Milton Investments, LLC v. Lockwood Brothers II, LLC, C.A. No. 4909-VCP (Del Ch. July 20, 2010), read opinion here. This 38-page opinion by the Delaware Court of Chancery addressed two issues that are of practical importance to business litigators.
Procedurally it is noteworthy that within about 6 weeks of the complaint being filed, cross-motions for summary judgment were presented to the Court and it is on that procedural basis that this decision was rendered.
(1) The arbitrability of a dispute between the only two members of an investment entity; and
(2) Whether an arbitrator chosen by the parties, who had a known conflict of interest when chosen– due to his prior representation of both parties, should be disqualified based on comments he made prior to a hearing about the issues to be presented to him in the matter to be arbitrated.
The Court provides a useful overview of the Delaware law of arbitrability and the seminal cases on the topic. In light of no new ground being covered on this issue, however, and the greater importance of the second issue addressed by the Court, this first issue will be treated with brevity. For example, the Court determined that it was not necessary to distinguish between substantive and procedural arbitrability based on the stipulations of the parties, and that the Court should decide the issue of arbitrability.
Notably, at footnote 44, the Court observed that Delaware mirrors federal law on the issue of substantive arbitrability. See also footnote 48 regarding the issue of who decides arbitrability. Although it did not impact its decision, the Court noted the very recent U.S. Supreme Court decision in Rent-a-Center, West, Inc. v. Jackson, 2010 WL 2471058 (2010). The Court of Chancery distilled the essence of the Jackson case as follows: " … if a party challenges the enforceability of an agreement to arbitrate, the court would consider the challenge, but if the party challenged the enforceability of the agreement as a whole, the arbitrator should consider it. Id. at *1, 5-8.
In addition most of the Court’s discussion was focused on determining whether the arbitration clause at issue should be regarded as either "narrow" or "broad". See footnotes 48 and 54-55.
Should Arbitrator Be Disqualified Based on Pre-Hearing Statements About Issues for Decision.
The parties had selected in their LLC agreement as the arbitrator for any issues to be arbitrated under the agreement, an attorney that had done legal work for both parties to the agreement. This would have disqualified him due to a conflict as a general matter, but these sophisticated parties knew of the conflict but chose him anyway to be their arbitrator.
The new issue that arose and that was the basis for the argument by one party to disqualify that arbitrator, resulted from comments that the arbitrator made in a letter regarding some of the matters that would be presented to him at the arbitration hearing.
The Court observed that "elementary fairness dictates that arbitrators generally should be neutral and impartial…." Section 5714(a)(2) of Title 10 of the Delaware Code gives the Court authority to set aside an arbitration award when "there is evident partiality by an arbitrator appointed as a neutral". See footnote 90.
If the parties sought a neutral arbitrator, Section 5714(a)(2) allows the court to vacate an award, if, for example, the arbitrator failed to disclose a substantial relationship with one of the parties to the arbitration. As a general matter, if an arbitrator is disqualified, or an arbitrator is unable to serve, another provision of Title 10 of the Delaware Code, Section 5704, authorizes the Court to appoint a new arbitrator.
The analysis in this case must start with the acknowledgement that the parties chose in their agreement an arbitrator that they knew had a known conflict. The Court observed that parties have the ability to agree to a "non-neutral arbitrator" or almost any other procedure to resolve their disputes, other than " … trial by battle, or by ordeal, … or a panel of three monkeys …." See footnote 93 and pages 33 to 37.
The Court closely examined the statements by the arbitrator that one party argued was a basis of disqualification, and the Court found those statements to be innocuous. See page 37. The Court concluded by noting that the parties are free to select an arbitrator with a known, disclosed conflict but that the parties in such a situtation (in this writer’s interpretation), should not expect much sympathy, but in any event, as in this case, such a selection may likely lead to wasteful litigation about the arbitrator’s ability to remain impartial.