A recent Delaware Court of Chancery opinion is noteworthy because it describes the impact of a recent decision of the United States Supreme Court on the Delaware law of arbitrability. In Gulf LNG Energy, LLC v. ENI USA Gas Marketing LLC, C.A. No. 2019-0460-AGB (Del. Ch. Dec. 30, 2019), the court also addressed two important lines of authority: (1) When a court should intervene to prevent collateral attacks on an arbitration award; and (2) What disputes will be covered by the contractual intent of the parties regarding who decides issues of arbitrability: the court or the arbitrators. Although many decisions on arbitrability have been covered on these pages over the last 15 years, this Chancery opinion provides helpful insights on relatively new nuances.

The detailed facts of this case should be reviewed for a full understanding of this decision, but this brief overview will be limited to the most important aspects of the decision with the widest applicability.

Basic Background:

Two energy companies entered into a long-term agreement involving a few hundred-million dollars. An arbitration decision initially resolved contractual disputes about the termination of that agreement. Subsequently, ENI initiated a separate, second arbitration, which prompted a lawsuit in Chancery seeking a permanent injunction to enjoin ENI from pursuing the second arbitration.

Most Notable Takeaways from Decision:

  • This decision observed that both Delaware law and New York law are essentially the same on the issue of arbitrability to the extent that when the parties specifically incorporate rules such as those of the American Arbitration Association, the net result is that it demonstrates an intent of the parties to have arbitrators decide issues of arbitrability.
  • This decision compares the differences between the issue of arbitrability and the separate collateral attack doctrine. The latter allows a court to issue an injunction to prevent a circumvention of a prior arbitration ruling.
  • The United Supreme Court recently issued an important decision on arbitrability styled Henry Schein, Inc. v. Archer and White Sales, Inc., 139 S.Ct. 524, 529 (2019). The Court of Chancery noted that: “One consequence of Schein is that it should end the additional ‘no non-frivolous argument about substantive arbitrability’ inquiry” this court has conducted under McLaughlin v. McCann, 942 A.2d 616, 626-27 (Del. Ch. 2008), to guard against the frivolous invocation of an arbitration clause even when the [Delaware Supreme Court’s] Willie Gary test has been satisfied.” UPM-Kymmene, 2017 WL 4461130, at * 4. See footnote 83.
  • But the Court of Chancery emphasized that the SCOTUS decision in Schein “does not address the collateral attack doctrine. Nor does Schein address the scenario present here where a second, related arbitration proceeding has been filed.”
  • The Court of Chancery conducts a very careful analysis to determine whether the claims in the second arbitration should be considered prohibited under the collateral attack doctrine or whether they present issues of arbitrability for the arbitration panel to determine. After synthesizing federal case law interpreting the Federal Arbitration Act, the court determined that one of the claims in the second arbitration was barred by the collateral attack doctrine and would be permanently enjoined, but that the other issue raised in the second arbitration presented an issue of arbitrability for the arbitrators to determine. That is, the arbitrators would determine whether the second issue raised in the subsequent arbitration was covered by the arbitration clause or should be decided in some other manner. See Slip op. at 30 – 33.

A recent decision of the United States Supreme Court addressed the frequently encountered issue of arbitrability—that is, whether a court or an arbitrator should decide whether or not a particular issue is subject to arbitration based on the arbitration clause in an agreement.

This decision is noteworthy because the issue often arises about how to handle an argument that a claim is subject to arbitration when that claim is frivolous (at least in one party’s view.) In Henry Schein, Inc. v. Archer & White Sales, Inc., U.S. Supr. Ct., No. 17-1272 (Jan. 8, 2019), a unanimous decision written by Justice Brett Kavanaugh, the court rejected a judicially-imposed exception to arbitrability under the Federal Arbitration Act.  The court determined that if an agreement containing an arbitration clause provides that arbitrators have the power to resolve arbitrability questions, then an arbitrator—not the court—should decide whether the arbitration provision applies to the issue involved, regardless of whether the arbitration demand is “groundless.”

The court rejected an argument followed by some lower courts that if an arbitration claim was “wholly groundless,” a court should decide arbitrability. The nation’s high court reasoned that because the statute did not impose a “wholly groundless” exception, the gateway question of arbitrability is a matter of contract law and, for example, when an agreement refers to the rules of the American Arbitration Association, those rules provide for the arbitrator to have the power to resolve arbitrability questions.

This decision should be compared to the long line of Delaware cases on arbitrability beginning with the Delaware Supreme Court decision in Willie Gary, highlighted on these pages here, that almost 13 years ago reached a similar result regarding questions of arbitrability. (Yours truly successfully argued that Willie Gary case.)

Shareholder Representative Services, LLC v. ExlService Holdings, Inc., C.A. No. 8367-VCG (Del. Ch., Aug. 27, 2013).

