The Delaware Rapid Arbitration Act: Possible Panacea or Potential Pitfall?

Arbitration is often believed to be a great alternative to litigating a dispute in state or federal court.  Faster, cheaper, and more definitive.  No lengthy court dockets.  No expensive, never-ending discovery.  And no lengthy appeals.  Right?  Well, not always.

Although arbitration has been lauded as solving many of the problems associated with litigating in the courts, in practice arbitration often has its own set of potential pitfalls which may include:  litigating over whether the parties’ arbitration agreement applies and the scope of arbitration, disputes over the selection of the arbitrators, extensive discovery  similar to that faced in litigation, delays in the process due to scheduling, extended hearings, excessive administrative cost, unnecessary delay in the rendition of a final award, and lack of substantive review.

Delaware has addressed these issues head on with the Delaware Rapid Arbitration Act (DRAA),¹ into which all companies incorporated in Delaware can opt in their contractual arrangements.  In April 2015, after years of study and failed attempts at arbitration using state court judges, the DRAA was enacted to streamline arbitration in an attempt to make it faster, cheaper, and more definitive.  The DRAA accomplishes this in five primary ways: an initial summary proceeding to select an arbitrator; divesting the Delaware courts of jurisdiction to address certain procedural issues; granting the arbitrator the power to issue injunctions and compel arbitration; providing a 120-day deadline for a final determination; and allowing the parties to waive the right to challenge the final award, or alternatively, allowing a more detailed review by arbitral appeal.

First, when the parties have not preselected an arbitrator or agreed to an arbitrator selection process, the DRAA provides a summary proceeding in the Delaware Court of Chancery for the selection.  The selection must be made within 30 days of the initial filing.²

Second, the court lacks jurisdiction to address whether the dispute is arbitrable under the parties’ agreement or the scope of the arbitration.³  Moreover, the court is specifically prohibited from enjoining arbitration under the DRAA.⁴  By removing the questions of arbitrability and the scope of the arbitration from the court, the DRAA eliminates state court challenges that often accompany particularly contentious arbitration.

Third, the DRAA also removes the potential of state court litigation by divesting the court of and vesting the arbitrator with the authority to enter injunctions and to compel a party to arbitration.⁵  Under the DRAA, the problem of going to state court for procedural questions or injunctions goes away.  In short, once the arbitrator is appointed, any dispute goes to the arbitrator for a decision.

Fourth, the DRAA imposes an obligation on the arbitrator to issue a final award within the time specified in the agreement, or 120 days from the date the arbitrator accepted the appointment.⁶  The deadline may be extended by unanimous consent of the parties to 180 days, but no longer.⁷  To ensure compliance by the arbitrator, the arbitrator’s fees are statutorily reduced by 25% if the award is less than 30 days late, by 75% if the final award is between 30 and 60 days late, and by 100% if the final award is 60 days late.

Fifth, the method of appeal has been modified.  A challenge to a final award by an arbitrator under the DRAA may be taken directly to the Delaware Supreme Court.⁸  The Supreme Court may only vacate, modify, or correct the final award in conformity with the Federal Arbitration Action.⁹  However, under the DRAA, the agreement to arbitrate may provide for no appellate review of a final award, or an appellate review by one or more arbitrators, in which case the appeal will proceed as provided by the agreement.¹⁰

The DRAA provides all “Delaware business entities” this rapid means of resolving legal disputes,¹¹ and is available provided at least one party to the agreement is a business entity formed or organized under the laws of Delaware.¹²  However, to be bound to the DRAA, the parties must specifically agree to arbitrate under the act in their arbitration agreement.¹³

The DRAA organizes arbitrations into a workable, well-organized framework, and Delaware entities should ,  seriously consider the Act as a means of resolving legal disputes.  However, it is uncertain if the courts of other states, including Florida, will enforce agreements to arbitrate under the Delaware Act’s provisions.    Although the DRAA permits the arbitration to occur in any state, or even outside of the United States,¹⁴ a Delaware entity attempting to enforce provisions of the DRAA in any state other than Delaware may instead encounter significant litigation over what, if any, portions of the DRAA apply to the dispute.  Delaware entities with no other connection to Delaware but their state of incorporation may encounter other challenges if they attempt to enforce the provisions in Delaware.

The DRAA does provide a model for other states to streamline their arbitration laws, and perhaps more states will follow Delaware.  In the interim, the DRAA provides a detailed framework of provisions that, depending on the laws of another state, provide potential solutions to be grafted into arbitrations provisions.  For example, preselecting an arbitrator that is willing to accept an appointment that requires rendering a final award within 120 days or face a reduction of fees not only avoids a dispute over the selection process, but provides financial incentive for the arbitrator to reach a final determination quickly. While the DRAA may not apply to entities outside of Delaware, it does provide a host of ideas that may enhance the desirability of any arbitration agreement.

• Christian A. Petersen and Helaina Bardunias are complex commercial litigators at the Florida law firm of Olive Judd. P.A.  Both Mr. Petersen and Ms. Bardunias represent Florida business, as well as national and international clients, in state court, federal court, and arbitration throughout Florida and the United States.  Their practice includes pre litigation planning and preparation of arbitration agreements.

[1] 10 Del. C. § 5801 et seq.

[2] 10 Del. C. § 5805(b)(1).

[3] 10 Del. C. § 5804(b).

[4] 10 Del. C. § 5804(b)(5).

[5] 10 Del. C. §§ 5803 and 5804(b)(5).

[6] 10 Del. C. § 5808(b).

[7] 10 Del. C. § 5808(c).

[8] 10 Del. C. § 5809(a).

[9] 10 Del. C. § 5809(c).

[10] 10 Del. C. § 5809(d).

[11]10 Del. C. § 5802.

[12] 10 Del. C. § 5803(a)(2).

[13] 10 Del. C. § 5803(a)(5).

[14]10 Del. C. § 5807(a).