Chancery Rules on Substantive Arbitrability

Li v. Standard Fiber LLC, C.A. No. 8191-VCN (Del. Ch. March 28, 2013).

This Court of Chancery opinion addressed a recurring theme in Delaware commercial litigation: substantive arbitrability.  That is, whether the court or an arbitrator should determine whether a particular claim is subject to an arbitration clause.  This opinion also addresses how multiple agreements, each with an integration clause, interface with each other when some but not all of them have arbitration clauses.

Brief Overview

This claim is based on an indemnification agreement which also provided for advancement.  The court determined that the advancement claims were subject to arbitration.

The court applied the familiar test of arbitrability in the seminal Delaware Supreme Court decision of James and Jackson LLC v. Willie Gary, LLC, 906 A.2d 76 (Del. 2006), highlighted on these pages here.  The threshold question of who decides arbitrability, the court or the arbitrator, was determined in a test set forth in the Willie Gary case.

Although there is a general presumption that the question of substantive arbitrability, i.e., whether the parties agree to arbitrate, is generally one for the courts to decide, that presumption is overcome when there is “clear and unmistakable” evidence that parties agree to arbitrate.

The court in Willie Gary held that “such clear evidence is present when an arbitration clause:  (1) generally provides for arbitration of disputes, and (2) incorporates a set of arbitration rules that empower arbitrators to decide arbitrability.”  Willie Gary’s progeny have since modified the “clear and unmistakable test” in one important respect.  Even when the Willie Gary test is satisfied, a court:  “must still make a preliminary evaluation of whether the party seeking to avoid arbitration of arbitrability has made a clear showing that its adversary has made “essentially no non-frivolous argument about substantive arbitrability.”  See footnote 45.  This additional step was meant to avoid situations in which the Willie Gary test is “technically satisfied but there is no non-frivolous argument that the arbitration clause covers the underlying dispute.”

Although related agreements involved in this case included arbitration clauses that satisfied the two prongs of the Willie Gary test, the indemnification agreement had an integration clause that did not include an arbitration clause.  The court determined however, that the arbitration clauses in the related agreements also covered the claims related to the advancement and indemnification issues.

The opinion also includes a helpful discussion of integration clauses in multiple related agreements that also have integration clauses even though they are obviously interfacing with other agreements.