Delaware Rapid Arbitration Act: A New Alternative for Cost-Effective Dispute Resolution
As its name suggests, the Delaware Rapid Arbitration Act (DRAA)1 is a new arbitration statute that is intended to give Delaware business entities a process for resolving business disputes in a rapid and efficient manner. It represents a response to a Third Circuit ruling that a prior arbitration statute, which provided for confidential arbitration using sitting Chancery Court judges as arbitrators, violated the First Amendment.2 The DRAA is an enabling statute, and does not foreclose parties from selecting another form of arbitration. The DRAA became effective on May 4, 2015.
The DRAA is available to resolve disputes among businesses, one of which must either be a Delaware entity or have its principal place of business in Delaware. It is expressly not available where one of the parties is a consumer.3 To create a binding arbitration agreement under the DRAA, the parties must enter into a written agreement that provides that it is governed or construed under the laws of Delaware without regard to principles of conflicts of laws, and the agreement must reference the DRAA.4 This can take the form of a detailed agreement that satisfies the
“The parties agree to arbitrate any and all disputes arising under or related to this agreement, including disputes related to the interpretation of this agreement, under the Delaware Rapid Arbitration Act.”
The choice of law provision in the agreement should provide that the arbitration provision is governed by Delaware law, without regard to principles of conflicts of laws. This simple approach relies on the default provisions under the DRAA, including for example those governing the appointment of arbitrators, and the ability of arbitrators to issue interim orders regarding discovery, as described below. The DRAA authorizes the Delaware Supreme Court, in consultation with the Court of Chancery, to publish procedural arbitration rules that will serve as default rules unless an agreement of the parties provides for different rules.5
Arbitrators can either be designated by the parties, or appointed by the Court of Chancery on petition by one of the parties. An arbitrator appointed by the Court of Chancery can only be a person selected under or pursuant to the parties’ agreement, a person expert in any nonlegal discipline described in an agreement or a member in good standing of the Delaware bar for at least 10 years.6 Unless the arbitration agreement provides otherwise, an arbitrator may administer oaths and compel the attendance of witnesses and the production of books, records and other evidence. An arbitrator can only issue subpoenas and award commissions to permit a deposition if provided for by agreement.
Arbitrators have the power to grant any legal or equitable remedy appropriate in the sole judgment of the arbitrator.7 Unless provided otherwise by agreement, an arbitrator’s fees and expenses are borne as provided for in the final award.8
The DRAA promotes rapid arbitration in a number of ways. It provides that any issues regarding the scope of arbitration are to be determined solely by the arbitrator and not the courts.9 This removes the ability of the parties to delay proceedings by initiating litigation over the scope of arbitrability. The DRAA generally also divests courts of the power to enjoin arbitration.
The DRAA provides a significant economic incentive for arbitrators to issue final awards on a timely basis. The DRAA requires arbitrators to issue final awards within 120 days of their acceptance of appointment, subject to an extension of up to 60 days by agreement of the parties.10 If an arbitrator fails to issue the final award prior to the statutory deadline, the arbitrator’s fees must be reduced by 25 percent if the final award is less than 30 days late, 75 percent if the final award is between 30 and 60 days late, and 100 percent if the final award is more than 60 days late. These reductions can be modified or eliminated only if exceptional circumstances exist.11
The DRAA further promotes the issuance of timely awards by providing that parties are deemed to have waived the right to make interim challenges to the arbitrator’s rulings and orders. While an arbitration is pending, parties are also prohibited from amending the terms of the arbitration agreement to alter the arbitration procedures without the arbitrator’s written consent. 12
The DRAA provides parties with the ability to waive the right to appeal awards. Where the parties do not waive this right, appeals must be brought directly to the Delaware Supreme Court within 15 days of the final award. The Supreme Court only has the ability to vacate, modify or correct the final award in conformity with the Federal Arbitration Act. Parties have the ability to provide instead for appeals to one or more appellate arbitrators. 13 Providing for appeals to appellate arbitrators is a potential way for parties to preserve the confidentiality of the arbitration during the appeal. Supreme Court proceedings are typically not conducted on a confidential basis.
The DRAA also speeds up enforcement of arbitration awards by eliminating the confirmation process. Arbitration awards typically have to go through the step of being confirmed by courts in order to commence enforcement proceedings. Under the DRAA, this happens automatically five business days after the period for challenge has lapsed or, if appellate review is not provided for, after the award has been issued.14
The DRAA is likely to be used by parties that value speed, limiting costs and preserving confidentiality. For example, it may be suitable to resolve periodic disputes between parties that are in a long-standing commercial relationship. It may also be useful to resolve disputes between venture capital funds and their portfolio companies, or disputes among investors in portfolio companies. The DRAA will not be suitable for complex disputes that cannot be resolved in under six months. The DRAA also cannot be imposed on parties who have not agreed to it. For example, it could not be imposed on nonconsenting shareholders, as a way to curtail shareholder strike suits, pursuant to an arbitration provision inserted into a company’s charter or bylaws. For private M&A deals, parties may wish to consider the relative merits of the DRAA, compared to other dispute resolution mechanisms, for post-closing indemnity and earnout disputes.
1 Chapter 58, Title 10 of the Delaware Code, available at: http://legis.delaware.gov/LIS/lis148.nsf/EngrossmentsforLookup/HB+49/$file/Engross.html?open. Unless expressly provided otherwise, all section references in this article are to this title and Chapter of the Delaware Code.
2 See Delaware Coalition for Open Government, Inc. v. Strine, 894 F. Supp. 493 (D. Del. 2012), aff’d, 733 F.3d 510 (2013).
3 “Consumer” is defined under Title 6 §2731 of the Delaware Code as “an individual who purchases or leases merchandise primarily for personal, family or household purposes.”
5 §5804(a). Draft model rules have been prepared by Richards, Layton & Finger and are available at the following link: http://www.rlf.com/DRAA/ModelRules.