Orix LF, L.P. v. InsCap Asset Management, LLC, C.A. No. 5063-VCS (Del. Ch. April 13, 2010), read opinion here.
Who Should Read This Court of Chancery Decision? Anyone who wants to know the latest Delaware law on the frequently recurring issue of: "Who decides whether a particular claim is subject to an arbitration clause, or not–the arbitrator or a court?" In this case, the Court determined that the arbitrator, and not the Court, must decide the issue of both substantive and procedural arbitrability. Thus, injunctive relief was denied.
Why This Opinion is "Blogworthy" to Synopsize: This blog covers all the key decisions on corporate and commercial law issued by Delaware’s Court of Chancery and Supreme Court, as well as related topics of interest to those make their living in the field of business litigation (or who otherwise want to know about the latest developments in the area). This decision covers a topic that frequently arises in the context of whether a particular issue is covered by the scope of an arbitration clause, and whether it makes a difference if the issue is categorized as one of "substantive arbitrability" or "procedural arbitrability".
Notable: The starting point for the Court’s legal analysis is the Delaware Supreme Court’s decision in James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76 (Del. 2006), which was summarized here on this blog. Though barely 4 years old, the Willie Gary case already has numerous Delaware progeny, all of them listed by the Court at footnote 2 of the opinion. (By way of background, that case involves one of the few attorneys who has his own Wikipedia entry. See Willie E. Gary, Esq. here.)
Highlights: This opinion does not announce new law but is useful to the extent that it provides in a relatively pithy manner "all one needs to know" about whether an arbitrator or a court will decide the arbitrability of a particular claim based on the specific phraseology of the applicable arbitration provision. For that reason, this case summary warrants "bullet points" as compared to a more thorough review.
- Orix filed this complaint to enjoin the defendants from arbitrating claims that Orix believed should not be arbitrated because, for example, a condition precedent to arbitration had not been satisfied–namely the consent of a company named Swiss Re.
- Initially, a TRO was sought, but that motion was converted to a motion for summary judgment at the very beginning of the case and so the procedural posture for this decision was a motion for summary judgment by the plaintiffs, as well as responsive motions to dismiss by the defendants. In the end, the Court only needed to decide the issue of jurisdiction based on the Rule 12(b)(1) motion. Because the Court determined that only the arbitrator had the authority to decide the issue, the Court dismissed the case for lack of subject matter jurisdiction.
- Relying extensively on the Willie Gary decision linked above, the Court recited the initial presumption that issues of procedural arbitrability are for the arbitrator to decide and issues of substantive arbitrability are usually for courts to decide. The latter presumption does not apply, however, if the "clear and unmistakable" evidence is that the parties intended for the arbitrator to decide all such issues, for example, when the following two conditions are met: "(1) the contract generally refers all disputes to arbitration; and (2) the contract refers to a set of rules that would empower arbitrators to decide arbitrability." (citing Willie Gary, 906 A.2d at 78-79).
- Those two conditions are met in this case because: (1) the arbitration clause covers "any dispute" that "arises out of or relates to" the Fund Agreement, (which phrases the Delaware courts have interpreted to be very broad language for casting a wide net to encompass the widest range of related disputes (FN 46)); and (2) the arbitration is governed by the American Arbitration Association (AAA) Rules. (The AAA Rules provide for the arbitrator to decide issues of arbitrability.)
- Although the issue in this case was one for the arbitrator to decide, the Court noted (FN52) that the arbitration clause was broad enough to cover an issue in a related agreement that did not have an arbitration clause but that was signed at the same time as part of the same transaction.
- BOTTOM LINE STANDARD: The Court further reasoned that unless the defendant’s position on arbitrability (i.e., the argument that the claim should be submitted to the arbitrator), is "’wholly groundless’ or ‘frivolous’, the arbitrator and not the court must determine the question of substantive arbitrability. To do otherwise and to resolve good faith disputes about substantive arbitrability, would conflate the substantive arbitrability analysis proper, and usurp the role Willie Gary says belongs to the arbitrator."
- Moreover, even though the Court determined that the arbitrator was the appropriate arbiter of substantive arbitrability in this instance, whether or not a condition precedent to arbitration was satisfied (i.e., the prior consent of Swiss Re in this case), is the particular type of issue that is rightly categorized as "procedural arbitrability" which, as we have seen at the beginning of this post, presumptively is decided by the arbitrator anyway.