to oversee the dispute. Administrative fees represent the fees paid to the arbitral institution (if applicable) to administer the case. Parties typically pay a portion of the arbitrator’s fees and institutional administrative fees in advance of the proceedings. These fees can vary across arbitral institutions, which often provide fee calculators or fee schedules that parties can use to calculate the total fees based on the amount in controversy.³

For example, according to the ICC, a $10 million dispute before a panel of three arbitrators would cost approximately $400,000 in estimated arbitrator and administrative fees. Similarly, in the case of a SIAC arbitration, a $10 million dispute before a panel of three arbitrators would cost approximately $300,000 in estimated arbitrator and administrative fees. Both the ICC and SIAC compensate their arbitrators according to a fixed-fee schedule governed by the amount in controversy. By contrast, other institutions like the ICDR or LCIA compensate their arbitrators based on the individual arbitrators’ rates and the amount of time the arbitrators dedicate to a particular matter.

Critically, as discussed above, cost shifting is the norm in international arbitration. As a result, an arbitrator can shift a party’s costs (including attorneys’ fees, expert fees, arbitrator fees, administrative fees, and ancillary expenses) to their adversary based on the outcome of the matter.

Further, parties should be aware that third-party funding is becoming increasingly common in international arbitration. While third-party funding structures vary, third-party funders commonly pay for all or part of a party’s attorneys’ fees, arbitration costs, and expenses in return for a specified share of any damages awarded.

B. Time

The time required to complete an international arbitration will depend on the facts of the case and how the parties organize the proceedings. Indeed, with greater control over the procedures, disclosures, and submissions, the parties can generally influence the length of their arbitration to suit the claims at issue.

However, institutional arbitration rules also play a significant role in influencing the timeline of an arbitration. Indeed, some arbitral rules implement unique procedures that can shorten (through expedited procedures) or lengthen the period required to obtain a final award — although these procedures are commonly implemented for good reason. While international arbitral institutions have dedicated significant effort to reducing the time required to complete an international arbitration, anecdotal evidence shows that a significant number (though not all) of international arbitration proceedings last between approximately 12 to 18 months.⁴

VII. How to Draft an International Arbitration Clause

Because arbitration is a creature of contract, if parties wish to arbitrate their disputes they must agree to do so in writing. Parties often set forth these agreements at the beginning of their relationship in the dispute resolution procedures contained in their contract.

For an agreement to arbitrate to be enforceable, it must be clear. Ambiguities can render an agreement to arbitrate unenforceable, or at a minimum, delay the ultimate resolution of a dispute.

To prevent such an outcome, arbitral institutions and ad hoc rules provide sample arbitration clauses. For example, the ICDR’s clause states:

Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be determined by arbitration administered by the International Centre for Dispute Resolution in accordance with its International Arbitration Rules.

Similarly, the ICC’s standard clause states:

All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.

Best practices suggest that parties should generally rely on an institution’s or ad hoc rules’ model arbitration clause and carefully modify that clause depending on the needs of the parties. However, many parties prefer to draft their own unique, specially tailored dispute resolution procedure. Regardless of whether the parties to a contract rely on standard clauses or craft their own, they should pay special attention to several essential elements of every arbitration clause:

The clause should state that resolution of disputes via international arbitration is mandatory.
The parties should set forth the specific rules of arbitration they intend to follow. In connection with this decision, parties should consider whether the rules they select are for ad hoc or administered/institutional arbitration.
The parties should specify the seat or place of the arbitration. The seat/place determines which country’s arbitration law governs the arbitration. The seat or place of arbitration is also the default location of the arbitration hearings. However, parties can agree to host the hearings in a different location in the arbitration agreement itself or during an arbitration.
The parties should define the scope of the arbitration clause, clearly specifying any types of disputes that are exempt from arbitration. Generally, parties should draft their arbitration clause broadly to provide for arbitration of a wide variety of disputes.
The parties should specify the substantive law that will govern the dispute. This does not necessarily have to be the law of the jurisdiction in which the arbitration is seated.
The parties should identify the language to be used during their proceedings.
The parties should typically spell out that the arbitral tribunal — and not a court — shall decide any questions of jurisdiction in the first instance.

The parties can specify several optional elements as well. These elements further define the contours of the arbitration and what the parties should expect from their dispute resolution procedure:

Number of arbitrators (typically one or three).
Method of selecting arbitrator(s).
Arbitrator qualifications.
Any additional confidentiality or nondisclosure rules.
Fee shifting (if the parties wish to deviate from the typical prevailing party rule).
Pre-arbitration negotiations/mediation.
Joinder or consolidation provisions that consent to the joinder of third parties or the consolidation of arbitrations involving related disputes.
Document exchange or other discovery-related procedures.
Express waiver of the right to challenge an award.

Importantly, while the elements discussed above are common features of most international arbitration agreements, the precise terms and requirements may vary depending on facts and circumstances of a particular matter. As a result, parties should carefully work with counsel to ensure their international arbitration agreements are appropriate for the transaction at issue.

VIII. Typical Steps for International Arbitration

While the exact procedure of any arbitration will depend on several factors and can be tailored by the parties’ agreement, the following steps are common among international arbitration proceedings.

A. Claimant’s Request for Arbitration

To initiate an arbitration, the claimant must first file a “Request for Arbitration” or “Arbitration Demand” with the relevant institution and/or provide the opposing party a copy. The length of and detail included in a request/demand can vary, but usually must include information concerning: (1) the parties and their representatives; (2) a basic summary of the claimant’s position and relief requested; and (3) any procedural items for discussion, such as claimant’s nomination of potential arbitrators (if applicable).

B. Respondent’s Answer

Upon receipt of a request/demand, the respondent has roughly 30 days to file an answer, depending on the applicable rules. According to most arbitration rules, an answer is not strictly required and if a respondent declines to submit an answer, the respondent will be deemed to have denied the allegations in the request/demand. Similar to the request/demand, answers vary in length and contain general denials of the claim, a brief rebuttal telling respondent’s side of the story, a description of any counterclaims, and any other procedural items, such as the respondent’s arbitrator selection (if applicable).

C. Appointment of the Tribunal

Once the initial pleadings have been filed, the institution will proceed to confirm the arbitral tribunal (whether a sole arbitrator or three-member arbitrator tribunal). While the methods of appointment vary depending on the rules and parties’ arbitration agreement, most often the parties will have the option to nominate and/or agree upon the tribunal members in the first instance (to be confirmed by the institution), with the institution intervening in the event of any impasse. Sometimes, however, the clause provides for selection of the arbitrator(s) by the institution straight away. The arbitrator appointment stage will require the nominated arbitrators to disclose any potential conflicts and allow the parties to object to an arbitrator’s appointment if either party believes the conflict raises concerns regarding impartiality.

D. Procedural Hearing and Procedural Order

Once the arbitration panel is constituted, a meeting is held with the parties to discuss the procedural schedule going forward. Following the procedural hearing, the arbitral tribunal will typically issue a procedural order outlining the arbitration schedule and the procedures that the parties must follow during the arbitration.

E. Written Submissions – Round One

Following the release of the tribunal’s scheduling order, the parties are expected to exchange detailed written submissions describing their claims and citing evidence in support thereof. While there are several different approaches, two common methods of structuring legal submissions in an international arbitration are known as the: (1) memorial approach; and (2) pleadings approach.

Memorial submissions, derived from civil law traditions, typically require the parties to set out their claims or defenses as part of one large omnibus submission. This means that a memorial submission will not only include a detailed legal submission concerning a party’s claims and defenses, but also all relevant exhibits, written witness statements,⁵ and expert reports.

Alternatively, under the pleadings approach, derived from common law traditions, the parties exchange their factual (and sometimes legal) positions in preliminary written submissions. Once the parties have both had an opportunity to set out their claims and defenses in writing, the parties then proceed through a series of stages where they exchange documents, witness statements, expert reports, and sometimes prehearing submissions.

F. Document Disclosure

Following the initial round of written submissions, the parties engage in a process referred to as document disclosure or document exchange. Critically, document disclosure in international arbitration is not U.S.-styled discovery. Indeed, in some instances, arbitral tribunals will elect not to permit document disclosure at all.

If document exchange is permitted, it is far more constrained than normal discovery practices in the U.S. and most commonly abides by standards described in guidelines, such as the IBA Rules on the Taking of Evidence in International Arbitration. In general terms, parties are only permitted to request documents (or narrow sets of documents) that are relevant and material to the dispute.

The document exchange process in international arbitration most often lasts approximately one month and involves three to four rounds of requests and objections. Most commonly, the process unfolds using a table known as a Redfern Schedule. At the outset of the document exchange process, each party sets out their document requests in the first column of the Redfern Schedule (with one request per row in the table). Thereafter, the responding party sets out any objections in the next column, followed by a reply by the requesting party in the next column, and often a surreply by the responding party in the following column. When all of the columns for each request have been filled in, the tribunal will resolve any disagreements between the parties and will decide whether the responding party must provide the requested documents or not.

G. Written Submissions – Round Two

After document exchange is complete, the parties often (though not always) exchange a second round of submissions. In the case of the memorial approach, the claimant will submit a reply memorial that often includes any new information collected during document disclosure, followed by the respondent’s surreply memorial. In the case of the pleadings approach, as described above, the second round of submissions typically involves written witness statements (including initial and reply witness statements), expert reports (including initial expert reports and reply expert reports), and prehearing submissions.

H. Hearing

After the parties have submitted all pleadings, a formal hearing is held in front of the tribunal. The precise procedures used during a hearing will depend in large part on the preferences of the arbitral tribunal; however, most international arbitration hearings follow a similar structure: (1) opening statements; (2) fact witness examination; (3) expert witness examination; and (4) closing statements (if necessary).

Much like U.S. domestic arbitration hearings and litigation trials, the bulk of an international arbitration hearing focuses on fact and expert witness testimony. However, because witnesses and experts have already introduced their direct testimony through written witness statements, the majority of hearing time is devoted to cross-examination. Indeed, a party’s ability to introduce new oral direct testimony is curtailed in international arbitration proceedings to limit opportunities for unfair surprises. In some cases, however, tribunals may permit a witness to provide limited oral direct examination at the hearing to provide an introduction or to address issues that the witness could not have previously raised in his or her prior written statements. In other instances, tribunals prefer to have the experts provide limited direct presentations to provide a high-level summary of their findings.

That lack of robust oral direct testimony, combined with substantial prehearing submissions, can help shorten international arbitration hearings. However, the length of the proceedings will often depend on the complexity of the dispute, the arbitral tribunal’s preferences, and parties’ time management practices.

I. Post-Hearing Submissions

Following the conclusion of hearings, each party may (if the arbitral tribunal finds it appropriate) submit post-hearing briefs, outlining their entire position of the case. In many instances, though not all, parties submit two rounds of post-hearing briefs, providing each party an opportunity to reply. The length of the post-hearing submission phase of an international arbitration can vary dramatically depending on several factors, but commonly lasts around 30 to 60 days.

J. Award

Following the conclusion of the hearing and post-hearing submissions, the tribunal will formally close the proceedings to prevent the introduction of additional evidence into the record. Thereafter, the tribunal will enter deliberations and formally draft the final award. The time required to draft an award can vary greatly, depending on the size and complexity of the dispute; however, many arbitral rules impose strict time limits on when the tribunal must release its final award. Once completed, the award itself is often a very detailed summary of the case, including the procedural history, facts, parties’ positions, and ultimately the tribunal’s decision.

K. Cost Submissions and Cost Awards

As explained above, cost shifting is a common practice in international arbitration. A cost award may be part of the final award on the merits, or the tribunal may ask the parties to issue cost submissions explaining why each party believes that costs should be shifted to the other side. In many instances, these rules will depend on the tribunal’s determination of, among other things, which party prevailed in the dispute, whether a party engaged in dilatory or inefficient tactics during the arbitration, and whether a party’s fees in the case were reasonable. Following a review of the parties’ submissions, the tribunal will issue a separate cost award allocating the parties’ costs.

IX. Technology in International Arbitration

The use of technology in international arbitration has increased significantly in recent years, with virtual and hybrid hearings becoming standard practice over the last decade. International arbitration’s ability to readily adopt new technologies in response to user demands for greater efficiency and convenience has been one of its most positive and distinctive features.

Most recently, AI has increasingly transformed how international arbitration proceedings are conducted. AI-powered tools are commonly used at virtually all stages of arbitration and institutions like the AAA have unveiled new AI-arbitrator platforms designed to leverage AI to resolve low-value disputes. While AI offers significant benefits in terms of efficiency and cost reduction, it also raises important concerns regarding confidentiality, accuracy, transparency, and the integrity of proceedings.

Several organizations have published guidance addressing AI use in arbitration including the Silicon Valley Arbitration and Mediation Center Guidelines (April 2024) and CIArb Guideline on the Use of AI in Arbitration (March 2025). As these organizations have highlighted, notwithstanding the promise of AI, parties, practitioners, and arbitrators should be aware of several significant risks associated with the use of AI in international arbitration proceedings.

Confidentiality: Many publicly available AI tools process user inputs on external servers and may retain data for training purposes. Submitting confidential arbitration materials to such platforms could compromise privilege and breach confidentiality obligations. Parties should use only AI tools that adequately safeguard confidentiality, assess data use and retention policies, and consider redacting or anonymizing materials before submission.

Accuracy and “Hallucinations”: AI systems, particularly large language models, can generate authoritative-sounding but entirely fabricated content, including nonexistent case citations or misquoted legal texts. All AI-generated output must be independently verified by qualified professionals.

Bias: AI tools trained on incomplete or skewed data may produce biased results. The “black box” nature of many AI systems can make it difficult to assess reliability or trace how outputs are generated.