This is yet another Chancery decision on the issue of arbitrability.  In essence, this Court of Chancery opinion addresses the substantive arbitrability of a claim but distinguished the seminal Delaware decision in the Willie Gary case, and ruled that despite a carve-out for seeking injunctive relief in the agreement, the plaintiff was neither seeking equitable relief (despite the “façade of prayers” requested), nor was it entitled to equitable relief under the facts of the case, notwithstanding the parties’ contract provision agreeing to irreparable harm.

Aedicis Pharmaceutical Corp. v. Anacor Pharmaceuticals, Inc., C.A. No. 8095-VCP (Del. Ch. Aug. 13, 2013).

What this case is about:  This decision is one of a multitude of Chancery opinions on the recurring issue of arbitrability.  This recent iteration includes a comprehensive overview of the many Chancery decisions that address both procedural arbitrability and substantive arbitrability.  Although the case law in Delaware is fairly well established on this issue, each case seems to address a slightly different nuance that may not be squarely addressed in the prior cases.

Viacom International, Inc. v. Winshall, Del. Supr., No. 513, 2012 (July 16, 2013).

Issue addressed: The Supreme Court revisits the oft-discussed distinction between substantive and procedural arbitrability, as well as the related issue of whether the court or the arbitrator decides a particular issue. Also addressed is the high threshold that must be crossed to successfully challenge an arbitrator’s decision under the Federal Arbitration Act.

The Court of Chancery decision, which was affirmed, was highlighted on these pages here. The appeal features both a former chancellor and a former vice chancellor on opposite sides of the case.

Legions of cases involving similar issues of arbitrability have been discussed on these pages. Still, this 13-page decision is short enough to be read quickly for the latest pronouncement of Delaware law on this recurring topic.

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–without the same integration clause–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.

Legend Natural Gas II Holdings, LP v. Hargis, C.A. No. 7213-VCP (Del. Ch. Sept. 28, 2012).

This decision addresses the well-worn issue of arbitrability. Because this issue is so frequently the subject of Chancery decisions highlighted on these pages, I will point out only a few bullet points that are noteworthy for future reference:

  • The court also addresses the power of the court to stay a case pending arbitration.
  • The risk of forcing a party to submit the issue of arbitrability to an arbitrator–when the argument is clearly frivolous, in light of the analytical approach required by the applicable standard, is discussed at length by the court.
  • The two-prong test to determine arbitrability as announced by the 2006 Delaware Supreme Court decision in Willie Gary is reiterated.

We often review Delaware cases that address issues of arbitrability. For comparison purposes we bring you two recent decisions of the Pennsylvania Superior Court (the intermediate appellate court in the Keystone State), that addressed the issue of arbitrability in two companion cases involving the issue of whether breach of fiduciary duty claims against a trustee of a non-profit corporation were subject to the arbitration clause in a construction agreement involving the trustee’s company and the non-profit. The trustee owned a construction company which did work for the non-profit. See, Elwyn v. James DeLuca, and Elwyn v. J.J. DeLuca Co., Inc. (We represent Elwyn in these two cases.)

Halpern Medical Services, LLC v. Greary, Del. Ch., C.A. No. 6679-VCN (Feb. 17, 2012).

Issues Addressed

This case serves as a refresher on several issues that are frequently argued before the Court of Chancery: (1) the arbitrability of a claim under a contractual arbitration clause; (2) waiver of the right to invoke arbitration; and (3) the application-by-analogy of the statute of limitations to a laches defense.

This summary was prepared by a former associate of Eckert Seamans.

Factual Background

Plaintiffs, Halpern Medical Serices, LLC (“HMS”) and Halpern Eye Associates, P.A. (“HEA”), alleged claims of breach of fiduciary duty, breach of contract, and unjust enrichment against Defendant Authur Greary. Greary was hired by the majority-owner of HMS and HEA in April 2002, to manage the companies’ day-to-day operations. Greary entered into an employment agreement with HMS that contained an arbitration clause providing that: “any dispute ‘arising out of, or relating to, [the Employment Agreement] or the breach thereof . . . shall first be submitted to arbitration in Kent County, Delaware,’ and that any arbitration award ‘shall be final and binding, with no right of appeal.’”

Plaintiffs asserted that Greary breached the employment agreement by investing in, associating with, and consulting for third parties while employed by HMS. For instance, Greary caused HMS and HEA to implement software purchased from a company in which Greary was an investor, and caused HMS and HEA to lease space from another company in which Greary was an investor.


I.          Arbitration

Before analyzing the arbitrability of the plaintiffs’ claims, the Court distinguished which claims were made on behalf of HMS and HEA, and found that the claims made by HEA, which was not a signatory to the employment agreement, would not be subject to arbitration.

