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The Delaware Rapid Arbitration Act: Cost-Efficient Resolution of Business Disputes

By Charles E. Harris II and Sarah E. Reynolds, with Jeehee "Naomi" Yang – November 11, 2015

 

Legal practitioners and businesses once viewed arbitration as a faster, less expensive alternative to litigation. But this method of alternative dispute resolution has become protracted and costly as arbitration rules (and arbitrators) more readily permit broad discovery, dispositive motions, and other procedures that prolong resolution of a dispute. The Delaware Rapid Arbitration Act, Del. Code Ann. tit. 10, §§ 5801 et seq. (DRAA or the Act), effective since May 2015, creates an arbitration regime that is commenced in the Delaware Chancery Court—like a typical litigation—but for an arbitration administered by the court rather than an outside arbitration administrator. See also Del. Ch. Rules 96–98 (effective June 2015). Aiming to address the concerns of the legal and business communities about the speed and efficiency of arbitration, the purpose of the Act, as its name suggests, is “to give Delaware business entities a method by which they may resolve business disputes in a prompt, cost-effective, and efficient manner, through voluntary arbitration conducted by expert arbitrators, and to ensure rapid resolution of those business disputes.” Del. Code Ann. tit. 10, § 5802.

 

As this article will fully discuss below, the provisions of the Act attempt to achieve this goal by, among other things, (1) requiring that an arbitrator issue a final award within (at most) 180 days after appointment, id. § 5808(b), (c); (2) requiring that parties consent to waive the right to certain legal procedures, such as interlocutory appeals, that might delay the arbitration, id. § 5803(c); (3) providing that challenges to the arbitration award may be taken directly to the Delaware Supreme Court, id. § 5809(a); and (4) providing that a final award is confirmed, by operation of law, without the need for further action from the court, and that entry of a final judgment may not be challenged once the award is confirmed, id. § 5810. Before this discussion, the article will briefly discuss how eligible businesses can select the procedures of the Act to resolve their disputes.

 

How to Select the Act to Resolve Disputes

The requirements to opt for the DRAA to resolve disputes are fairly straightforward. Using the well-known language from section 2 of the Federal Arbitration Act (FAA), 9 U.S.C. § 2, the Act provides that “[a] written agreement to submit to arbitration any controversy existing at or arising after the effective date of the agreement is valid, enforceable, and irrevocable” if the following five conditions are satisfied:

 

  1. 1. The arbitration agreement must be signed by both parties;

  2. 2. At least one of the signatories must be a business that is either organized under Delaware law or has its principal place of business in Delaware;

  3. 3. No party to the arbitration agreement can be a consumer;

  4. 4. The parties must agree that the arbitration agreement is governed by Delaware law (different state laws may govern other matters in the overall agreement); and

  5. 5. The arbitration agreement must include an express reference to the DRAA.

 

Del. Code Ann. tit. 10, § 5803(a). During the pendency of an arbitration, “an agreement may be amended to alter the procedures of the arbitration . . . with the approval of an arbitrator,” but the parties cannot agree to extend the arbitration longer than the 180-day period under section 5808(b) of the Act (discussed below). Id.

 

Provisions of the Act That Make It “Rapid”

 

180 days or else. What truly makes the DRAA “rapid” is its requirement that an award be issued within, at most, six months (or 180 days) after the arbitrator is appointed. Under section 5808(b), unless another time is fixed by agreement, “an arbitrator shall issue a final award . . . within 120 days of the arbitrator’s acceptance of [his or her] appointment” (emphasis added). Any extension of this period must be brief. Section 5808(c) states that parties “may extend the time for the final award by unanimous consent in writing . . . but the extension may not exceed . . . 60 days after the expiration” of the 120 days under section 5808(b) (emphasis added). Hence, the maximum 180-day period.

 

The DRAA is unique in that it imposes penalties on an arbitrator if an award is not issued within the described time period. In particular, under section 5806(b), “an arbitrator that fails to issue a final award in compliance with § 5808(b) . . . is not entitled to full payment of the arbitrator’s fees”: the fee “must be reduced by 25% if the final award is less than 30 days late; . . . by 75% if the final award is between 30 to 60 days late; and . . . by 100% if the final award is more than 60 days late.” The Delaware Chancery Court, which “[d]etermines [the] arbitrator’s fees,” id. § 5804(b)(4), has the authority to modify and eliminate the reductions where “exceptional circumstances exist.” Id. § 5806(b).

 

Although arbitrators possess broad authority under the Act to compel the production of documents, issue subpoenas, permit depositions, and make interim rulings, see id. § 5807(b), (c), the likely effect of section 5806(b) is that they will be more attentive to limiting the extent of discovery to matters that are essential to resolving issues in the arbitration. This also means that arbitrators will be less likely to allow significant dispositive motions. Additionally, due to the truncated proceedings, the arbitrator and the parties will be forced to work more efficiently. All told, the 180-day requirement should undoubtedly make arbitration under the DRAA faster, more efficient, and cheaper.

