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Procedural Arbitrability Compared with Substantive Arbitrability: Should Court or Arbitrator Decide?

By Francis G.X. Pileggi

Avnet, Inc. v. H.I.G. Source Inc., C.A. No. 5266-VCP (Del. Ch. Sept. 29, 2010), read opinion here.

Short Overview

This opinion decided the recurring issue of arbitrability. Specifically the Court of Chancery decided whether the issue involving the post-merger price adjustment was within the scope of an arbitration clause in the merger agreement, and more specifically, whether that was a matter of substantive arbitrability for the Court to decide, or whether it was an issue of procedural arbitrability for the arbitrator to decide.

The general rule is that issues of procedural arbitrability, such as the conditions precedent for arbitration, are decided by the arbitrator. The Courts will presume, however, that the parties intended issues of substantive arbitrability (for example, the scope of and arbitration clause), to be decided by a Court, absent evidence that the parties 'clearly and unmistakably intended otherwise.' See James & Jackson LLC v. Willie Gary LLC, 906 A.2d 76, 79 (Del. 2006). See here for summary of that seminal Delaware case on this topic.

Short Discussion

The Court cited to several other cases involving arbitrability in connection with post-merger price adjustment. See footnotes 38 to 40. The specific issue in this case was whether the arbitration clause in the merger agreement encompassed actions that did not conform with the specific process agreed upon by the parties for resolving disputes about the Closing Balance Sheet. Specifically, there was a four-step process that provided for deadlines by which disputes would be submitted and one of the parties missed that deadline by approximately one year. The Court reasoned that only those disputes that followed the procedure in the agreement were within the scope of the mandatory arbitration clause. That is, the parties did not agree to arbitrate issues that arose outside of those procedures.

Moreover, the Court regarded the dispute presented to it as a contractual issue that should be decided by the Court and not the arbitrator. Namely, the issue is whether the parties agreed to arbitrate the issue and not what rules would govern the arbitration procedure. In contrast, the issue did not include a condition precedent which would only involve whether the plaintiff was entitled to seek relief, and unlike the present case, would not involve the subject matter of the dispute. The question in this case is not whether a condition precedent was met; rather, it involves whether the parties have agreed to arbitrate the specific issues presented. Because that is a substantive matter of arbitrability for the Court to resolve, the Court denied a motion for judgment on the pleadings which sought to compel arbitration. 

As a closing aside, this case is a good example of why arbitration clauses do not always make the resolution of a dispute faster and cheaper, because there is often litigation about the arbitration issues before the merits of a dispute are ever addressed.
 

Full post as published by Delaware Corporate and Commercial Litigation Blog on October 17, 2010 (boomark / email).