Nondelegation of Decision-Making: Arbitrators retain personal responsibility for their mandate and decision-making function. The SVAMC Guidelines provide: “An arbitrator shall not delegate any part of their personal mandate to any AI tool. This principle shall particularly apply to the arbitrator’s decision-making process.”

The regulatory landscape for AI continues to evolve rapidly, with different jurisdictions adopting varying approaches. Practitioners should remain attentive to applicable national laws and institutional requirements that may affect AI use in their proceedings. Given the increasing prevalence of AI in international arbitration proceedings, parties and arbitrators are increasingly counseled to consider addressing AI use early in proceedings.

X. Enforcement and Appeal of Arbitral Awards

A. Broad Enforcement

As discussed above, one of the key benefits of international arbitration is the enforceability of an award. Should a losing party fail to comply with an award, the prevailing party will generally be able to bring an action to seek judicial recognition and enforcement of the award in most jurisdictions, including in any of the 170+ countries that are signatories to the New York Convention. Naturally, the prevailing party will choose a country where the losing party has assets that can be used to satisfy an award. In the event that a losing party does not have sufficient assets in any one country, the prevailing party can seek judicial recognition in multiple locations.

There are very limited grounds for challenging an award. Under the New York Convention — the general standard around the globe — an award may only be challenged if a party furnishes proof that:⁶

A party to the arbitration agreement was under some form of incapacity or the arbitration agreement was invalid;
The arbitration proceeding was subject to severe procedural unfairness, such that one side was unable to present its case;
The award addressed matters outside the scope of the arbitration proceeding;
The composition of the arbitral tribunal or the arbitration procedure was not in accordance with the parties’ arbitration agreement or mandatory arbitral law;
The arbitration award is not binding on the parties, or was set aside in the country in which, or under the law of which, that award was made;
The subject matter of the dispute was not capable of settlement by arbitration under the laws of the enforcing jurisdiction; and
The recognition or enforcement of the award would be contrary to the public policy of the enforcing jurisdiction.

While practices may differ from country to country, courts around the world tend to narrowly apply these grounds for nonenforcement.⁷ For example, even if an award is set aside by national courts of the “seat” or “place” of the arbitration, the award may sometimes be enforced in the jurisdiction where the assets are found.

XI. Investor-State Arbitration

While the bulk of this guide focuses on practices related to international commercial arbitration disputes, parties should also be aware of a separate species of international arbitration known as “investor-state arbitration” or “investment arbitration.”

Investor-state arbitration is designed to resolve disputes between investors (either individuals or corporations) and a sovereign government. Unlike international commercial arbitration, investment arbitrations do not typically arise out of the parties’ contractual agreements. Rather, investor-state arbitration is most often a product of international investment treaties, the most common of which are bilateral investment treaties (BITs) between two sovereign nations.

According to UNCTAD, more than 2,500 bilateral investment treaties (BITs) and treaties with investment provisions (TIPs) are currently in force, with the total universe of signed international investment agreements (including those not yet in force or that have been terminated) exceeding 3,600. The landscape of investment treaties continues to evolve, with some countries terminating existing BITs as part of broader reform efforts while others negotiate new agreements.

These treaties have been put into place to promote global investment and afford basic protections to investors engaging in foreign direct investment. In broad strokes, by signing these treaties, a host nation promises not to discriminate, unfairly prejudice, or unlawfully expropriate the investing party’s business opportunities.⁸ In return, the host nation hopes to realize benefits from increased investment. The most common sectors impacted by BITs include construction, agriculture, mining, manufacturing, financial institutions, and infrastructure.

Before investing in a foreign state, corporations should carefully review the applicable treaties to determine if they are able to avail themselves of treaty protections in the future. If not, the investor may wish to consider restructuring its investment vehicle — before a dispute arises — to ensure it retains the appropriate treaty safeguards.

In addition to affording investors basic protections, investment treaties grant investors the right to pursue claims against the host state through a number of dispute resolution methods (most importantly arbitration) if a host state violates one or more of the treaty protections. In other words, by entering into an investment treaty, the host state agrees to submit to the jurisdiction of an investment arbitration tribunal to resolve any disputes associated with a breach of those treaty protections. This allows foreign parties to avoid: (1) issues of sovereign immunity; and (2) the challenges of litigating in unfamiliar local courts, which may be unsympathetic to foreign investors’ claims against their own government.

Some of the most common arbitral bodies that administer or promulgate rules related to investor-state arbitrations are:

a) International Centre for the Settlement of Investment Disputes (ICSID).
b) Arbitration Institute of the Stockholm Chamber of Commerce (SCC).
c) International Court of Arbitration of the International Chamber of Commerce (ICC).
d) London Court of International Arbitration (LCIA).
e) Ad Hoc Arbitration UNCITRAL Arbitration (Note: UNCITRAL does not administer these arbitrations, but publishes a set of procedural rules used in ad hoc arbitrations).

While there are numerous complexities to investor-state arbitrations, the key takeaways that parties should consider are as follows:

Consider what treaties are in effect with the host state (and potentially restructure the investment vehicle) before making an investment to identify the applicable protections.
Understand what substantive rights these treaties confer and how that may affect the investment risk.
In the event a dispute arises, understand that investment arbitration may be a potential avenue to protect the underlying investment and follow all applicable procedures set forth in the investment treaty.

XII. Troutman Pepper Locke’s International Arbitration Group

Our advocates understand international arbitration, from the drafting of the arbitration clause all the way through the hearing, including cross-examination and written and oral submissions. We are well-connected to the relatively small community of high-quality practitioners, and therefore have particular insights into the selection of appropriate arbitrators for each matter. We understand cultural and legal differences in the common law and civil law traditions that can signal the difference between victory and defeat, and have unique industry experience that our clients rely on when in need.

XIII. Representative Experience

Successfully defended the respondent franchisee in ICC arbitration (Paris seat) related to Middle East-based quick service food franchises.
Successfully defended the CEO and 50% shareholder of a global manufacturer in ICDR proceedings, achieving a complete victory on all claims and a multimillion-dollar costs award.
Represented a satellite technology company in a six-week merits hearing before HKIAC, defeating all claims and prevailing on all counterclaims with damages estimated in excess of $1 billion.
Represented the claimant African LNG facility in ICC arbitration (London seat) arising from a price reopener provision.
Secured dismissal based upon time-barred limitations of claims against a mining contractor in SCC arbitration (Stockholm seat).
Achieved a favorable award for a multinational reinsurer in a $100 million dispute concerning recapture rights under a series of life reinsurance treaties with a Canadian cedent.
Secured award for international oilfield service company in ICC arbitration against local agent in Nigeria.
Represented two Canadian reinsurance companies in ad hoc proceedings regarding termination of existing treaty obligations through novation and portfolio transfer.
Represented a contractor in LCIA arbitration (London seat) regarding refurbishment of Caribbean refinery.
Represented a U.S. specialty equipment manufacturer in CIETAC proceedings arising from a distribution arrangement in China.
Represented a contractor in ICDR arbitration (Houston) involving drilling and joint operating obligations under West African offshore concession.
Secured a $76 million quantum award following evidentiary hearings in Delhi and London under LCIA Rules, with related enforcement proceedings in multiple jurisdictions.
Represented a gas processing company in ad hoc arbitration (Houston) against a producer to revise processing fees under long-term agreement.
Represented a licensor in LCIA arbitration (London seat) regarding unpaid fees under the license.
Represented a German research institution in an ICC merits hearing in Paris concerning IP rights governed by Belgian law.
Represented a U.S. purchaser under an asset purchase agreement in LCIA arbitration (London seat) seeking recovery related to breached warranties and representations.
Represented an international water company in ad hoc arbitration (Houston) against Central American government regarding the provision of goods and services.
Obtained a liability award before the SCC for a U.S. purchaser against a Russian state instrumentality in a uranium supply dispute.
Counseled the Middle Eastern Ministry of Justice regarding accession to international investment regime.

Endnotes

¹ The availability of preliminary relief is not, however, confined to the national courts. Many international arbitration institutions provide emergency arbitration procedures, which allow parties to seek expedited relief prior to a fulsome arbitration proceeding.

² For a complete list of participating states, see: https://www.newyorkconvention.org/countries.

³ See, e.g., AAA-ICDR Calculator at https://apps.adr.org/feecalculator/faces/FeeCalcHome.jsf; see also ICC Cost Calculator at https://iccwbo.org/dispute-resolution-services/arbitration/costs-and-payments/cost-calculator/.

⁴ See, e.g., “AAA Arbitration Report: Time and Cost: Considering the Impact of Settling International Arbitrations,” https://www.icdr.org/sites/default/files/document_repository/AAA241_ICDR_Time_and_Cost_Study.pdf.

⁵ A unique feature of international arbitration proceedings is that direct witness testimony is more often introduced in written form through submissions known as “witness statements.” The witness statement is intended to serve as a substitute for the oral direct testimony of a fact witness at the arbitration hearing.

⁶ New York Convention, Article V(1).

⁷ Parties should be aware that arbitration awards rendered in the United States may be subject to challenge based on a separate series of similar but distinct legal grounds set forth in the Federal Arbitration Act.

⁸ Commonly, this includes protections from: unfair or unequitable treatment; undue interference; expropriation without just compensation; limitation of transfer of capital; and discriminatory laws against the investor.

In this crossover episode of The Consumer Finance Podcast and Regulatory Oversight, Chris Willis is joined by Joseph DeFazio, Bill Foley, and Michael Yaghi to discuss the implications of New York’s FAIR Act, a significant amendment to the state’s UDAAP statute. The FAIR Act aims to broaden consumer protection by lowering the threshold for legal action against unfair and abusive business practices. With expanded enforcement powers for the state, this legislation could dramatically increase litigation risks for financial services companies operating in New York if the governor signs the bill. Tune in to understand how this legislative shift might affect the industry and what steps businesses can take to prepare.

Synopsis

The Internal Revenue Service (IRS) released a Generic Legal Advice Memorandum, GLAM 2020-004 (the IRS Memo) dated May 18, 2020 addressing the timing of income and payroll tax withholding on three types of employee equity awards: nonqualified stock options (Options), stock-settled stock appreciation rights (SARs), and stock-settled restricted stock units (RSUs).

For publicly traded companies, the IRS Memo clarifies that Options and SARs are taxable when exercised, even though shares may not be delivered to the employee’s brokerage account for up to two days after exercise. This conclusion should be unsurprising to most employers.

More interestingly, the IRS Memo states that RSUs are treated as taxable when the employer “initiates payment” of the RSUs to employees. This “initiates payment” standard for RSUs appears to be a new concept and could prove helpful to some employers. This article explores some planning opportunities for employers related to this standard.

The Basics of Options, SARs, and RSUs

Options, SARS, and RSUs have the following basic features:

An Option is a contractual right, granted by an employer to an employee, for the employee to purchase a fixed number of employer shares at a fixed price (the exercise price) during a fixed period of time (the option term). The exercise price is typically the fair market value of the shares on the grant date, and the option term is usually 10 years (or less due to termination of employment). An employee’s right to exercise is usually conditioned on meeting vesting requirements specified in the award agreement. To exercise the Option, the employee normally must provide a written exercise notice plus payment in full of the exercise price. The employee must also provide funds to satisfy all tax withholding obligations (discussed further below).[1]
SARs are economically similar to Options, but do not require the employee to pay an exercise price. Instead, SARs entitle the employee to receive upon exercise the difference between the value of the underlying shares on the date of exercise and the SAR “base price,” which (like the Option exercise price) is typically the fair market value of the shares on the grant date. For a stock-settled SAR, this spread in value upon exercise is paid by delivery of a number of shares equal in value to that spread. The IRS Memo addresses only stock-settled SARs.
An RSU is a contractual right of an employee to receive a specified number of the employer’s shares at a later date, after satisfying any applicable vesting requirements. The vesting requirements could include continued employment through scheduled vesting dates (sometimes referred to as “time-vesting” RSUs) and/or achievement of performance goals (sometimes referred to as “performance-vesting” RSUs, or PSUs). The employee pays no exercise price. The date the shares are to be paid is often the date the vesting requirements are met, but can also be a later specified date. The design of RSUs needs to consider compliance with the deferred compensation rules under Internal Revenue Code Section 409A and the “special timing rule” for FICA taxes (i.e., Social Security taxes up to the Social Security wage base plus Medicare taxes), especially if the payment date can occur in a later year after the vesting date.[2]

When a taxable event for an Option, SAR, or RSU occurs for an employee, the employer must determine the amount of taxable income that will be included in the employee’s W-2 taxable wages for the year. The employer also must withhold all applicable federal, state, and local income taxes and applicable FICA taxes.[3] The IRS Memo addresses how and when these taxable wages and withholdings are determined.

Timing and Amount of Taxation Per the IRS Memo

For public companies, there is usually a brief delay between when Options and SARs are exercised and when shares are actually delivered to the employee (usually into a brokerage account with a third-party administrator for the employer’s equity compensation plan). A similar delay can occur between the date that an employer starts the process to issue shares in payment of an RSU and the date that the shares are actually delivered to the employee’s brokerage account.

The IRS Memo addresses when the taxable event is considered to have occurred for these transactions. The date of the taxable event is important for at least two reasons:

determining the fair market value of the shares to determine the amount of taxable income, and
determining when tax withholding deposits are due.

The IRS Memo includes examples for each type of award.

For Options and SARs, taxation occurs upon exercise. In the examples in the IRS Memo, if an Option with an exercise price of $10 is exercised on Day 1 when the stock has a fair market value[4] of $25, the amount of taxable income is $15 (i.e., $25 – $10). This calculation applies even if the shares are not actually delivered to the employee until Day 3, and even though on Day 3 the stock is worth $24. In accordance with the IRS Memo, once the exercise has occurred, the employee is considered to have beneficial ownership of the shares to be delivered, because the employee stands to participate in any increase or decrease in the value of those shares after exercise.