Next, the Court implemented the two-step process enunciated in Parfi Holding AB v. Mirror Image Internet, Inc., for determining the arbitrability of a claim: (1) determine whether the arbitration clause is broad or narrow; and (2) apply the scope of the clause to the claims to determine whether the claims are within the scope. The arbitration clause in the employment agreement was found to be broad—based on the inclusive language of the clause and its similarity to the clause in Parfi, which was also found to be broad. As such, the Court was required to “defer to arbitration [] any issues that touch on contract rights or contract performance for which arbitration is the agreed-upon mode of dispute resolution.” The Court also referenced Delaware’s public policy in support of arbitration, and the strong presumption in favor of arbitration where a reasonable interpretation of the parties’ intent to arbitrate exists.

Plaintiffs’ breach of contract claim was solidly based on a breach of the employment agreement, and clearly fell within the scope of the arbitration clause. The claim for breach of fiduciary duty was based on the “contractual duty of loyalty” and performance of the employment agreement, which were embodied in the employment agreement. And Plaintiffs did not contest that their unjust enrichment claim alleging that Greary was reimbursed for non-HMS expenses and that he received outside compensation during his employment, were based on specific provisions of the employment agreement. Accordingly, the Court held that all of HMS’s claims against Greary were subject to arbitration. The Court stayed (but did not dismiss) HMS’s claims against Greary.

II.     Waiver of the Right to Invoke Arbitration

In this case, both parties argued that the other had waived the right to invoke the arbitration clause of the employment agreement. The Court rejected both parties’ arguments, and reiterated the well-established standard for finding waiver.

Waiver is not lightly inferred. Rather, it will only be found where the party seeking arbitration has actively taken action inconsistent with the right to arbitration. However, it is “the presence or absence of prejudice which is determinative of the issue of waiver.”

The Court focuses on two factors when determining whether a party has waived its right to arbitrate: (1) the length of time between the commencement of the suit and the demand for arbitration or dismissal due to the arbitrability of the claims; and (2) whether the parties have engaged in extensive discovery. Since only two months had elapsed between the filing of the suit and the defendant’s motion to dismiss, there was no basis for a finding of waiver.

It is important for Chancery litigators to note that participating in the initial stages of litigation will not amount to a waiver of the right to arbitrate. The Court specifically rejected the argument that filing suit is enough to waive the right to arbitrate, and also rejected the argument that filing a motion to dismiss is sufficient to waive to the right to arbitrate.

III.    Laches

The Court applied the “laches-borrowed three-year statute of limitations” to the breach of fiduciary duty and unjust enrichment claims. “To prevail on a laches defense, a defendant must show that: (1) the plaintiff had knowledge of his claim; (2) he delayed unreasonably in bringing that claims; and (3) the defendant suffered resulting prejudice.”

Defendants’ actions that occurred outside of the three-year period were barred by laches. The complaint was unclear as to the timing of one alleged wrongful act, so the Court denied the motion to dismiss that claim. With respect to the remaining claims, the Court found that the defendant did not satisfy all three elements of a laches defense, and denied the motion to dismiss those claims.

Preferred Sands of Genoa, LLC v. Outotec (USA) Inc., C.A. No. 6011-VCN (Del. Ch. July 29, 2011), read letter decision here. This jewel of a pithy decision includes one of the most concise summaries of the Delaware law on arbitrability that one is likely to find in a Court ruling.

(  The new Kent County Superior Court  Pictured is the recently completed Kent County Courthouse building which will house the Court of Chancery’s Dover Courtrooms until the old Courthouse building is renovated, at which time they will move back to their renovated quarters on The Green.)

Issues Addressed:

(1) The issue of arbitrability in this case specifically related to a settlement agreement and whether the enforceability of a settlement agreement (which did not have an arbitration clause), was covered by the same arbitration clause in the prime agreement for which a breach of contract case had previously been inititated before an arbitration panel. The settlement agreement purported to settle the pending arbitration proceeding.

(2) The high threshold (not met here) of trying to dismiss a case in Delaware based on forum non conveniens was also addressed by the Court.

Key Legal Points

When an agreement involves interstate commerce, the Federal Arbitration Act (which Delaware law closely tracks), applies. See footnote 8. The Court also cited the seminal Delaware Supreme Court decision on arbitrability,  James & Jackson LLC v. Willie Gary, LLC, 906 A.2d 76, 80 (Del. 2006)(summarized on these pages here), as well as related decisions. This decision is consistent with similar federal law on arbitrability which squarely resolved this case and sent it back to the arbitrators.

The issue of arbitrability or in other words: “who decides whether a claim should be arbitrated, the court or the arbitrator,” was analyzed by the Court in a succinct fashion. The Court observed that Section 5703 of Title 10 of the Delaware Code gives Chancery jurisdiction to enjoin an arbitration when no binding arbitration agreement exists. If such an applicable arbitration agreement exists, however, it divests the Court of jurisdiction.

The issue of forum non conveniens was also easily dispatched and it was noted that despite linguistic appearances, mere inconvenience is not a basis in Delaware to have a case dismissed, but rather substantial hardship is required if  forum non conveniens is relied on for a motion to dismiss.