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Chancery Rules on Perennial Dispute: Who Decides Issue of Substantive Arbitrability--Court or Abitrator?

By Francis G.X. Pileggi

GTSI Corp. v. Eyak Technology, LLC, C.A. No. 5815-VCL (Del. Ch. Nov. 15, 2010), read opinion here.

Issue Presented

The limited issue presented in this Delaware Court of Chancery opinion is a perennial corporate litigation conundrum that has been the subject of many case summaries on this blog, and that is: Who decides the issue of substantive arbitrability, the Court or an arbitrator?

Brief Summary

The resolution of the issue in this case turned on an interpretation of the arbitration clause in the LLC Agreement of the parties. The Court of Chancery in this relatively short 12-page opinion observed as follows: 'The parties have devoted six (!) briefs to debating the meaning of James & Jackson LLC v. Willie Gary, LLC, 906 A.2d 76 (Del. 2006).' (exclamation point in original).

The Willie Gary decision has often been cited and discussed on this blog in the context of the arbitrability issue, along with the many subsequent decisions that have been part of its prodigious progeny in the few short years since it was decided by the Delaware Supreme Court. Multiple blog summaries and references to the Willie Gary decision and the many cases that have applied it over the last several years, are available here.

The Court in this decision emphasized that the threshold question was whether the LLC Agreement 'clearly and unmistakably contemplates that the parties will arbitrate substantive arbitrability. In Willie Gary, the LLC Agreement did not contain language addressing that issue, other than a generic reference to the AAA Rules.' [The agreement in Willie Gary also had a carve-out for injunctive relief.] By contrast, the Court described the LLC Agreement in the instant matter as evidencing the agreement by the parties that they 'shall' arbitrate 'any dispute . . . including the validity, scope and enforceability of these arbitration provisions.' The Court reasoned that: 'This language is dispositive and requires that I defer to the arbitrator to determine substantive arbitrability.'

However, the Court acknowledged that when 'excised from the LLC Agreement and read out of context,' the equitable remedy provisions were similar to that in the Willie Gary case, but Delaware law mandates that an agreement be 'read as a whole.' Unlike the Willie Gary case, the arbitration provision in this case specifically contemplated that the arbitrator shall decide whether a claim is properly brought in arbitration and also empowers the arbitrator to award equitable relief, whereas the arbitration clause in Willie Gary carved out equitable relief for the courts.

In sum, the Court reasoned that: 'All I need find is that there are non-frivolous arguments in favor of arbitrability. Because there are, I defer to the arbitrator to answer the question, in accordance with the clear and unmistakable evidence of the parties' intent.' Thus, the Motion to Stay was granted pending the arbitrator's decision.

 

Full post as published by Delaware Corporate and Commercial Litigation Blog on November 16, 2010 (boomark / email).