As noted above, there is no exercise date for RSUs. According to the IRS Memo, the tax date for RSUs is the date that the employer “initiates payment.” As in the examples for Options and SARs, if the shares are worth $25 on Day 1 when the employer initiates payment of vested RSUs, that $25 value will be the price used to determine the amount of income taxes and withholdings for the RSUs, even though the shares are not actually delivered to the employee until Day 3 when the shares are worth $24. Similar to the analysis for Options and SARs, the IRS concludes that the employee has beneficial ownership in the shares once payment has been initiated by the employer.

The IRS Memo does not expressly define what “initiates payment” means, but indicates that a public company initiates payment when it instructs its transfer agent to transfer shares to the employee’s brokerage account.

Many employers will initiate payment for an RSU on the scheduled vesting date. This approach is especially common for typical time-vesting RSUs. In those cases, the vesting date fair market value of the shares will determine the amount of taxable income and withholdings. This result likely represents no change in practice for many employers.

But the design of some RSUs will require the recognition of income on dates other than the vesting date.[5] For example, many RSUs provide for payment within a specified period (e.g., 30 days) following the applicable vesting date. PSUs often provide for payment during a period (e.g., 2 ½ months) following the end of the applicable performance period and after performance results have been certified. In these cases, employers will have flexibility in determining when to initiate payment within the stated period, and the employer’s decision as to the date that the payment is initiated will determine the date of income inclusion according to the IRS Memo.

Unlike Options and SARs, RSUs can also have deferred payment dates, subject to compliance with Section 409A. If a deferred RSU is payable on a future fixed date or permissible payment event (such as termination of employment), the taxable amount and withholdings should be based on when the employer initiates payment following that permissible payment date or event.[6]

Interplay with One-Day Rule

The IRS Memo reaffirms that the deposit of employment taxes (i.e., both required income tax withholdings and FICA taxes) must occur within one business day after the relevant tax event for Options, SARs, and RSUs if the employer has accumulated $100,000 or more in employment taxes during a monthly or semi-monthly deposit period (the One-Day Rule). The IRS Memo confirms that the clock for the One-Day Rule starts on the day of exercise for Options and SARs and the day the employer initiates payment for RSUs, so that employment tax deposits are technically due the following business day.

The One-Day Rule can present a challenge for public companies when (i) shares from the award are sold by the employee on the date of Option/SAR exercise or RSU payment to fund required tax withholding, but (ii) the proceeds of the same-day sales are not deposited until two days later, consistent with “T+2” settlement requirements under current Securities and Exchange Commission (SEC) rules. The IRS previously issued a 2003 Field Directive in which it directs agents to not assert penalties on employers that fail to satisfy the One-Day Rule in connection with Option exercises if the employer deposits employment taxes within one day after settlement of the shares, assuming settlement occurs within three days after exercise (consistent with the SEC’s “T+3” settlement requirement that applied at that time).

The omission of SARs and RSUs from the 2003 Field Directive was not especially significant or surprising at that time, as those award types were not common then. Since then, however, the popularity of RSUs has increased substantially and the absence of relief for RSUs from the One-Day Rule has become a practical problem for some employers.

Thankfully, immediately after publication of the IRS Memo, the IRS revised its Internal Revenue Manual field agent guidance to provide relief from the One-Day Rule for SAR exercises and RSU payments, as well as Option exercises. The revision states that agents may waive otherwise applicable late deposit penalties if employment taxes are deposited within one business day after the “T+2” settlement date for SARs and RSUs, as well as Options.[7]

Planning Opportunities for Employers

The new “initiates payment” standard for the timing of taxation for RSUs may present employers with planning opportunities. Some of the possible planning opportunities include:

having a single payment date for administration of tax reporting and withholding for RSUs and PSUs that vest on multiple prior days during a year,
timing the payment date to be during an open trading window (e.g., three days after public release of quarterly or annual financial statements), and
timing the payment date in coordination with dividend record dates (e.g., so that the shares delivered in settlement will qualify to receive the dividend).

For example, assume an employer has time-vesting RSUs that vest on February 12, 14, and 15 during 2021. Assume there is also a PSU award with a 2018-2020 performance period that the compensation committee, at its meeting in February 2021, determines was earned at target. Assume the employer plans to file it’s 10-K at the end of February, with an open trading window under their insider trading policy starting on March 4. If the award agreements include language permitting the employer to pick a payment date within a specified administrative period (e.g., on a day no later than March 15, 2021), the employer could select March 4 as the payment date for all of these awards and initiate payment on that date. This single payment date for the various awards could provide several potential benefits, such as:

simpler administration for tax reporting and withholding (e.g., by having a single stock price to value all of the awards for tax purposes);
if share withholding is used to cover taxes for Section 16 officers, simpler Form 4 filing requirements (with a single Form 4 reporting those share withholding transactions for each Section 16 officer); and
if tax withholding is to be covered through employee-directed broker sales of shares subject to the awards, simpler compliance with insider trading policy requirements (i.e., by having the sale transactions executed during an open window).

Public companies looking to conserve cash during the economic crisis created by COVID-19 may also want to consider greater use of broker sales to cover tax withholding obligations related to stock-settled SAR exercises and RSU payments. Previously, this approach was not possible without exposing the employer to late deposit penalties or without the employer using its cash to advance the proceeds expected from employee-directed broker sales. The recent IRS clarification about application of the One-Day Rule to these transactions (described above) will facilitate timely tax deposit using this approach.

Conclusion

While the IRS Memo likely does not change the tax reporting and withholding practices as to Option and SAR exercises for most public company employers, it does present some planning opportunities regarding the settlement of vested RSUs and PSUs. Employers may wish to review their RSU and PSU awards agreements and related tax administrative practices and consider whether any changes are appropriate or desired.

[1] A “statutory option” or “incentive stock option” (an ISO) is a special kind of stock option that meets certain technical requirements under the Internal Revenue Code, and provides employees with special tax benefits. The Options discussed in the IRS Memo are not ISOs, but are “non-qualified stock options” that are generally taxable upon exercise.

[2] Options and SARs are usually designed to be exempt from the requirements of Section 409A. When RSUs vest in one year but are paid in a later year, FICA taxes are usually due in the year of vesting, even though income taxes are not due until the year of payment. This is sometimes referred to as the FICA tax “special timing rule.”

[3] See footnote 2 regarding the FICA tax special timing rule that sometimes applies to RSUs, depending on the design. The guidance in the IRS Memo does not change the special timing rule. The examples in the IRS Memo related to RSUs were designed so that income and FICA taxes became due at the same time.

[4] Public company employers have some flexibility in how the fair market value of the shares are determined at the time of exercise for purposes of calculating taxable income. Employers may use any reasonable method for determining fair market value for income recognition purposes. Depending on the facts and circumstances, these methods may include closing price on the day of the taxable event, closing price for the prior day, an average of high and low prices, or a trailing average of prices over a number of days. Any such approach should be properly documented and consistently applied.

[5] Such award features must be designed carefully to achieve compliance with, or exemption from, Section 409A.

[6] But see footnote 2 above regarding the FICA tax special timing rule that may require assessment of FICA taxes on RSUs in the year of vesting rather that at the later, deferred payment date.

[7] See IRM 20.1.4.26.2(5), “Expanded instruction to NSO, stock-settled SAR, and stock-settled RSU. Clarified time frame for settlement,” issued May 26, 2020.

Executive Summary of FERC Order No. 872: Qualifying Facility Rates and Requirements Implementation Issues Under the Public Utility Regulatory Policies Act of 1978 [1]

I. Overview

On July 16, 2020, the Federal Energy Regulatory Commission (FERC or the Commission) issued Order No. 872, the Commission’s final order revising its regulations implementing Sections 201 and 210 of the Public Utility Regulatory Policies Act of 1978 (PURPA) [2]. This order, which follows a 2016 technical conference on PURPA issues and a September 2019 Notice of Proposed Rulemaking (NOPR) [3], is the first major set of revisions to FERC’s regulations implementing PURPA since they were established through Order No. 69 in 1980.

As FERC explained in the NOPR, the energy landscape has evolved in significant ways since the initial PURPA regulations were established, which includes increased supplies of natural gas, a more matured renewables industry, and the growing presence of non-Qualifying Facility (QF) independent power producers. These and other changes prompted FERC to revise its PURPA regulations, many of which are implemented by the states. These new changes provide additional guidance to state commissions regarding PURPA implementation and rests additional authority in state commissions regarding QF rates and contract terms. These regulatory changes fall into five categories, as outlined below:

Rates:
- In the case of QF power sales contracts and other Legally Enforceable Obligations (LEOs), in addition to continuing to allow states to establish fixed QF rates, FERC granted states the flexibility to set variable rates for QF energy (but not capacity).
- In the case of QF power sales contracts and LEOs utilizing fixed rates, FERC granted states additional flexibility to establish such fixed rates using projected energy prices during the term of a QF’s contract.
- In the case of QFs selling on an “as-available” basis within an organized wholesale market, FERC established a rebuttable presumption, rather than a per se rule (as proposed in the NOPR), that locational marginal prices (LMPs) may reflect a purchasing electric utility’s avoided energy costs. Outside of an organized wholesale market, FERC granted states flexibility to set “as available” energy rates at competitive prices from liquid market hubs or calculated from a formula based on natural gas price indices and heat rates.
- Allows states to utilize transparent and non-discriminatory competitive solicitations to set “avoided costs” for QF energy and capacity sales.
One-Mile Rule:
- Amends the “one-mile” rule to add a new rebuttable presumption that affiliated facilities more than one mile apart but less than 10 miles apart are separate facilities.
- Maintains the irrebuttable presumption that facilities located one mile apart or less constitute a single facility and creates an irrebuttable presumption that facilities 10 miles apart or more are separate facilities.
Obligation to Purchase:
- Reduces the size threshold from 20 MW to 5 MW for the rebuttable presumption that QFs have nondiscriminatory access to markets.
- However, FERC confirmed that utilities that were previously granted termination of the mandatory purchase obligation for contracts above 20 MW must reapply with FERC requesting relief from the mandatory purchase obligation for small power production facilities between 5 MW and 20 MW.
Legally Enforceable Obligation:
- Allows states to establish objective and reasonable criteria to determine a QF’s commercial viability and financial commitment to construction before a QF may establish a LEO.
QF Self-Certification:
- Allows parties to protest QF certifications without filing a petition for declaratory order.
- Clarifies that protests may be made to new certifications, but only to recertifications that make substantive changes to the existing certification.

FERC declined to adopt the proposed rule permitting states with retail competition to allow relief from the PURPA purchase obligation. Instead, FERC clarified that the Commission’s existing PURPA Regulations already require that states, to the extent practicable, must account for reduced loads in setting QF capacity rates.

FERC also rejected arguments from various parties that an environmental analysis under the National Environmental Policy Act of 1969 (NEPA) was required.

In a partial dissent, Commissioner Glick rejected much of the Commission’s Order No. 872 as an “administrative gutting” of its long-standing PURPA implementation regime, chastising the Commission for failing to pursue a more “durable, consensus solution” rooted in promoting competition. In particular, Commissioner Glick argued that the reduction to the rebuttable 20 MW purchase-obligation threshold in Order No. 872 and changes to its avoided cost rate determination violated PURPA’s mandate to prevent discriminatory rate treatment and encourage QF development.

Order No. 872 will go into effect 120 days from its publication in the Federal Register.

II. Summary of Revisions

A. QF Rates

A core aspect to PURPA is the obligation on utilities to purchase QF power at a rate that does not exceed such utility’s “incremental cost…of alternative electric energy,” i.e., the rate that, but for the QF purchase, the utility would otherwise incur by purchasing from another source. This rate, referred to as the “avoided cost” rate, must be both non-discriminatory for the QFs, while also being just and reasonable to the consumers of the electric utility and in the public interest [4]. FERC’s PURPA regulations provide QFs with two options for selling their power at avoided cost rates: (1) selling as much energy as the QF chooses whenever it becomes available (referred to as an “as-available” sale), and (2) selling its output pursuant to an LEO (such as a contract), over a specified term, with the “avoided cost” rate calculated either at the time of delivery, or calculated and fixed at the time the LEO is incurred [5].

Order No. 872 is notable, therefore, in so far as it fundamentally reforms how states are allowed to set “avoided costs” rates for QFs—both in the “as-available” and LEO contexts. In particular, and as summarized below, FERC revised its PURPA regulations to permit states to incorporate competitive market forces in setting QF rates.

1. Granting States the Flexibility to Require Variable Energy (but not Capacity) QF Rates in QF Power Sales Contracts and Other LEOs

Under long-standing PURPA regulations, if a QF chooses to sell energy and/or capacity pursuant to a contract, the QF would be provided the option of receiving the purchasing electric utility’s avoided cost that was calculated and fixed at the time an LEO is incurred [6]. In the NOPR, FERC proposed to revise its regulations to allow states the flexibility to require QF energy rates to vary during the term of a QF contract [7]. Avoided capacity costs calculated at the time the contract or LEO is incurred would still remain fixed, however. As FERC explained in the NOPR, record evidence at the time suggested that fixed QF energy rates more often led to QFs receiving greater than avoided-cost rates [8].

The proposal drew criticism and support from a variety of parties, with proponents generally arguing that fixed rates, coupled with the overall decline in energy prices, led to improper customer subsidization of QFs, while opponents argued that Congress and court precedent supported long-term fixed energy rates as being necessary to encourage QF development [9].

