Delaware Tries Again on Rapid Arbitration

On March 12, 2015, House Bill 49 was introduced in the Delaware State House to enact the Delaware Rapid Arbitration Act (DRAA).  The purpose of the DRAA is stated to be 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. The Act is intended to provide an additional option by which sophisticated entities may resolve their business disputes.  

The proposed legislation comes in response to the finding in Delaware Coalition for Open Government v. Strine upholding a lower court decision striking down the confidential arbitration program that had been in place since 2009 in Delaware's Court of Chancery on the ground that it violated First Amendment standards of openness in court proceedings.  Under the confidential program, certain business disputes could be resolved by secret arbitration conducted by Court of Chancery judges rather than at trial.

In striking down the program, U.S. District Judge Mary A. McLaughlin found that its operations involved

• a sitting judge of the Chancery Court, acting pursuant to state authority, hears evidence, finds facts, and issues an enforceable order dictating the obligations of the parties… The court concludes that the Delaware proceeding functions essentially as a nonjury trial before a Chancery Court judge. Because it is a civil trial, there is a qualified right of access and this proceeding must be open to the public.

The DRAA is careful to avoid the constitutional issues encountered by the earlier program.  It stipulates that the role of the courts will be limited and public.  Judges of the Court of Chancery will not serve as arbitrators under DRAA.  Instead, any person appointed by the parties may serve as an arbitrator.  If the parties do not specify a person or a category of persons to serve, or if the person specified by the parties fails to serve, the Court of Chancery has discretion to appoint an arbitrator.

Further, under the DRAA, the Court of Chancery is vested with jurisdiction to enter relief in aid of arbitration until the arbitrator is appointed. In addition, the Court of Chancery is vested with authority to appoint an arbitrator in the event that the parties fail to do so, or the arbitrator they chose is unable or unwilling to serve. The Court of Chancery is also vested with jurisdiction to hear petitions for relief from arbitrators who, due to “exceptional circumstances” believe that the financial penalties of the Act should not apply to them. Finally, the DRAA provides for limited review of arbitral awards in the Supreme Court of Delaware, unless the parties contract for no review or, alternatively, for review before an appellate arbitral panel.

.Other features of the DRAA include strict limits on how long an arbitration should take and penalizes arbitrators who fail to act within those limits. Drafters also expect that use of DRAA will help avoid the extensive e-discovery that sometimes occurs in arbitrations not under the Act.

Why seek to implement DRAA in light of the failure of the earlier arbitral program?  The race to remain competitive as a state amenable to business interests is never-ending.  The race has shifted its focus from being the preferred state of incorporation to being the state that offers the most favorable regime of corporate governance.  With a rapid arbitration process, Delaware seeks to provide a system it believes is desired by the business community as an alternative to otherwise expensive litigation. 

Whatever one thinks about the merits of arbitration, it is interesting to consider the motives of (or the pressure put on?) the Delaware legislature in passing the DRAA while at the same time considering legislation to prohibit fee-shifting by-laws (discussed here and here).  On the one hand the legislature seems to be accommodating business interests while on the other it disadvantages them.  The race to lead—for better or worse—in corporate governance matters continues apace.