Applicability of Statute of Repose Is An Issue Of Procedural Arbitrability To Be Decided By Arbitrator

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In Rummel Klepper & Kahl, LLP v. Delaware River & Bay Authority, C.A. No. 2020-0458-PAF (Del. Ch. Jan. 3, 2022), the Court of Chancery considered Defendant’s motion to dismiss and to compel arbitration.  The Plaintiff and Defendant entered into a Consulting Services Agreement (“Agreement”) that contained an arbitration clause.  Under the arbitration clause, the Defendant’s executive director was designated as the arbitrator.  The Plaintiff brought suit to enjoin the Defendant from pursuing arbitration of disputes arising under the Agreement.  The Plaintiff argued that the Defendant was not entitled to arbitration because (a) the disputes related to work performed after the expiration date of the Agreement; (b) the disputes were time-barred under a statute of repose, 10 Del. C. § 8127; and (c) the arbitration clause was unconscionable because it designated Defendant’s employee as the arbitrator.  The Defendant moved to dismiss and to compel arbitration on the basis that the challenges to arbitration were issues of procedural arbitration to be decided by the arbitrator.

The Court granted the motions to dismiss and to compel arbitration. A motion to dismiss based on a contractual arbitration clause implicates the Court’s subject matter jurisdiction, and so it is reviewed under Court of Chancery Rule 12(b)(1).  “‘[A] motion to dismiss for lack of subject matter jurisdiction will be granted if the dispute is one that, on its face, falls within the arbitration clause of the contract.”  Under Delaware law, issues of substantively arbitrability generally are decided by courts, while issues of procedural arbitrability generally are decided by the arbitrator.  Substantive arbitrability includes “a dispute over the scope of an arbitration provision” or “whether an arbitration clause is valid and enforceable.” Procedural arbitrability includes “whether prerequisites such as time limits, notice, laches, estoppel, and other conditions precedent to an obligation to arbitrate have been met, as well as allegations of waiver, delay, or a like defense to arbitrability.”

The Court determined that the applicability of a statute of repose, like 10 Del. C. § 8127, was procedural in nature and thus must be decided by the arbitrator.  Prior to this case, Delaware courts had not definitively stated whether a statute of repose was a matter of procedural or substantive arbitrability.  The Court noted that the U.S. Supreme Court views time limits as an issue presumptively for the arbitrator, citing Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002).

The Court further held that disputes concerning work completed after the expiration of the Agreement are subject to the arbitration clause.  The Court observed that the parties intended the continued work to be extensions of the original agreement.  Because the disputes brought in connection with services performed both before and after the expiration date depended upon the existence of the Agreement, they fell within the scope of the arbitration clause.

Finally, the Court rejected Plaintiff’s argument that the arbitration clause was unconscionable.  The court noted that unconscionability is used “sparingly.”  “To find unconscionability, the court must find both procedural and substantive unconscionability.”  Procedural unconscionability relates to the procedures that led to the execution of the contract, including the relative bargaining strength of the parties.  Substantive unconscionability requires a finding of terms that are so imbalanced as to shock the conscience.  The Court determined that neither procedural nor substantive unconscionability exist in this case.  Other bidders for the work subject to the Agreement did not object to the arbitration clause, which undermines the position that the provision was unconscionable.  Moreover, “The fact that the chosen arbitrator may be an employee of one of the parties is not sufficient to show unconscionability.”  Both parties were sophisticated parties who were aware of and agreed to the arbitration clause. Accordingly, the clause was not unenforceable for unconscionability.

The Court’s opinion is available here.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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