In Order No. 872, FERC adopted the NOPR proposal without modification. As FERC explained, the primary impetus for the change was “to better comply with Congress’s clear instruction in PURPA that the Commission may not require QF rates in excess of a purchasing utility’s avoided costs.” [10] In support, FERC argued first, that the record evidence demonstrates that long-term fixed avoided cost energy rates are often well above avoided-costs without balancing out over time [11]. Second, although FERC acknowledged the obligation in PURPA for commission regulations to encourage QF development, this obligation, FERC argued, “is bounded” by the general prohibition that QF rates may not exceed avoided costs [12]. Third, FERC generally rejected claims that allowing variable QF energy prices would lead to discrimination against QFs [13], and argued that, even if PURPA guaranteed QF financeability, variable avoided cost energy rates would still allow QFs to obtain financing [14].

In adopting the NOPR proposal, FERC also rejected requests to allow for variable avoided capacity costs, reasoning that the cost for avoided capacity is determined at the time of the capacity purchase obligation, which is different from variable energy prices determined at the time of delivery. FERC also declined requests to specify a minimum required contract length and to adopt additional criteria for establishing avoided capacity costs, leaving such decisions up to existing state processes [15].

FERC cautioned, however, that states may not “toggle” back and forth between requiring fixed and variable QF energy rates. Rather, “QFs are entitled to the certainty that once a state has made its choice with respect to a particular QF’s contract or LEO, that QF’s contract or LEO is not subject to change during the term of that contract or LEO except by mutual consent.” [16]

2. Granting Additional Flexibility to Establish Fixed QF Energy Contract Rates Based on Forecasts

In addition to allowing variable energy rates in QF contracts, for QF contracts utilizing fixed energy rates, FERC proposed to permit a QF to request a fixed energy rate for the entire term of the contract based on a forward price curve—i.e., forecasted energy prices at the times of delivery over the life of the contract. This proposal generally received widespread support.

FERC adopted the proposed reform in Order No. 872 [17]. FERC clarified that a state may use competitive market prices and/or variable energy rates in the context of a more fixed estimated avoided cost energy rate (together with a fixed avoided capacity rate) that is determined at the time an LEO or contract is incurred. This fixed energy rate component, FERC explained, could be a single rate, based on the amortized present value of forecast energy prices, or it could be a series of specified rates that change from year-to-year (or other periods) in future years. According to FERC, states may establish the applicable energy rate(s) for the QF for the entire term, or the rate may change from year-to-year (or some other period) of the contract at the time the LEO is incurred [18].

3. Granting States Inside and Outside RTOs/ISOs Additional Flexibility in Setting “As Available” QF Energy Rates

In the NOPR, FERC also proposed various reforms related to “as available” QF sales—both inside and outside organized wholesale markets operated by Regional Transmission Operators (RTOs) and Independent System Operators (ISOs).

For QFs selling their energy on an as-available basis in an RTO/ISO, FERC proposed in the NOPR, and adopted in Order No. 872, to permit states to set such as-available QF energy rates at the Locational Marginal Price (LMP) calculated at the time of delivery [19]. In contrast to the NOPR, however, FERC declined to adopt a rule that LMP was a “per se” appropriate measure of avoided costs, but instead that there was a presumption of appropriateness, that could be rebutted by an aggrieved party (such as a QF).

For QFs selling their energy on an as-available basis outside of an RTO/ISO, FERC proposed, and adopted in Order No. 872, to allow states to set such as-available QF energy rates at delivery-based competitive prices from liquid market hubs [20], or, in the absence of such a hub, calculated from a formula based on natural gas price indices and heat rates [21]. In either case, FERC noted that states must first find that the chosen option adequately represents the purchasing utility’s avoided cost for as-available energy [22].

In the case of liquid market hubs, FERC also confirmed that (1) states with access to more than one such market may average or develop a formula to derive an as-available avoided energy cost; (2) states must determine that a liquid market hub is sufficiently liquid that its prices are competitive; and (3) the market hub price may need to be subject to adjustments to account for transmission costs the electric utility would incur [23]. In the case of formula-based natural gas price indices, FERC confirmed the formula should include recovery of variable O&M costs [24]. FERC also rejected calls to consider other, non-combined cycle natural gas, technologies, reasoning that states already have that flexibility—and nothing in the rule foreclosed that option—and that focusing on combined cycle technology was appropriate for the proposal, given that such generation makes up a large portion of the country’s generation fleet [25].

4. Granting States Flexibility to Set Energy and Capacity Rates based on Competitive Solicitations

In the NOPR, the Commission also proposed to permit states to set avoided energy and/or capacity rates using competitive solicitations (i.e., RFPs). In Order No. 872, FERC adopted this proposal, with several modifications and clarifications. First, FERC expanded on the NOPR minimum criteria for what constitutes a transparent and non-discriminatory solicitation. Without passing judgment on previously-conducted solicitations, FERC concluded that, going forward, a PURPA-compliant solicitation must be conducted in a process that includes, but is not limited to, the following factors: (i) the solicitation process is an open and transparent process that includes, but is not limited to, providing equally to all potential bidders “substantial and meaningful” information regarding transmission constraints, levels of congestion, and interconnections, subject to appropriate confidentiality safeguards; (ii) solicitations must be open to all sources, to satisfy that purchasing electric utility’s capacity needs, “taking into account the required operating characteristics of the needed capacity”;(iii) solicitations are conducted at “regular intervals”; (iv) solicitations are subject to oversight by an “independent administrator”; and (v) solicitations are “certified” as fulfilling the above criteria by the relevant state regulatory authority or nonregulated electric utility through a post-solicitation report [26].

Second, FERC clarified that competitive solicitations must also be conducted in accordance with the principles in Allegheny Energy Supply Co., LLC, 108 FERC ¶ 61,082, at P 18 (2004) [27]. FERC then made certain other clarifications from the NOPR, including:

Participants must be given “substantial and meaningful information regarding transmission constraints, levels of congestion, and interconnections, subject to appropriate confidentiality safeguards.” [28]
Utilities must provide state commissions, and make publicly available, a post-solicitation report that summarizes the solicitation results and demonstrates non-preference for the utility and its affiliates [29].
The phrase “taking into account the operating characteristics of the needed capacity” necessarily allows utilities to procure the type of capacity that they need, but it should not be used to effectively exclude QF generation [30].
FERC declined to be overly prescriptive about what constitutes “regular intervals” or an “independent administrator,” but did clarify that “certification” required a written, formally-issued finding by the relevant state commission that the solicitation was PURPA-compliant [31].

B. The One-Mile Rule

Under FERC’s current PURPA regulations, there is an irrebuttable presumption that facilities owned by the same person(s) that use the same energy resource, but are more than one mile apart from each other, are located on separate sites and are therefore separate facilities [32]. This is often referred to as FERC’s “one-mile rule”.

In the NOPR, FERC proposed to change the one-mile rule by creating a new rebuttable presumption that facilities more than one mile apart and less than 10 miles apart are separate facilities [33]. This new presumption would allow any interested party to intervene and file a protest to argue that two facilities (which would be more than one mile apart and less than 10 miles apart) should be treated as a single facility.

Commenting parties were divided as to whether QF developers are currently circumventing the current one-mile rule by strategically siting small power production facilities that use the same energy resource more than one mile apart. FERC noted that some parties had expressed that concern while others argued there was no evidence of any such “gaming” of the current one-mile rule [34]. Commenters also questioned the potential impact the one-mile rule revisions could have on other Federal Power Act (FPA) and Public Utility Holding Act (PUHCA) exemptions [35].

Order No. 872 adopts the NOPR proposal to change the one-mile rule. Thus, if a small power production facility seeking QF status is located more than one mile but less than 10 miles from any affiliated small power production QFs that use the same energy resource, it will be presumed to be at a separate site [36]. Any such QFs located one mile or less will be irrebuttably presumed to be at the same site, and any such QFs located 10 miles or more will be irrebuttably presumed to be at separate sites [37]. While the rebuttable presumption can be protested by any interested person or entity, FERC also noted that it could act sua sponte [38].

FERC confirmed the one-mile rule would not remove or amend other exemptions that a QF is entitled to, but that the one-mile rule would be used to determine whether affiliated facilities were at the same site and if a QF did not meet the 80 MW size limit “for whatever reason” (including a failure to meet the revised one-mile rule) then it would not be a QF [39].

FERC also explained that a small power production facility seeking QF status may provide additional information in its certification (or recertification) to preemptively defend against a challenge by identifying certain physical and ownership factors that affirmatively show its facility is at a separate site from affiliated small power production QFs that use the same energy resource that are more than one but less than 10 miles from its facility [40]. Finally, FERC defined “electrical generating equipment” and confirmed that any such equipment must be measured from the edge of the equipment closest to the affiliated small production QF’s nearest electrical generating equipment [41].

C. Relief from Purchase Obligation in Competitive Retail Markets—Not Adopted

In the NOPR, FERC proposed to amend Section 292.303(a) of the PURPA regulations, which generally requires utilities to purchase “any energy and capacity which is made available from a qualifying facility,” [42] to provide that a utility’s obligation to purchase power from QFs may be reduced to the extent the purchasing electric utility’s supply obligation has been reduced by a state retail choice program. In Order No. 872, FERC declined to adopt its NOPR proposal, but instead clarified that its existing PURPA regulations already require that states, to extent practicable, account for reduced loads in setting QF rates [43].

FERC received comments both in support and in opposition to its proposal. Commenters in opposition argued, among other things, that FERC lacked statutory authority to implement its proposal, and that FERC’s rationale for the rule was unclear [44]. Other commenters requested additional clarification from FERC, including on states’ authority to exempt traditional or alternative retail suppliers from PURPA’s mandatory purchase obligation [45].

In declining to adopt its proposed amendments to Section 292.303(a), FERC explained that Section 292.304(e)(3) already does, and will continue to allow states, when setting avoided cost rates, to take into account “the ability of the electric utility to avoid costs, including the deferral of capacity additions.” [46] FERC stated that it regards this existing regulation as allowing a state to consider reductions in a purchasing electric utility’s provider of last resort obligations under state law [47]. FERC further clarified that it did not intend for this to be reflected as a MW-for-MW reduction (or increase) based on yearly changes in load, and that Section 292.304(e)(3) “does not and may not serve to terminate a purchasing utility’s mandatory purchase obligation under PURPA section 210(a).” [48]

D. Self-Certification Process

Under the current PURPA regulations, QFs file a FERC Form 556 to certify that they meet the requirements for QF status [49]. If a QF makes any material modification to its facility, it cannot rely upon its certification and must re-certify with the updated information [50]. FERC does not verify any of the information provided, and has declined to make any changes to the self-certify process in past orders to provide any such verification.

In the NOPR, FERC proposed to change section 292.207(a) of its PURPA regulations to allow interested persons to protest QF self-certifications and recertifications without having to file a petition for a declaratory order or paying any associated fees [51]. FERC also proposed to change its Form 556 to allow QFs to proactively provide information that would be considered in any challenge pertaining to the changes to the one-mile rule regulations. These changes include providing all affiliated facilities within 10 miles rather than affiliated QFs within one mile, as required before.

Several commenters raised the issue of grandfathering existing QFs for their future recertifications arguing, among other things, that the application of the new rule to existing QFs would effectively bar the transfer or sale of existing assets that were lawfully qualified under the one-mile rule but would not pass the 80 MW aggregate threshold under the new rule [52]. Other implementation questions were posed focusing on the administrative burden and litigation risk imposed by the new rule.

Order No. 872 largely adopted the NOPR proposal but did provide for limited grandfathering. When the rules become effective, protests may be made to new certifications (both self-certifications and applications for FERC certification) but only to recertifications that make substantive changes to the existing certification [53]. FERC agreed that recertifications that were needed for non-substantive changes should not subject existing QFs to potentially losing their QF status [54]. FERC also adopted its proposal to expand the affiliated facility information collected on Form No. 556 from one to 10 miles [55]. FERC explained that this information was necessary to implement the new rules. As mentioned above, applicants with affiliated small power production QFs greater than one mile and less than 10 miles from the entity seeking QF status may, if they choose, explain why the QFs should be considered to be at separate sites by providing the relevant physical and ownership factors.

Any protest filed under the new rules must be made 30 days from the filing of a QF’s Form No. 556, and the party filing any such protest bears the burden to demonstrate that the facility does not satisfy the requirements for QF status [56]. If this prima facie burden is met, then the burden shifts to the applicant submitting the QF self-certification or recertification to demonstrate that the certification is warranted [57]. FERC will issue an order within 90 days of the filing of a protest and if FERC declines to take action on the protest it will be deemed denied and the certification will remain effective [58].

E. Obligation to Purchase

PURPA is perhaps most known for its mandatory purchase obligation, but FERC’s PURPA regulations permit an electric utility to file an application requesting relief from the mandatory purchase obligation if FERC determines that the QF has nondiscriminatory access to certain markets to sell its power. This provision was added by the Energy Policy Act of 2005, and was intended to reflect the fact that organized electric markets provide alternative markets for sales by QFs. The current PURPA regulations include a rebuttable presumption that QFs with a net power production capacity at or below 20 MW lack nondiscriminatory access to any such markets [59].

In the NOPR, FERC proposed to reduce the size threshold at which the presumption of nondiscriminatory access to a market attaches from 20 MW to 1 MW for small power production facilities (but not cogeneration facilities) [60]. FERC reasoned that in light of the maturation of organized markets, such a reduction was consistent with Congress’s intent to relieve electric utilities of their obligation to purchase when a QF has nondiscriminatory access to competitive markets [61]. FERC proposed to exclude cogeneration facilities from the revisions because the owners of cogeneration facilities might not be as familiar with energy markets and the technical requirements for such sales.

FERC noted numerous comments addressing the proposal. Parties opposed to the reduction argued, among other things, that there was a lack of evidentiary support or sufficient explanation for FERC’s change in policy and a substantial increase in administrative burdens [62]. Comments supporting the revisions pointed to the widespread participation in RTO/ISO markets that has taken place since 2005 [63]. The National Association of Regulatory Utility Commissioners (NARUC) suggested that FERC allow utilities to rely upon RFPs and liquid market hubs to establish eligibility to terminate the mandatory purchase obligation, while other comments suggested that utility-sponsored RFP programs were not robust enough to simulate a competitive market [64].

