Delaware Legislature Introduces Rapid Arbitration Act

by Mintz Levin - Securities Matters

The Delaware Rapid Arbitration Act, House Bill 49, was recently introduced in the Delaware General Assembly. The proposed Act would establish a streamlined arbitration procedure to resolve disputes involving Delaware business entities, effectively replacing a previous statute that was invalidated on constitutional grounds.  The Act states that its purpose is “to give Delaware business entities a method by which they may resolve business disputes in a prompt, cost-effective, and efficient manner, through voluntary arbitration conducted by expert arbitrators, and to ensure rapid resolution of those business disputes.”

To take advantage of the Act’s arbitration procedures, parties would have to meet the following requirements:

  • At least one party must be a business entity organized under Delaware law or having a principal place of business in Delaware;
  • No party to the arbitration agreement may be a consumer; and
  • The parties must agree in writing to submit an existing or future controversy to arbitration, expressly referring to the Delaware Rapid Arbitration Act, and the agreement must provide that it shall be governed by Delaware law.

According to accompanying commentary, the Act’s procedures are not suited for actions brought by shareholders in a representative capacity, and an arbitration requirement could not be imposed on shareholders via bylaws in light of the requirement that all parties sign an arbitration agreement.

Here are some key features of the proposed Act:

Selection and appointment of the arbitrator(s). The parties may agree to appoint one or more arbitrators, or on a procedure for appointment, but if they are unable to do so, upon application of a party the Delaware Court of Chancery would have exclusive power to appoint an arbitrator from lists proposed by the parties.

Discovery and hearing. The arbitrator would have the power to compel attendance of witnesses and production of documents, but issuance of subpoenas and commissions for depositions would not be permitted unless agreed to by the parties.

Timing of decision. The arbitrator would be required to render a decision within the time fixed by the parties’ agreement or within 120 days of accepting an appointment. An additional 60 day extension could be authorized by the parties’ unanimous consent.   If the arbitrator’s decision is rendered after a deadline, the arbitrator’s fee may be reduced.

Confirmation and appeal. The parties may agree that there shall be no review of an arbitrator’s award or that it shall be subject only to review by one or more arbitrators. Otherwise the Act provides that any challenge to an award will be heard by the Delaware Supreme Court, and the award may only be vacated, modified, or corrected in conformity with the limited grounds provided in the Federal Arbitration Act, see 9 U.S.C. §§ 10, 11.  If there is no appeal or challenge, the arbitrator’s award is automatically deemed to have been confirmed by the Court of Chancery five business days after the time for challenge has expired.

Confidentiality. Accompanying commentary indicates that arbitrations would be confidential except insofar as an appeal is made to the Delaware Supreme Court.

Limitations on ancillary objections and court litigation. The proposed Act is designed to avoid court litigation that often delays arbitrations. By entering into an arbitration agreement under the Act, parties would be deemed to have waived the right to:

  • seek to enjoin the arbitration;
  • remove any related court action under the Act to federal court;
  • appeal or challenge any interim order by the arbitrator; or
  • challenge an award except as provided in the Act.

The parties would also be deemed to have waived objection and consented to:

  • the procedures provided by the Act;
  • submission to the arbitrator of any issues concerning substantive and procedural arbitrability;
  • exclusive personal and subject matter jurisdiction of an arbitration with its seat in Delaware (regardless of the place of hearing);
  • exclusive personal and subject matter jurisdiction of the Delaware state courts for the purposes specified in the Act; and
  • except as otherwise limited by the agreement, the arbitrator’s power and authority to grant relief and to determine in the first instance the scope of his or her remedial authority.

The Act has been developed by members of the Delaware State Bar Association working with judges and other state officials. It would effectively replace another arbitration statute, 10 Del. C. § 349, which granted the Delaware Court of Chancery the power to arbitrate business disputes, but was held unconstitutional by the U.S. Court of Appeals for the Third Circuit in Delaware Coalition for Open Government, Inc. v. Strine. In a 2-1 decision, the Third Circuit held that the previous statute violated the First Amendment right of public access to judicial proceedings, insofar as it maintained the confidentiality of arbitrations conducted by judges in courthouses.  The U.S. Supreme Court subsequently denied a petition for certiorari filed by the judges of the Court of Chancery.

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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