 

Waiver. Another feature of the Act that makes its procedures “rapid”—by preventing delays—is the requirement that parties waive their right to certain legal actions that would delay either the arbitration proceedings or the finality of an arbitration award. Specifically, under section 5803(c), a party to an arbitration agreement selecting the DRAA is “deemed to have waived the right to”:

 

  • Seek to enjoin the arbitration;
  • Remove any action under the DRAA to federal court;
  • Appeal or challenge an interim ruling or order of an arbitrator;
  • Appeal or challenge the final award, except under section 5809 (discussed below); and
  • Challenge whether an arbitration has been properly held, except under section 5809.

 

The waiver of these important rights should make arbitration under the DRAA less costly and limit some of the legal maneuvering parties engage in that has the effect of delaying a final, nonappealable award.

 

Challenge to the final award. Under section 12 of the FAA, a party has “three months after the award is filed or delivered” to file a petition challenging the award. 9 U.S.C. § 12 (emphasis added); accord Illinois Uniform Arbitration Act, 710 Ill. Comp. Stat. 5/12(b), /13(a) (“90 days after delivery of a copy of the award” (emphasis added)). This period under section 5809 of the Act is much faster: “A challenge to a final award must be taken within 15 days of the issuance of the final award.” Del. Code Ann. tit. 10, § 5809(b) (emphasis added).

 

More importantly, section 5809 streamlines the process for challenging an award by providing that any “challenge to a final award may be taken” directly to the state’s highest court, the Delaware Supreme Court; this is the only matter under the Act that the court has jurisdiction to consider. Id. § 5804(a). Typically, a petition challenging an award is filed in the trial court, and parties can appeal, as a matter of right, to the appellate court, and petition the highest court in the jurisdiction to hear the matter. The result is that it can take years to achieve a final, nonappealable judgment from the award. The Act avoids this prolonged appeals process.

 

The Delaware Supreme Court may “vacate, modify, or correct the final award” in accordance with the limited grounds on which a court may do so under the FAA, id. § 5809(c)—i.e., fraud, evident partiality, arbitrator misconduct, the arbitrators exceeded their powers, evident material miscalculation or mistake, award upon a matter not submitted, or the form of the award is imperfect. See 9 U.S.C. §§ 10, 11. The Delaware Supreme Court may also “order confirmation of a final award, which confirmation shall be deemed to be confirmation under § 5810(a)” (discussed below). Del. Code Ann. tit. 10, § 5809(c).

 

Section 5809(d) provides for an alternative to the appellate review by the Delaware Supreme Court. Parties may agree to have “[n]o appellate review of a final award” or to have “[a]ppellate review of a final award by [one] or more arbitrators, in which case appellate review shall proceed as provided in the [parties’] agreement.” The appellate arbitrator, like the Delaware Supreme Court, has the authority “to order confirmation of a final award” under section 5810(a). Id. § 5809(d)(2). Having just one level of appellate review under the Act should certainly lead to more rapid finality of arbitration awards.

 

Confirmation and final judgment. Section 5810 of the Act and the rules promulgated pursuant to it eradicate the need to file a separate petition in a trial court to confirm an arbitration award, and ostensibly make the process of securing a final judgment effortless. Unless a challenge is made to the final award, the award “is deemed to have been confirmed by the Court of Chancery on the fifth business day” following the 15-day period to challenge an award under section 5809(b). Id. § 5810(a). If the parties agreed to no appellate review, the “final award is deemed to have been so confirmed on the fifth business day following its issuance.” Id.

 

Regarding final judgment, section 5810 states that the appropriate court (i.e., the Delaware Chancery or Superior Court) “shall promptly enter a final judgment in conformity with [the] final award” upon filing of a petition from a party to an arbitration “in which a final award has been confirmed.” Further, the Act’s rules provide that “[n]o answer may be filed in the proceeding” seeking a final judgment, “[n]o discovery may be taken in the proceeding,” and “[u]pon the [c]ourt’s satisfaction that the requirements of [section 5810] have been satisfied, final judgment shall be entered forthwith.” Del. Ch. Rule 97(d)(3)–(5). The Act and its rules seem resolved to removing any hindrance to a final, nonappealable order of judgment once a final award is confirmed.

 

Conclusion
Initially, legal practitioners will probably be reluctant to suggest to business clients that they invoke the DRAA as the arbitration forum in agreements because the Act is still a new regime and is thus untested. However, if the potential effectiveness of the Act in speeding up arbitration and making it less costly is proven in due course, we should begin to see more practitioners and businesses willing to select the procedures of the Act to resolve disputes—assuming that the appointed arbitrators are knowledgeable, fair, and able to follow existing law.

 

Keywords: litigation, ADR, Delaware, arbitration, procedures, administrator, rapid

 

Charles E. Harris II is a partner and Sarah E. Reynolds is an associate with Mayer Brown LLP in Chicago, Illinois. Jeehee “Naomi” Yang is a 2017 J.D. candidate at Harvard Law School.

 


 
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