Recognizing some of the challenges that QFs near 1 MW have in participating in markets, FERC modified its proposal and changed the size threshold to 5 MW instead of 1 MW [65]. Thus, the rebuttable presumption that QFs with a net capacity at or below 20 MW do not have nondiscriminatory access to those markets is reduced to 5 MW for small power production facilities (but remains unchanged for cogeneration facilities). FERC stated it would consider on a case-by-case basis whether a properly run RFP or competitive acquisition process could also justify the termination of the mandatory purchase obligation [66].

FERC also confirmed that utilities that were previously granted termination of the mandatory purchase obligation for contracts above 20 MW must reapply with FERC requesting relief from the mandatory purchase obligation for small power production facilities between 5 MW and 20 MW [67]. FERC noted that QFs over 5 MW and under 20 MW can still attempt to rebut the presumption, and make their case that they do not truly have nondiscriminatory access to a market and therefore should still be entitled to a mandatory purchase obligation [68].

F. Legally Enforceable Obligation

The current PURPA regulations specifically provide that QFs can choose to have their rates based on the avoided cost calculated at the time of delivery, or at the time an LEO is incurred. The regulations do not provide any details, however, about when or how an LEO is established, which has been a frequent area of litigation.

The NOPR proposed to amend Section 292.304(d)(3) of the PURPA regulations to require that QFs demonstrate that a proposed project is commercially viable, and that the QF has a financial commitment to construct the proposed project pursuant to objective, reasonable, state-determined criteria to be eligible for an LEO [69]. FERC intended the revisions to ensure that no electric utility obligation was triggered for a QF project that was not sufficiently advanced in its development and for which it would be unreasonable for a utility to include in its resource planning while at the same time ensuring that the purchasing utility does not unilaterally and unreasonably decide when its obligation arises [70].

Among the arguments opposing the LEO changes, some commenters stated that developers cannot obtain financing without the financial commitment of a power purchase agreement (PPA) or LEO from the utility and that the new requirement would lead to a substantial reduction in the number of QFs. Others argued that the new requirement would not narrow the range of divergent LEO tests currently adopted by states. Commenters supporting the proposal thought the revisions appropriately balanced the interests of utilities and developers and provided states more clarity about the LEO while still preserving their ability to develop criteria specific to local planning needs. Numerous commenters also requested additional modifications to the LEO proposal [71].

Order No. 872 adopted the NOPR proposal requiring states to establish objective and reasonable criteria to determine a QF’s commercial viability and financial commitment to construction before a QF can establish a LEO [72]. FERC confirmed states have flexibility as to what constituted an acceptable showing of commercial viability and financial commitment but noted that the factors must be within the control of the QF [73]. Thus, states could reasonably require QFs to take meaningful steps to obtain site control or file an interconnection application with the appropriate entity but could not require QFs to obtain site control or obtain a PPA [74].

FERC described the LEO revisions as “raising the bar to prevent speculative QFs from obtaining LEOs” without “establishing a barrier for financially committed developers seeking to develop commercially viable QFs.” [75] FERC disagreed with those arguing that the revisions would cause a substantial reduction of QFs, stating that objective criteria will protect QFs against onerous requirements that hinder financing [76]. FERC also confirmed that the LEO changes do not affect the viability of any executed contact or LEO in place as of the effective date of the final rule [77].

G. Environmental Analysis

In the NOPR, FERC explained that it was not possible to determine environmental effects related to the proposed revisions to the PURPA regulations given numerous uncertainties and therefore environmental review under the National Environmental Policy Act of 1969 (NEPA) was not needed [78]. Several commenters argued that FERC erred in failing to conduct such a review, pointing out, for example, that FERC undertook a NEPA analysis when it first implemented PURPA [79].

In Order No. 872, FERC found that no Environmental Assessment (EA) or Environmental Impact Statement (EIS) to evaluate the final rule was required, as the final rule does not propose, authorize, or define the scope and limits of any potential energy infrastructure, and in the alternative, FERC found that this rule was categorically excluded due to the fact that the revisions to PURPA were clarifying, corrective, and procedural in nature and do not substantially change the effect of a regulation being amended [80].

III. Commissioner Glick Partial Dissent

In a lengthy partial dissent, Commissioner Glick explained that, despite supporting certain aspects of Order No. 872, such as the revision allowing stakeholders to protest a QF’s self-certification, he believed that the Order as a whole is “not just poor public policy, but also arbitrary and capricious agency action.” [81] Specifically, he argued that Order No. 872 fails to encourage the development of QF facilities and prevent discrimination against QFs, as statutorily mandated under PURPA. In support of his conclusion, Commissioner Glick pointed to a number of specific aspects of the Order that he viewed as problematic.

Avoided Cost Rate: With respect to the Order’s elimination of the fixed energy rate, or contract option, Commissioner Glick highlighted his belief in the “essential role” fixed-price contracts play both in the financing of QF facilities and in helping to ensure QFs are guaranteed full cost recovery on par with the cost recovery guarantees afforded to vertically integrated utilities. As a result, he dismissed as “hogwash” the Commission’s arguments that its removal of the fixed energy rate option will encourage QF development and continue to satisfy PURPA’s prohibition on discriminatory rates. Second, Commissioner Glick disagreed with the Order’s rebuttable presumption for setting the avoided cost rate at the LMP as discriminatory, noting his concern that short-term prices may not reflect the long-term marginal energy costs avoided by purchasing utilities [82].

20 MW Threshold: Commissioner Glick asserted that Order No. 872 reduces the threshold for the rebuttable presumption that QFs operating in RTO/ISOs have non-discriminatory access to competitive markets from 20 MW to 5 MW without explanation as to how the barriers arrayed against small QFs in organized markets have dissipated. As a result, he concluded that the Commission’s policy reversal is “toothless” and “arbitrary and capricious.” [83]
NEPA Review: Commissioner Glick also challenged the Commission’s characterization of revisions set forth in Order No. 872 as “mere corrective changes” that would qualify them for categorical exemption from environmental review under NEPA [84].

Finally, on a more macro level, Commissioner Glick expressed dismay over the Commission’s election to, in his words, “administratively gut” its implementation of PURPA, instead of modernizing its PURPA regulations by promoting market competition. In particular, Commissioner Glick pointed to a proposal released by the National Association of Regulatory Utility Commissioners—which urged the Commission to establish criteria for vertically- integrated utilities outside of RTOs/ISOs to terminate its must-purchase obligation based on competitive solicitations—as a more “durable, consensus solution” than the Order [85].

The effective date of Order No. 872 will be 120 days from the date of the Federal Register publication.

[1] DISCLAIMER: THIS SUMMARY IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE ON ANY PARTICULAR QUESTION, NOR SHOULD IT BE CONSTRUED TO CREATE AN ATTORNEY-CLIENT RELATIONSHIP.

[2] Qualifying Facility Rates and Requirements Implementation Issues Under the Public Utility Regulatory Policies Act of 1978, 172 FERC ¶ 61,041 (2020) (Order No. 872).

[3] Qualifying Facility Rates and Requirements Implementation Issues Under the Public Utility Regulatory Policies Act of 1978, Notice of Proposed Rulemaking, 168 FERC ¶ 61,184 (2019) (NOPR).

[4] Order No. 872 at P 96.

[5] Id. at P 97.

[6] Id. at P 232. An LEO gives a QF the enforceable right to require utilities to purchase the QF’s power at avoided cost rates.

[7] Id. at P 234 (explaining NOPR proposal).

[8] Id. at P 235.

[9] Id. at PP 245-252.

[10] Id. at P 256.

[11] Id. at PP 283-293.

[12] Id. at PP 295-296

[13] Id. at P 302.

[14] Id. at PP 335-336.

[15] Id. at PP 357-360.

[16] Id. at P 353

[17] Id. at P 227

[18] Id. at P 227.

[19] Id. at P 151

[20] Id. at P 189.

[21] Id. at P 211.

[22] Id. at P 190 (setting out factors for states to consider in making a determination regarding whether a liquid market hub represents the purchasing utility’s avoided cost for as-available energy); id. at P 212.

[23] Id. at P 201.

[24] Id. at P 211

[25] Id. at P 214.

[26] Id. at P 427.

[27] Id. at P 430.

[28] Id. at P 431.

[29] Id. at P 432.

[30] Id. at P 433.

[31] Id. at P 436.

[32] Id. at P 458.

[33] Id. at P 460.

[34] Id. at P 470.

[35] Id. at P 512.

[36] Id. at P 466. FERC modified the NOPR proposal slightly to shift from focusing on identifying “separate facilities” to identifying whether facilities are at “the same site” to better match its statutory language. See id. at P 476.

[37] Id. at P 466.

[38] Id. at P 460.

[39] Id. at P 514.

[40] Id. at P 480. See also id. at P 509 (listing the specific physical and ownership factors adopted by FERC).

[41] Id. at PP 521-23. FERC defines “electrical generating equipment” to include all boilers, heat recovery steam generators, prime movers, electrical generators, photovoltaic solar panels and/or inverters, fuel cell equipment and/or other primary power generation equipment, but excluding equipment used for gathering energy to be used in the facility.

[42] 18 C.F.R. § 292.303(a).

[43] Order No. 872 at P 457.

[44] Id. at PP 444-48.

[45] Id. at PP 449-55.

[46] Id. at PP 456-57.

[47] Id.

[48] Id.

[49] Id. at P 525.

[50] Id. at P 552.

[51] Id. at P 525.

[52] Id. at P 531.

[53] Id. at P 547.

[54] Id. at P 550. FERC also determined that its recertification requirement would be unduly burdensome for rooftop solar PV developers, and is therefore requiring any such developers to recertify quarterly. Id. at P 559.

[55] Id. at P 591. FERC modified its proposal slightly by including the expanded information in item 8a rather than adding another line item as 8b.

[56] Id. at P 526.

[57] Id. at P 557.

[58] Id. at P 566.

[59] Id. at PP 118-121.

[60] Id. at P 597.

[61] Id. at P 598.

[62] Id. at PP 602-13.

[63] Id. at PP 614-23.

[64] Id. at P 648.

[65] Id. at P 625.

[66] Id. at P 662.

[67] Id. at P 645.

[68] Id. at PP 636, 641 (listing factors to rebut the presumption to access to market).

[69] Id. at P 663.

[70] Id at P 664.

[71] Id. at PP 676-83.

[72] Id. at P 684.

[73] Id. at PP 684-85.

[74] Id. at P 685.

[75] Id. at P 688.

[76] Id. at P 689 (citing FERC orders pertaining to state LEO standards).

[77] Id. at P 694.

[78] Id. at P 702.

[79] Id. at PP 704-09.

[80] Id. at 710-42.

[81] Partial Dissent, P 7.

[82] Id. at PP 9-16.

[83] Id. at PP 20-24.

[84] Id. at PP 25-26.

[85] Id. at P 29.

This article was originally published on July 9, 2020 on ConsensusDocs. It is reprinted here with permission.

It is sometimes overlooked that clauses in contracts requiring performance are not treated the same in cases of breach. There is a distinct difference in construction contracts between clauses that are conditions and clauses that are covenants. This difference determines the remedy a party is entitled to receive upon breach of the obligation. To understand this difference, we must first identify how these clauses are defined.

“A covenant is a promise to do something (as in a covenant of quiet enjoyment in a deed)”; whereas,
“[a] condition is a contingency that must be met, otherwise a particular property right could be gained or lost.”[1]

Under generally accepted principles of contract law, the remedies for breaches of covenants and conditions are different. The remedies are as follows:

For a breach of a condition, the breaching party is not entitled to performance (i.e., payment) by the nonbreaching party.[2]
For breach of a covenant, the breaching party is entitled to the nonbreaching party’s performance; however, the nonbreaching party is entitled to be compensated for damages resulting from the breach of the covenant.[3]

The classic law school case Jacob & Youngs, Inc. v. Kent[4] provides a good analysis of the distinction. After the completion of a home construction project, it was discovered that the home was constructed with nonconforming pipe. The owner demanded replacement of the pipe, notwithstanding the fact that there was no evidence that the nonconforming pipe was inferior in quality to the pipe specified in the contract. Judge Cardozo, who authored the majority opinion of the court, discussed the distinction between covenants and conditions (sometimes referring to covenants as “dependent promises”). He stated:

There will be harshness sometimes and oppression in the implication of a condition when the thing upon which labor has been expended is incapable of surrender because united to the land, and equity and reason in the implication of a like condition when the subject matter, if defective, is in shape to be returned. From the conclusion that promises may not be treated as dependent to the extent of their uttermost minutiae without a sacrifice of justice, the progress is a short one to the conclusion that they may not be so treated without a perversion of intention. . . . There will be no assumption of a purpose to visit venial faults with oppressive retribution.[5]

The court held that the failure to use the specified pipe was the breach of a covenant rather than a condition. Thus, the owner was not excused from paying for the work (i.e., “oppressive retribution”), but the payment could be reduced to reflect any reduction in value because of the use of the nonspecified pipe.

