Chartis Specialty Insurance Company v. LaSalle Bank, N.A., C.A. No. 6103-VCN (Del. Ch. July 29, 2011), read opinion here.
This Delaware Court of Chancery opinion addressed the following issues:
1) Whether an arbitration award issued by a panel of the American Arbitration Association (AAA), which had entered a confidentiality order, should be filed under seal based on Court of Chancery Rule 5(g); and
2) Whether there was a sufficient showing to justify post-arbitration discovery regarding the alleged partiality of one member of a three-member AAA arbitration panel.
Summary of the Court’s Ruling
First, the Court determined that Court of Chancery Rule 5(g) required Chartis to show good cause as to why the arbitration award should be sealed. Having failed to establish that the entire award should be sealed, the Court offered the parties an opportunity to agree on redactions of those parts of the award that were confidential, but failing that, to return to the Court. Second, the Court determined that Chartis was entitled to limited discovery into the alleged partiality of one of the three members of the AAA arbitration panel.
The parties to this case were involved in a very lengthy and complex arbitration proceeding that resulted in a 250-page arbitration award that was effective as of December 2010. Chartis filed an action in the Court of Chancery the same day to vacate the award under the Federal Arbitration Act (FAA), as well as the Fifth and Fourteenth Amendments to the U.S. Constitution, based on five separate grounds, including failure of one of the members of the panel to disclose past adversarial relationships with Chartis, and that the arbitration panel exceeded its authority. One might wonder why this case was not filed in Federal Court and/or why the defendant did not remove it to Federal Court, but the Court of Chancery explains in the text accompanying footnote 45 that it has inherent power to enforce, modify or vacate arbitration awards, and the FAA does not derogate the inherent equity jurisdiction of the Court of Chancery, even though the Federal Arbitration Act applied here. See 9 U.S.C. Section 10, and compare Sections 5701 to 5725 of Title 10 of the Delaware Code regarding the similarity between the FAA and the Delaware Uniform Arbitration Act.
Highlights of Court’s Analysis
● This is a very useful decision for practitioners to refer to for an analysis of those situations where Court of Chancery Rule 5(g) would be applied to keep an arbitration decision under seal. Compare the recent decision in Espinoza v. Hewlett Packard, summarized here, regarding the attempt of an intervening party to maintain documents under seal.
● The Court explained the typical reasons why a document would be maintained under seal pursuant to Rule 5(g), for such things as trade secrets, third-party confidential material or private financial information, none of which apply in this case. See footnote 31 and accompanying text. In the end, the Court determined that the risk of harm to Chartis by disclosure of the information was at best minimal and did not outweigh the right of the public to access to the arbitration award. Nonetheless, the Court gave the parties an opportunity to agree to redactions of portions of the award but failing to do that, the parties would submit supplemental briefing regarding the good cause issue.
Post-Arbitration Discovery on Partiality Issue
● The Court acknowledged that post-arbitration discovery is very rarely granted but nonetheless reviewed the broad scope of discovery under Court of Chancery Rule 26(b)(1) and the power of the Court to limit that discovery.
● The Court also reviewed the limited basis under the FAA for vacating or modifying an arbitration award.
● The Court acknowledged that there was sparse caselaw that defined partiality as a basis for vacating an arbitration award, and no uniform authority on what showing would be required to justify post-arbitration discovery based on a claim of partiality on the part of one of the arbitrators. The Court concluded that under any of the standards that most courts used, discovery would be permitted in this case regarding the alleged partiality of one member of a three-member arbitration panel, in part because the disclosures of the arbitrator were not consistent with information in the record about his prior affiliations. See generally a recent Delaware Supreme Court decision highlighted here, regarding the reversal of a action by a public body when one member of panel was alleged to be less than objective.