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Court of Chancery Decides Arbitrability Issues

By Francis G. X. Pileggi, Esq.

Lefkowitz v. HWF Holdings, LLC, No. 4381-VCP (Del. Ch. Nov. 13, 2009), read opinion here. This 30-page opinion is a helpful primer on the recurring topics of both procedural and substantive arbitrability. That is, it addresses when the applicability of an arbitration clause in an agreement can, or cannot, be decided in the first instance by a court, for example, where, as in this case, injunctive relief was sought to prevent one party from pursuing a claim in an arbitration proceeding. Many similar cases have been highlighted on these pages involving similar issues.

While I suggest a reading of the entire opinion is necessary for anyone interested in the latest iteration of Delaware law on this topic, for present purposes I will merely provide highlights of several points in this decision that I have arbitrarily determined to be especially noteworthy.

• Substantive arbitrability addresses whether the parties decided in the contract to submit a particular dispute to arbitration, and those issues historically have been decided by a judge. The Court referred to what it described as the "seminal Delaware Supreme Court opinion" on this topic, James and Jackson LLC v. Willie Gary LLC, highlighted on this blog here, which formulated a two-prong test to determine whether an arbitration clause demonstrates "clear and unmistakeable evidence" that the parties intended to "arbitrate arbitrability". That test is whether the arbitration clause: (i) generally refers all disputes to arbitration; and (ii) references a set of arbitrable rules that empowers arbitrators to decide arbitrability, such as the AAA rules. Willie Gary, 906 A.2d at 80.
• Procedural arbitrability by contrast covers, for example, issues such as whether the proper notice  of intent to arbitrate was given as required in the arbitration clause, and those issues are presumptively for the arbitrator to decide.
• The Delaware Uniform Arbitration Act was recently amended to make two provisions that are unique to Delaware (i.e., they depart from the Uniform Arbitration Act in other states), less ambiguous. For example, whether one has a statute of limitations defense to an arbitration proceeding was formerly  considered to be a matter of "substantive arbitrability" that would ostensibly allow one to seek injunctive relief in court  to stop arbitration in some circumstances.  See 10 Del. C. Sections 5702(c); 5703 and 5714(a)(5) (1974).
• Recent amendments to those sections however, have "converted" them to be presumptively matters of "procedural arbitrability" for the arbitrator to decide--not the court.
• This opinion also has a very useful discussion of the interplay between the Federal Arbitration Act, and Uniform Arbitration Act and the Delaware Uniform Arbitration Act, and when one applies to the exclusion of the other.

There is much more to this opinion than I have only covered cursorily in this short post, but one concluding comment that I am impelled to make is that this case is a not uncommon example of why arbitration is not always the faster and less expensive alternative it is often touted to be. There are many instances of expensive litigation like this matter that incur substantial costs before the arbitration even begins. In addition there are other examples of post-arbitration litigation that contests the arbitrator's decision and asks the court to set aside what was supposed to be "final and binding arbitration".

 

Full post as published by Delaware Corporate and Commercial Litigation Blog on November 18, 2009 (boomark / email).