Due the harsh difference in remedies as noted by Judge Cardoza, conditions are often interpreted as covenants to avoid forfeiture — the surrendering of the right to receive payment over “venial faults.” Since failure to satisfy a condition would prevent a contractor from recovering for work that it performed under the contract, courts may prefer to treat contractual obligations as covenants rather than conditions.[6] This is particularly true when a benefit has been conferred on the owner and nonpayment would be considered inequitable and akin to a forfeiture. As a generally accepted maxim of jurisprudence, equity abhors a forfeiture:

Forfeitures are not favored by the courts, and if an agreement can be reasonably interpreted so as to avoid a forfeiture, it is the duty of the court to avoid it. The burden is upon the party claiming a forfeiture to show that such was the unmistakable intention of the instrument. “A contract is not to be construed to provide a forfeiture unless no other interpretation is reasonably possible.”[7]

A common area where conditions are interpreted as covenants are notice provisions. In California, for instance, notice provisions in contracts can be interpreted as covenants rather than conditions to avoid forfeiture of a contractor’s claim.[8] When the notice requirement is found to be a covenant, the owner is entitled to recover, as an offset against the contractor’s claim, whatever damages the owner actually suffered from not receiving timely notice.[9]

The policy behind treating conditions as covenants is to interpret the contracting parties’ intentions to avoid unusual or inequitable results, to avoid forfeitures, and to avoid placing one party at the mercy of the other.[10] Courts have found that a provision in a contract for forfeiture of any damages for noncompliance with provisions relating to the filing of the claims must be strictly construed against that entity for whose benefit the clause was inserted.[11]

For example, in D. A. Parrish & Sons v. County Sanitation District,[12] the contract required written notice of a claim within 10 days after discovering the factual basis for the claim, and it provided: “The Contractor’s failure to notify the Owner within such ten (10) day period shall be deemed a waiver and relinquishment of any such claim against the Owner.” In refusing to enforce this forfeiture, the court held, “[A] forfeiture clause, such as this, will not only be strictly construed but has been interpreted by this court not to apply to claims arising from breaches of the contract caused by the other party.”

Outside of California, other jurisdictions also interpret notice provisions to avoid forfeiture. Sometimes courts will find that the government entity received “constructive notice,” thereby satisfying the notice condition in the contract. For example, in Welding, Inc. v. Bland County Service Authority,[13] a court found that mention of the claim issues in the progress meeting minutes was found to satisfy the notice requirement. Also, some courts will find that the notice would serve no useful function in the context of the case and therefore would not be considered a condition of the contract.[14]

There are some jurisdictions, however, that will not treat conditions as covenants in an effort to avoid forfeiture. For example, Stone Forest Industries, Inc. v. United States[15] involved a dispute arising out of contracts entered into with the U.S. Forest Service. Each of the contracts contained a provision stating that the purchaser shall file claims against the U.S. Forest Service within certain time limits and that “[f]ailure by Purchaser to submit a claim within these time limits shall relinquish the United States from any and all obligations whatsoever arising under said contract or portions thereof.”[16] The court held that this was “clearly a condition” because “the time limitation is clearly ‘an event, not certain to occur, which must occur . . . before performance under a contract becomes due.’”[17] Additionally, the court held that the time limitation “is not a covenant, as plaintiffs argue, because it does not create a right or duty in and of itself.”[18] The court found that, because the time limitation provision was a condition, and not a covenant, compliance with the time limitation was required before plaintiffs could enforce their refund rights under the contract.

Thus, due to the distinct differences in remedies in breaches of conditions and covenants, provisions in contracts that might be construed as conditions requiring forfeiture should be examined closely with an eye to the law of the contract’s jurisdiction and any equitable principles that may cause courts discomfort in enforcing.

1 John Reily, Covenants vs. Conditions, The Data Advocate (July 25, 2014).

2 See Thomas C. Horne, Arizona Construction Law § 102 (2020).

3 Id.

4 Jacob & Youngs v. Kent, 230 N.Y. 239, 242 (1921).

5 Id.

6 See Thomas C. Horne, Arizona Construction Law § 102 (2020).

7 Universal Sales Corp., Ltd. v. California Press Mfg. Co., 128 P.2d 665, 677 (Cal. 1942).

8 See Cal. Civ. Code §§ 1442, 1670.5 (2020); Restatement (Second) Contracts § 227 (Am. Law Inst. 1981).

9 E.g., Streicher v. Heimburge, 272 P. 290, 294 (Cal. 1928) (“Many cases may be found where the words ‘provided’ or even ‘on condition that’ have been used and nevertheless held to be covenants and not conditions.”).

10 See Cal. Civ. Code §§ 3542 & 3520; Hawley v. Orange County Flood etc. Dist., 211 Cal. Rptr. 478, 480 (Cal. Ct. App. 1963).

11 See Milovich v. Los Angeles, 108 P.2d 960, 965 (Cal. Ct. App. 1941).

12 See D. A. Parrish & Sons v. Cty. Sanitation Dist., 344 P.2d 883, 887 (Cal. Ct. App. 1959).

13 See Welding, Inc. v. Bland Cty. Serv. Auth., 541 S.E.2d 909, 915 (Va. 2001).

14 Sunshine Steak, Salad & Seafood, Inc. v. W. I. M. Realty, Inc. 522 N.Y.S.2d 292, 293 (N.Y. 1987) (“[W]here it becomes clear that one party will not live up to a contract, the aggrieved party is relieved from the performance of futile acts or conditions precedent.”).

15 See Stone Forest Industries, Inc. v. U.S., 26 Cl. Ct. 410, 414 (1992).

16 Id. at 412.

17 Id. at 416-417.

18 Id. at 417.

The Federal Communications Commission (FCC) issued a noteworthy order on June 25, 2020, in its continuing interpretation of the Telephone Consumer Protection Act (TCPA). In its order, the FCC confirmed many courts’ existing interpretation of the TCPA, noting that any text platform that requires manual entry of telephone numbers and manual launching of texts on a one-by-one basis is not an automatic telephone dialing system (ATDS). The FCC also waded into the debate regarding random or sequential number generation, stating that whether a telephone is an “autodialer turns on whether such equipment is capable of dialing random or sequential telephone numbers without human intervention.”

Background

P2P Alliance, a coalition of providers and users of peer-to-peer text messaging services, petitioned the FCC in 2018 for clarity regarding text messaging platforms that most P2P members use. The Alliance described the P2P platforms as “ones that enable two-way text communication, require a person to manually send each text message one at a time, and enable the sender to exercise discretion regarding the content and other features of the text messages.” The Alliance further confirmed that the platforms do not have the capacity to store or produce telephone numbers to be called, using a random or sequential generator. Instead, the platform “requires a person to actively and affirmatively manually dial each recipient’s number and transmit each text message one at a time.” The Alliance emphasized the fact that their text message communications are the result of a relationship between the sender and recipient, “where the recipient has indicated his or her consent to receive such messages by providing a contact number to which P2P Alliance messages are delivered.”

The Order

In its order, the FCC confirmed that a text message system that “requires a person to actively and affirmatively manually dial each recipient’s number and transmit each message one at a time and lacks the capacity to transmit more than one message without a human manually dialing each recipient’s number,” then it is not an ATDS. While courts have disagreed on what constitutes an ATDS with regard to random or sequential number generation, courts on both sides have still found that human intervention reigns supreme. The FCC order reinforced this conclusion. According to the FCC, where a party can show that its telephone system or text message platform requires human beings to manually initiate each call one at a time, that system is not an ATDS.

The FCC order also waded into the debate regarding random or sequential number generation. There is currently a Circuit split as to how to interpret the random or sequential number generation requirement in the TCPA’s ATDS definition. Some courts, like the Ninth Circuit, have held that “storage” of telephone numbers alone – without random or sequential number generation – is enough to satisfy the first prong of the ATDS definition. Other courts, like the Seventh Circuit, have concluded that a telephone without the capacity to generate numbers randomly or sequentially cannot be an ATDS, even if it is capable of storing numbers. The FCC is aware of the debate raging in these courts and solicited public comment in light of the Ninth Circuit’s decision in Marks v. Crunch San Diego, LLC.

In its order, the FCC did not explicitly state that it was wading into the debate regarding random or sequential number generation. But the order’s language implies otherwise. According to the FCC’s order, “whether the calling platform or equipment is an autodialer turns on whether such equipment is capable of dialing random or sequential telephone numbers without human intervention.” This statement is significant. If the FCC believed storage of telephone numbers was enough to satisfy the first prong of the ATDS definition, there would be no reason for the FCC order to reference “random or sequential” telephone numbers. But, it chose to do so, nonetheless. This suggests that the FCC – perhaps implicitly – is endorsing the majority rule that a telephone does not constitute an ATDS unless it is capable of generating random or sequential numbers, regardless of whether the telephone can also store numbers to be called.

“Take Aways”

Although the order is relatively short, it provides several important “take aways.”

The FCC confirmed that a system is not an ATDS if it is not capable of dialing numbers without a human “actively and affirmatively dialing each one.”
The FCC clarified that whether a platform or system is able to send texts or make calls to a considerable volume of telephone numbers is not dispositive of the ATDS issue. In doing so, the FCC emphasizes human intervention over volume of calls or messages.
The FCC rejected the notion that policy concerns should invade the interpretation of the TCPA’s ATDS definition. For example, consumer groups argued that telemarketers “would immediately gravitate to P2P systems as a way to evade the TCPA’s restrictions on unwanted calls.” The FCC responded that “[t]he TCPA does not and was not intended to stop every type of call.”
The FCC suggested that random or sequential number generation is an ATDS requirement, although it left a more definitive interpretation of that issue for another day.

In sum, the FCC’s order confirms the analysis coming from the courts for the past two years – human intervention is a powerful argument against a telephone system constituting an ATDS. As the number of human steps a telephone system requires to launch a call or text increases, the likelihood that the system is an ATDS decreases. In addition, the FCC provided new fodder for arguing that random or sequential number generation is a requirement for a system to constitute an ATDS.

NEW YORK — Troutman Sanders and Pepper Hamilton officially became Troutman Pepper (Troutman Pepper Hamilton Sanders LLP) today, a national law firm with 1,100 attorneys in 23 U.S. cities. The new firm offers clients greater resources and bench strength, enhanced practices, and expanded geographical reach.

Troutman Pepper is one of the 50 largest law firms in the country, with offices in eight of the 10 largest U.S. markets. The firm supports some of the country’s biggest industry sectors, including health sciences, energy, real estate, insurance, finance, private equity, construction, and technology.

The new firm is led by Steve Lewis, Chair and Chief Executive Officer.

“The mission of our firm is a higher commitment to client care,” Lewis said. “We will surpass what clients expect or appreciate, focusing on what they value. Our expanded capabilities and bigger footprint will allow us to deliver a new level of service to our clients.”

The two firms were originally scheduled to merge on April 1 but postponed the combination until July 1 in light of the COVID-19 pandemic. While the merger was postponed, the firms partnered together to launch a COVID-19 Resource Center, with attorneys collaborating across firms to provide guidance to clients on legal and business issues related to COVID-19.

“Delaying the merger allowed us to prioritize the health and safety of our people,” Lewis continued. “In the interim, our firms have come together in meaningful ways to guide clients through this difficult time. As our industry and indeed all industries continue to grapple with the challenges created by the health crisis, we know that we are stronger as one firm and choose to move forward together.”

“The combining of the two storied firms presented an opportunity to seamlessly merge different but complementary strengths of each,” Lewis said. Troutman Sanders specialized in serving the energy, banking, finance, and insurance industries, while Pepper Hamilton was highly regarded for its health care, life sciences, and private equity practices.

Other key practices at Troutman Pepper include corporate, litigation, intellectual property, tax, and bankruptcy, among others.

In addition to focusing on the client experience, Troutman Pepper will also prioritize talent and innovation.

“Excellent attorneys have been the foundation of both firms, and we will continue to be at the forefront of the industry in developing and supporting our outstanding legal talent,” said Tom Gallagher, Vice Chair of Troutman Pepper. “We’ll also focus on innovation, in ways that lead to meaningful client outcomes.”

Gallagher said that the culture of Troutman Pepper is one that encompasses teamwork and respect, inclusion and diversity, and pro bono and community service.

“How we treat one another, create welcoming workplaces, and give back to our communities were values each of our firms honored,” he said. “They are the foundation of the Troutman Pepper culture.”

Additional officers of Troutman Pepper are Tom Cole, Managing Partner, and Andrea Farley, Chair of Troutman Pepper’s Partner Compensation Committee.

They will be joined by these department chairs:

Business Litigation Department – John West
Health Sciences Department – Rachael Bushey
Regulatory & Finance Department – Amie Colby
Specialized Litigation Department – Bill Belanger
Transactional Department – Mason Bayler

Troutman Pepper will have offices in 23 cities (in alphabetical order):

Atlanta, GA	New York, NY	Rochester, NY
Berwyn, PA	Orange County, CA	San Diego, CA
Boston, MA	Philadelphia, PA	San Francisco, CA
Charlotte, NC	Pittsburgh, PA	Silicon Valley, CA
Chicago, IL	Portland, OR	Virginia Beach, VA
Detroit, MI	Princeton, NJ	Washington, DC
Harrisburg, PA	Raleigh, NC	Wilmington, DE
Los Angeles, CA	Richmond, VA

About Troutman Pepper
Troutman Pepper is a national law firm known for its higher commitment to client care. With more than 1,100 attorneys in 23 U.S. cities, the firm partners with clients across every industry sector to help them achieve their business goals. Read more about the firm’s litigation, transactional, and regulatory practices at troutman.com.

As the wave of reopening orders sweeps across the country, businesses see a light at the end of the tunnel. That light, however, in many instances is still yellow, and may be so for some time to come. Serious restrictions continue to hamper the habitual functioning of America’s businesses, customers have dwindling cash to pay for goods, supplies are restricted or cut, and social distancing practices and protocols reduce productivity. Companies, therefore, continue to take a closer look at their contracts to determine their rights, including whether force majeure and other provisions may still be invoked.

This article is set forth in three parts. First, it describes general considerations in deciding whether and how to invoke force majeure, encouraging contracting parties to take a holistic view of the entire contractual relationship. Second, the article addresses best practices in drafting force majeure notices, including general points to consider, what form a notice should take, and what to include in the notice. This portion of the article includes a draft template that can be tailored to the specific business and legal context. Third, this article describes general notices, a tool often used in construction contracts, as an alternative to specifically addressing force majeure. This section recognizes that there are often instances in which other contractual remedies are more attractive than force majeure.

General Considerations

When drafting a notice related to a force majeure event, it is important to keep in mind a few general themes, including the objectives, contract terms, an understanding of the force majeure event, the business relationship, and, as always, the potential for litigation.

Objectives. It is imperative to determine the objective that the force majeure notice will serve. What are you trying to accomplish with the force majeure notice? Is an extension of time sought? Is the recovery of prolongation costs in addition to schedule relief needed? While many have knee-jerk reactions to serve a notice under the contractual force majeure provision the instant an unforeseen event impacting performance occurs, it is critical to make sure the objective of the notice is clear before sending. Keep in mind that typical force majeure provisions may only offer an extension of time to perform. There may be, however, certain circumstances in which invoking force majeure is not the best route to accomplish the objective, particularly when other contractual remedies afford more practical or attractive solutions to meet your objectives.
Contract terms. Force majeure notices are contractually driven. The form and contents of the notice are governed by the force majeure provision in the contract. However, after establishing objectives, what if the remedies available in the force majeure provision do not match those objectives? Does the contract contain other clauses that provide a better remedy more in line with your objectives? Knowing all of the nuances of the contract becomes critical to determining your course of action. It is also crucial to consider the contractual options of your contract opponent. Will you trigger a reason to terminate or withhold payment? Will you trigger a claim of anticipatory breach? Be familiar with all contractual terms before drafting any force majeure notice.
Understand the impacts caused by the force majeure event. This may seem obvious, but it is necessary to consider the possible scenarios occurring at the beginning of the force majeure event, and afterwards as well. There have been numerous federal and state shutdown and stay-at-home orders issued, and now we are beginning to see reopening orders being implemented. As the shutdown and stay-at-home orders are lifted, there will be a “ramp up” period in which businesses will open, but not be operating at full capacity. Will this ramp-up period, when an emergency declaration is no longer in place, still impact one’s ability to perform under the contract? Moreover, what impact will social distancing have on your business for the weeks or months after the technical force majeure event ends? Offices may operate at half-staff, stores may limit the number of guests allowed at a time, and factories may limit the number of staff at the facility. Considering all of the possible impacts of the force majeure event will be key in determining what to include in a notice.
The business relationship. It is always important to strictly abide by contractual notice requirements. However, the strength of your business relationship can impact how your notice is received. A longstanding business partner may accept a simple contract-compliant notice that generally explains the delays and increased costs due to the force majeure event, while other more litigious business partners may require a more detailed explanation. There may be other outside laws, regulations or considerations that impact the force majeure notice, including whether there are administrative notice requirements, whether the parties conduct other business together, and whether the force majeure event has impacted that business as well. While it is important to understand the contract between the parties in drafting a force majeure notice, it is just as important to have a complete understanding of the business relationship and the people involved.
The potential for litigation. As always, keep in mind that there could be litigation resulting from the force majeure event. Accordingly, the notice should be drafted as if giving notice for any other legal purpose, with a long-term view in mind. Be flexible with the notice, and avoid limiting rights and remedies to prevent hamstringing legal positions down the road. Remember, courts have held that “[t]he failure to give proper notice is fatal to a defense based upon a force majeure clause requiring notice.” Sabine Corp. v. ONG Western, Inc., 725 F. Supp. 1157, 1168-69 (W.D. Okla. 1989) (dismissing defendant’s force majeure affirmative defense for failure to provide sufficient and proper notice of invoking force majeure).

With that background, here are some best practices when drafting force majeure notices.

Drafting Force Majeure Notices

Form and Service of Notice

When issuing either a force majeure notice or more general notice of delay, there are a few practical concepts to keep in mind regarding what form the notice should take. These three tips will ensure your notice is proper and serves its intended purpose.

Comply with the contract terms. The general form of the notice will be guided by the terms of the contractual force majeure provision. This will include the means of communicating the notice, the way in which the notice is to be served, and the time in which the notice must be served. Parties typically must strictly adhere to the requirements set forth in notice provisions to be effective.
If impossible, then substantially comply. There may be instances, however, when strict compliance is impossible. For example, if personal service is required, governmental restrictions limiting business operation may prevent a party from providing personal service within the time period allotted. Under these circumstances, substantial compliance may excuse failure to achieve literal compliance with the contract terms. Courts have held that a reasonable effort to provide notice as soon as possible may constitute valid notice, even if it is not in strict compliance with the contractual terms. See Toyomenka Pac. Petroleum, Inc. v. Hess Oil Virgin Islands Corp., 771 F. Supp. 63, 68 (S.D.N.Y. 1991) (granting summary judgment and holding that six-day delay in providing notice did not prevent defendant from force majeure defense because defendant made reasonable effort to give notice as soon as possible).
Keep and maintain documentation of all notice activities. Where strict compliance is impossible to achieve, keep careful records of all attempts to serve and provide notice. Complete records will be critical to combat later arguments that a notice was ineffective because it was not served in compliance with the contract.

Substance of a Force Majeure Notice

After identifying your objectives, understanding the event, analyzing the business relationship, and reviewing your contract, you decide that invoking force majeure is the best option. Each of the below points should be included in your force majeure notice. Including these points should ensure your force majeure notice will constitute valid notice under your contract.

Identify the force majeure event. Regardless of how obvious or apparent the force majeure event may be, the force majeure event must be specifically identified in the notice. It is common for contractual force majeure provisions to specifically reference events like government acts, pandemics, epidemics or health emergencies. Some force majeure provisions are more general, and may only reference events like “acts of God.” If the event does not fall squarely within an enumerated event covered by the force majeure clause, mirror the language of the force majeure clause when explaining the event. If intent on invoking the force majeure clause, cite specifically to the section and language of the force majeure provision in the contract when detailing the event. Keep in mind, however, you should do this only if you have gone through the contract and concluded that invoking force majeure is the best option. If other, better remedies are available in the contract, then including reference to the specific force majeure section may limit your potential rights and remedies during a litigation. Thus, you should include a citation to the specific force majeure clause only if force majeure is the desired course and you do not plan to ever seek additional forms of relief. Otherwise, as discussed further below, your notice should not include reference to the force majeure provision to avoid limiting future rights.
Explain how the force majeure event impacts performance. The notice should provide an explanation of how the force majeure event is preventing performance of contractual obligations and how long it is expected to impact performance. Reference sections in the contract that are specifically impacted, such as clauses detailing work, deliverables or services to be provided. Characterize and quantify the loss of time, ability or money suffered as a result of the force majeure event. Include attempts taken to mitigate, and, if possible, consider providing supporting documentation. Keep in mind, however, that if there is an expected insurance or government investigation into the force majeure event, providing documentation such as photos should only be done if absolutely necessary.
Identify the relief the force majeure notice seeks. Here is where knowing your contract and having clear goals come into play. Are you seeking an extension of time to perform? Are you seeking termination of the contract? While the available remedies may be contract-dependent, the notice should include the relief sought.
Include adequate assurances. In order to avoid any claims for anticipatory breach, it may be necessary to include adequate assurances of performance once the force majeure event subsides. Include how and when performance will be fulfilled once possible. This is especially important if only a suspension of performance is sought, and not termination of the contract. Note that updates will be given if circumstances change, and keep the possibility of continuing the contractual relationship if feasible. If there are no alternatives and termination is sought, notify and memorialize any attempts made to perform, and be clear in noting the force majeure event’s impact on the ability to perform.
Do not limit rights. Circumstances change. Litigation may arise. The notice may be an exhibit to a pleading. Be sure to reserve all rights and remedies, both contractually and at law, in the notice. In addition, consider whether you might be able to rely on the common law doctrines of impossibility, impracticability or frustration of purpose, and make reference to each in your notice to ensure they are not waived.
Supplement as more information becomes available. Keep the lines of communication open. Advise that regular updates will be given. Show good faith in the attempts to perform and mitigate damages. This will go a long way for the business relationship and in potential litigation, especially during times of uncertainty.

Force Majeure Notice Template

To go along with the best practices, a template force majeure notice that can be used to invoke a force majeure provision is available here. It is consistent with the guidance and best practices above. It should be tailored depending on the terms of the contract, the relationship of the parties, the type of force majeure event, and the ultimate goals in issuing a force majeure notice. Keep in mind, however, that while the template serves as a guiding framework, the notice must ultimately be consistent with the terms of the contractual requirements and the law of the relevant jurisdiction.

General Notice Instead of Force Majeure Notice

In certain circumstances, particularly in construction contracts, the remedies afforded in the force majeure clause may not align with the objectives for issuing a force majeure notice. Moreover, there may be other provisions that provide better relief than force majeure. One example would be if the force majeure provision only affords an extension of time to perform while other provisions may permit the recovery of lost profits or other prolongation costs. If there is any question regarding which provision should apply, a broader, more general notice may be more practicable in order to avoid limiting available rights and remedies should a dispute arise. Here are some key points to consider when drafting a general notice of delay as opposed to a force majeure notice.

Identify the event. Similar to a force majeure notice, the general notice should identify the event causing the delay or hindering performance. It should not call the event a “force majeure event” or reference the specific force majeure section of the contract. Doing so may give the appearance of simply invoking the force majeure clause instead of a more beneficial clause in the contract. The notice should instead establish the date when the event impacting performance began and provide dates when it is expected that the event will subside or cease interference with performance.
Explain how the event impacts performance. Provide a similar explanation as to how the event is preventing performance. Provide assurances that, once possible, performance under the contract will be completed.
Define the relief sought. Explain the relief sought as a result of the event. When calculating or determining the relief sought, be sure to take into account all relief sought by any “downstream” entities reporting to you as well. For example, if a general contractor needs 50 additional days to complete a task due to an unforeseen event, and a subcontractor informed the general contractor that it will need an extra 20 days to perform, the general contractor, in putting together its notice of delay, should request 70 days to encompass what will be needed for the project to be completed.
Do not limit rights or remedies. When it is unclear which clause should be invoked, do not limit your remedies to those in the force majeure clause. Do not cite to a specific provision for which you are providing notice when providing a general notice of delay. Because the goal is to provide a general notice for all possible applicable provisions offering relief in the contract, citing to a specific provision may waive the future exercise of other clauses. To simultaneously provide contractual notice of delay without citing to a specific provision in the contract, explain that the notice will be “in satisfaction of all notice requirements in the contract.” Finally, include a reservation of rights and remedies both within the contract and at law.
Provide “downstream” notices “upstream.” Particularly in construction, the entire supply chain, including suppliers, subcontractors and general contractors, may be impacted by a similar event. For anyone who has to pass notice “upstream,” it is imperative to provide any and all notices received from “downstream” parties. For example, a supplier may provide a notice to a subcontractor, who also provides notice to the general contractor. In order to give the property owner or developer a more complete understanding of the impact of the event, and to ensure you provide notice for all of the relief sought, it is critical to incorporate notices received from all subcontractors and suppliers in your upstream notice to the owner or developer.

Authors:
Evelyn Small Traub, Partner, Troutman Sanders
James E. Earle, Partner, Troutman Sanders
Jessica Hajjar

On May 27, 2020, the DOL published final rules that provide a new safe harbor method for the electronic delivery of ERISA-required notices (the “Final Rules”).

The Final Rules apply to any participant, beneficiary, or alternate payee who provides the plan sponsor or administrator with an email address or smartphone number. Plan sponsors and administrators may deliver required ERISA notices by a combination of (i) providing the covered individuals with an electronic “notice of internet availability” that identifies a website where the ERISA notice is posted, and (ii) posting the notice on the website (i.e., “notice and access”). For many regular annual required notices, the “notice of internet availability” must be furnished only once per year. Alternatively, covered documents may be delivered directly to the covered individual’s email address. The rules apply only to required notices for 401(k) and other tax-qualified retirement plans, and do not apply to group medical or other health and welfare plans.

The new safe harbor is a small but welcomed step forward in reducing some of the administrative burdens related to tax-qualified retirement plans while also recognizing the wired world in which we live. Before using the new safe harbor, the plan administrator must notify participants of the new delivery method.

Background

Plan sponsors and administrators of 401(k) and other tax-qualified retirement plans must comply with numerous notice requirements under the Employee Retirement Income Security Act of 1974 (“ERISA”). Participants and beneficiaries must receive copies of summary plan descriptions, summaries of material modifications, summary annual reports, various investment disclosures, plan statements, and numerous other required notices.

In 2002, the Department of Labor (“DOL”) approved two “safe-harbor” methods to electronically deliver these notices. One easy-to-use safe harbor applies to employees who are “wired at work.” The other safe harbor applies to anyone else in the plan – i.e., employees who are not “wired at work,” former employees with accounts, beneficiaries, and alternate payees. These individuals must provide affirmative consent to electronic delivery.

These safe harbors have proved helpful and remain in effect. However, with the rapid changes in electronic options, they may have become a cumbersome way for employers to deliver notices. In October 2019, the DOL proposed a new, additional safe harbor that follows a “notice and access” electronic delivery model intended to provide a more convenient and efficient method for furnishing required ERISA notices, especially for individuals who do not qualify for the 2002 “wired at work” safe harbor. The finalized rules are substantially similar to the proposed rules, but some changes have been incorporated in response to concerns raised by commenters, as further described below.

New Electronic Delivery Safe Harbor

The Final Rules create a new safe harbor allowing ERISA plans to provide plan participants, beneficiaries and other individuals with a notice stating that the required plan disclosures will be made available on a website or to provide required disclosures directly by email (the “safe harbor”). However, a plan administrator who wishes to continue to rely on the existing 2002 safe harbor rules for e-delivery or continue to deliver by hand or first-class mail may continue to do so.

The Final Rules utilize a “notice and access” structure for furnishing ERISA required disclosures electronically. Under this structure, a plan administrator notifies the “covered individuals” of the availability of the documents with an electronic “notice of internet availability” (the “notice”) and then posts the required disclosures on a website. The requirement and parameters of this process are discussed below. The direct disclosure by email is also discussed below.

Effective Date

The Final Rules are effective on July 27, 2020. The DOL has stated that it will not take any enforcement action against a plan administrator that relies on the new safe harbor before the effective date in connection with the Federal government’s broader effort to respond to COVID-19.

Getting Started:

Initial Paper Notification of Default Electronic Delivery and Right to Opt Out

A plan administrator that decides to utilize the new safe harbor must send an initial notification on paper that some or all of the covered documents will be e-delivered to the participant’s electronic address on file. Additionally, the initial notification must alert the covered individual of his or her right to receive the covered documents in paper and that he or she may opt out of e-delivery, including the procedures for exercising such rights.

If the plan is currently using the 2002 safe harbor and wishes to adopt the new safe harbor, the plan administrator must send a one-time notification to each existing employee (including those who provided their affirmative consent under the 2002 safe harbor) notifying them of the plan’s intent to rely on the new safe harbor. Thereafter, the administrator must send this notification to each new employee who would be covered by the safe harbor.

Details of the New Safe Harbor

Covered Individuals

Under the Final Rules a “covered individual” is a participant, beneficiary or alternate payee for whom the employer, sponsor or plan administrator has an electronic address (e.g. email address, smartphone number, etc.). The Final Rules require, a condition to use the safe harbor, that the administrator receive an electronic address or number with which to communicate with the covered individual. This may include a personal or work email address. Because technology changes so often, the Final Rules do not limit the type of device a participant or beneficiary must have to be covered by the safe harbor.

Employers may use a work email address that it assigns to an employee for employment related purposes other than solely the delivery of covered documents under the new safe harbor.

Covered Documents

A plan administrator may use the safe harbor only for pension benefit plans, which includes 401(k) and other tax-qualified retirement plans. The safe harbor covers documents that are required to be provided to participants and beneficiaries under Title I of ERISA (“covered documents”). The definition of covered documents includes documents that must be sent as a result of the passage time – such as a summary annual report – and documents required as a result of a specific triggering event – such as a summary of material modification (SMM), blackout notice or claim denial. The plan administrator has discretion to only apply the safe harbor to certain covered documents.

The Final Rules do not apply to employee welfare plans. However, the DOL has reserved the right to expand the safe harbor in the future.

Timing of Notice of Internet Availability

The Final Rules require the plan administrator to send the notice to the covered individuals for a covered document at the time it becomes available. For example, if a plan is required to send six different covered documents, such as four quarterly benefit statements, a black out notice and a new Summary of Material Modifications (SMM) to its covered individuals over the course of the plan year, the plan administrator would have to send six notices in order to comply with the safe harbor.

However, a plan administrator may send a single combined annual notice for all or some of the following documents:

Summary plan descriptions (SPDs);
SMMs (after initial notice of availability);
Any covered document that must be furnished at least annually, as opposed to at the time of a specific event, such as:

Summary annual reports;
Annual funding notices;
Investment-related disclosures (identifying information, performance data, benchmarks, fee information, etc.);
Qualified default investment alternative notices;
Pension benefit statements; and

Any IRS required notices if authorized by the IRS to be delivered electronically by means of a combined notice.

If the plan administrator uses a combined notice, the timing requirement is satisfied if the combined notice is furnished each plan year. If the combined notice was furnished in the prior plan year, then the combined notice must be sent no later than 14 months following the date the prior plan year’s notice was sent.

Additionally, the Final Rules require the plan administrator to make the covered document available on the website by the covered document’s ERISA deadline.

Content of Notice of Internet Availability

The notice of internet availability must contain the following information:

A prominent statement (such as a title, legend or subject line) that reads, “Disclosure About Your Retirement Plan;”
A statement that reads, “Important information about your retirement plan is available at the website address below. Please review this information;”
An identification of the covered document by name, a brief description of the covered document and why it is important (if not evident from the name);
A specific website address that provides ready access to the covered document or in a combined notice covered documents (e.g., a direct link to the document or a log-in page that provides a link to the document);
A statement of the right to request and obtain a paper version of the covered document, free of charge, and an explanation of how to exercise this right;
A cautionary statement that the covered document is not required to be available on the website for more than a year or, if later, after it is superseded by a subsequent version;
A statement of the right to opt out of receiving covered documents electronically, and an explanation of how to exercise this right; and
A telephone number to contact the administrator or other designated representative of the plan.

Form and Manner of Providing the Notice of Internet Availability

Like most participant disclosures under ERISA, the DOL expects the notice to be clear and concise in explaining its content and importance. In order to satisfy the safe harbor, the notice must:

Be sent electronically to the covered individual’s electronic address;
Contain only the required content, though pictures, logos or similar design elements may be included, so long as the design is not inaccurate or misleading and the required content is clear;
Be furnished separately from any other documents or disclosures, including those required by ERISA, sent to the covered individual (unless the exception for combined notices applies); and
Be written in a manner calculated to be understood by the average plan participant.

For this purpose, the DOL removed the requirement included in the proposed rules that the notices meet an objective general readability standard. The DOL will, however, continue to study ways to improve readability of the required notices.

Website

The plan administrator is also required to establish and maintain a website (or other electronic-based repository for information such as a mobile app) where covered individuals can easily access the covered documents. The administrator may delegate some responsibilities associated with the website to third party service providers. But, the administrator, as a plan fiduciary, must prudently select and monitor those service providers. Additionally, the administrator must take measures reasonably calculated to ensure the website meets certain requirements. For example, covered documents posted on the website must:

Be available on the website by the applicable ERISA deadline for furnishing the covered document;
Remain available on the website at least a year or if later, until it is superseded by a later version;
Be presented in a manner calculated to be understood by the average plan participant;
Be available in a widely-used format suitable for reading online and printing clearly on paper;
Be searchable electronically by numbers, letters or words so participants can quickly find information about specific issues; and
Be available in a widely used format that allows the document to be permanently retained electronically (e.g., PDF).

A plan administrator must also take reasonably calculated measures to ensure the website protects the covered individual’s personal information and confidentiality.

Right to Request Paper Copies and Opt Out

The Final Rules require the plan administrator to maintain reasonable procedures to allow a covered individual to request a paper copy of the document free of charge. The Final Rules also require the plan administrator to establish reasonable procedures to give covered individuals the ability to opt out of e-delivery and receive only paper copies of some or all of the covered documents. If a participant decides to opt out, then all future covered documents must be delivered in paper, unless the covered individual decides to opt back into e-delivery.

Severance from Employment with Plan Sponsor

Covered individuals may continue to receive their covered documents by e-delivery even after they separate from employment with the plan sponsor. In such case, the plan administrator must take measures reasonably calculated to ensure the continued accuracy of the covered individual’s electronic address or obtain the covered individual’s new electronic address to ensure the covered individual’s continued access to the covered documents.

Alert About Invalid Electronic Addresses

The Final Rules require the system for furnishing the notice to provide an alert to the administrator in case a covered individual’s electronic address appears to be invalid or otherwise inoperable. The administrator then must take steps to obtain a new, valid electronic address. If the administrator cannot obtain a new valid address, then it must deem the covered individual to have opted out of e-delivery. As a best practice, plan administrators should keep a secondary electronic address for the covered individual on file and send the notice to the secondary address if they are alerted to an invalid or inoperable primary electronic address. The DOL has stated that this requirement is intended to help reduce the number of post-employment “lost participants.”

Temporary Unavailability

The Final Rules require plan administrators to have reasonable procedures in place to ensure that the covered documents are available. However, the Final Rules recognize that technological errors do occur and that they may render the covered documents temporarily unavailable. If the documents do become temporarily unavailable, the plan administrator must take prompt action to get the covered documents back online and available as soon as practicable following the time when the administrator knew or reasonably should have known the documents were unavailable.

Alternative to “Notice and Access” Method

As an alternative to the safe harbor described above, the administrator can send a covered document directly to a covered individual’s email address no later than the date the document must otherwise be furnished. The email must use a subject line that reads: “Disclosure About Your Retirement Plan” and include much of the same content as the notice of internet availability described above, such as the name of the document (including a brief description, if needed), a statement of the right to receive a paper copy and/or opt out of electronic delivery, and a contact phone number. The document can be delivered in the body of the email or as an attachment. The document must meet the same standards of readability and other requirements for documents that are posted on the website described above.

If you have questions about the new electronic distribution rules, or if you would like to implement the new delivery methods, please contact an attorney in the Troutman Sanders Employee Benefits and Executive Compensation Practice.

Reprinted with permission from the May 27, 2020 edition of the Delaware Business Court Insider. © 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. (ALMReprints.com, 877.257.3382).

The Delaware Superior Court recently elaborated on the common interest doctrine in the context of a merger. In American Bottling Co. v. Repole, C.A. No. N19C-03-048 AML CCLD, Judge LeGrow held that privileged communications shared with a third party during the final stages of a merger were not subject to the common interest doctrine. Under the common interest doctrine, the attorney-client privilege will not be waived, despite disclosure to a third party, when the communication at issue was between a client or his lawyer and another lawyer who is representing another person in a matter of common interest. This doctrine will only apply, however, when the parties’ shared interest involves primarily legal issues, not a commercial common interest. This commercial versus legal distinction was at the heart of the court’s conclusion in American Bottling Co.

Background

The subject litigation arose from defendant BA Sports, Nutrition, LLC’s (Body Armor) termination of its distribution agreement with plaintiff the American Bottling Company (ABC) after ABC’s parent company, Dr. Pepper Snapple Group (DPSG), merged with one of Body Armor’s competitors, Keurig Green Mountain. As part of its due diligence process, Keurig and its advisers shared some otherwise privileged communications with DPSG regarding the distribution agreement’s termination clause and any associated fee, and sought DPSG’s input. The disclosure at issue took place after the merger agreement had been signed, but before the transaction closed.

Body Armor sought to compel the production of the allegedly privileged material. The materials in question included a chart that Keurig’s parent company’s counsel prepared during due diligence to identify additional information needed, as well as various emails between Ernst & Young, the accounting firm involved in due diligence, and DPSG executives and in-house counsel. According to Body Armor, Keurig waived its privilege when it shared the communications and materials with DPSG. In response, ABC asserted that the common interest doctrine applied based on the parties’ shared legal interest in protecting the merged company’s rights under the distribution agreement. Body Armor, on the other hand, argued that ABC’s identified common interest was commercial, not legal, and ABC had not carried its burden of proving privilege.

Analysis

The court began its analysis by recognizing that parties to a merger may share common interests between the time when a merger agreement is signed and the transaction closes. 3Com Corp. v. Diamond II Holdings, Inc., 2010 Del. Ch. LEXIS 126, at *32 (Del. Ch. May 31, 2010). The court pointed out, however, that this does not mean that in these situations the parties’ interests are 100 percent aligned, and certainly does not mean that the parties’ interests are legal in nature, as required to be protected by the common interest doctrine. In order to rule on the application of the common interest doctrine in the case at hand, the court had to determine whether Keurig’s interests were aligned with DPSG’s, and whether those interests were primarily legal. It concluded that, although the parties’ interests may have been aligned for some purposes, the common interests were not primarily legal in nature. Therefore, the doctrine did not apply.

The court described a line of cases relevant to this analysis, observing that both the Delaware Superior Court and the Delaware Court of Chancery have held that negotiations regarding the terms of a business relationship or discussions regarding the execution of business goals are commercial in nature and not sufficient to provide protection under the common interest doctrine. For instance, in Glassman v. Crossfit, Inc., the Court of Chancery held that the plaintiff and the private equity firm to which she intended to sell her 50 percent ownership interest in Crossfit, Inc. did not share a common legal interest because the plaintiff could not establish that the communications had been shared in order to coordinate a joint litigation strategy regarding the approval of her divorce settlement and related sale of her Crossfit ownership interest. 2012 Del. Ch. LEXIS 248, at *9-11 (Del. Ch. Oct. 12, 2012). By contrast, the cases in which courts have found that a common legal interest exists typically involve coordinated action with an eye toward potential litigation. For example, in In re Lululemon Athleta Inc. 220 Litigation, the Court of Chancery held that Lululemon and its founder shared a common interest in communications coordinating a response to allegations of impropriety related to the founder’s stock trades, especially in light of the reasonable anticipation that litigation might ensue. 2015 Del. Ch. LEXIS 127, at *31-32 (Del. Ch. Apr. 2015). When applying these lines of cases to the case at hand, the court explained, “[t]he parties may well have an interest in positioning the post-merger entity so as to capitalize on the distribution agreements. But even if one aspect of that interest was avoiding litigation, the primary focus of the interest was plainly commercial.” The fact that one component of the parties’ communication may have touched on the desire to avoid litigation was of no consequence. As a result, ABC’s motion to compel was granted.

Takeaways

It appears that the Delaware courts, most recently the Superior Court, are taking a narrow view of what constitutes a legal interest sufficient to invoke the common interest doctrine, at least in the context of late-stage merger communications. In order to ensure that communications to a third party sharing a common interest are protected, parties asserting the privilege must be able to clearly articulate the precise legal ties connecting the parties. The Delaware Superior Court’s latest decision on the issue seems to suggest that litigation avoidance or preparation should be an integral part of the communication. Therefore, parties before the Delaware courts should proceed with caution when seeking to invoke the common interest doctrine for communications not directly related to litigation or made in anticipation of litigation or, when branching away from strictly litigation-related communications, should ensure that a clearly legal interest can be articulated.

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