Innovation in Arbitration Law: The Delaware Rapid Arbitration Act

In 2015, Delaware adopted the Delaware Rapid Arbitration Act (DRAA). The DRAA replaced Delaware’s system of Court of Chancery arbitration (under which Court of Chancery judges could serve as arbitrators in confidential arbitration proceedings), which had been held unconstitutional as violating the First Amendment right of access to the courts.[1] The stated purpose of the DRAA “is to give Delaware business entities a method by which they may resolve business disputes in a prompt, cost-effective, and efficient manner.” The process by which the DRAA was enacted itself was rapid. The DRAA was introduced into the Delaware House on March 12, 2015, and the Governor signed it into law (after it passed both the Delaware House and Senate by near unanimous votes) on April 2, 2015.

In a forthcoming symposium article in the Pepperdine Law Review, I analyze the DRAA in more detail. In this post, I discuss the scope of the DRAA and the extent to which it in fact facilitates “rapid arbitration” over and above what parties themselves can do by contract.

Scope of the DRAA

By its terms, the DRAA only applies when the statutory requirements are met. First, the arbitration agreement must be signed by all the parties to the arbitration. A party that has not signed the arbitration agreement cannot be a party to a DRAA arbitration. The purpose of the signature requirement (which is atypical in arbitration law: the Federal Arbitration Act (FAA), for example, does not require arbitration agreements to be signed) is “to exclude the possibility that provisions in a certificate of incorporation or by-laws would bind stockholders who did not personally sign a document expressly agreeing to arbitration under the Act.” But the signature requirement also precludes enforcing an arbitration agreement on the basis of tacit assent or most theories commonly used to bind non-signatories to arbitration agreements.

Second, at least one party to the agreement must be a Delaware corporation. This requirement appears designed to make Delaware a more attractive venue for incorporation. But it lessens the value of the DRAA for non-Delaware parties, limiting the competitiveness of Delaware as a location for arbitration proceedings.

Third, no party to the arbitration can be a “consumer,” defined as “an individual who purchases or leases merchandise primarily for personal, family, or household purposes.”[2] “Merchandise,” in turn, is defined as “any objects, wares, goods, commodities, intangibles, real estate or services, other than insurance.” So most consumer contracts are excluded from the DRAA, but insurance contracts are not. Nor are employment contracts, even though the given purpose of the exclusion is to protect “vulnerable parties.”

Fourth, the contract must provide that it is governed by Delaware law and expressly refer to the “Delaware Rapid Arbitration Act.” In other words, parties must expressly opt in to application of the statute.

“Rapid” Arbitration

Assuming the above requirements are met, The DRAA seeks to foster a system of “rapid” arbitration in several ways, the most prominent of which are described below. To the extent the DRAA reduces or speeds up court involvement in the arbitration process, it provides a potentially attractive option for parties. Its provisions directed at the arbitration process are less attractive, because in most if not all cases parties already can replicate those provisions by contract.

  1. The DRAA precludes courts from issuing anti-arbitration injunctions, which are injunctions that prohibit parties from proceeding with an arbitration. By comparison, both the FAA and the Delaware Uniform Arbitration Act permit courts to issue anti-arbitration injunctions.
  1. The DRAA delegates to the arbitrator issues of substantive arbitrability—“gateway questions relating to the scope of an arbitration provision and its applicability to a given dispute.”[3] These issues otherwise are ones over which a court would might have the final say. But even without the DRAA, parties can agree to such an allocation of authority in their arbitration agreement, and, indeed, almost all courts have held that standard institutional arbitration rules allocate substantive arbitrability issues to the arbitrator.
  1. The DRAA sets strict time limits for awards and enforces those time limits by providing for the arbitrator’s fee to be reduced if the time limit is not met. If the award is late by less than 30 days, the arbitrator’s fee is reduced by 25%, if the award is between 30 and 60 days late, the arbitrator’s fee is reduced by 75%, and if the award is more than 60 days late the arbitrator’s fee is reduced by 100%. Again, the parties could adopt similar time limits and sanctions by contract, and many arbitration institutions have promulgated rules for expedited arbitrations. Indeed, the International Chamber of Commerce recently announced that it would reduce the arbitrator’s fees for a late award.
  1. The DRAA provides that a challenge to an arbitral award may be filed directly with the Delaware Supreme Court. It also permits the parties to replace court review of an award with an arbitral appeals panel or do away with review altogether. One federal court of appeals has held that parties may waive the right to appeal a district court’s decision on whether to vacate an arbitration award, which like the DRAA would remove one tier of review. But that one tier of review would be to a federal district court, not the Delaware Supreme Court as under the DRAA. And while the FAA permits parties to agree to an arbitral appeals panel, courts have consistently held that the FAA does not permit parties to waive court review of arbitral awards altogether.

Conclusion

It is too early to evaluate the success of the DRAA. So far, it has not had widespread acceptance, at least using observable measures. As of February 1, 2016, only one material contract filed with the SEC has provided for DRAA arbitration.[4] But not all contracts that might agree to DRAA arbitration must be filed with the SEC. In addition, two corporations have cited the DRAA (among other reasons) in explaining to shareholders why they were reincorporating in Delaware.[5] But there is no way to tell whether the DRAA actually influenced the corporations’ decisions in these cases, or whether it has influenced corporate decisions not announced to shareholders in SEC filings. The analysis here suggests that if parties agree to DRAA arbitration, it likely will be because of the provisions of the Act limiting court involvement in arbitration, not the provisions dealing with the arbitration process (since parties already can replicate those provisions by contract).

ENDNOTES

[1] Del. Coal. for Open Gov’t v. Strine, 894 F. Supp. 2d 493, 494 (D. Del. 2012), aff’d, 733 F.3d 510 (3d Cir. 2013), cert. denied, 134 S. Ct. 1551 (2014).

[2] The DRAA uses the definition from Del. Code Ann., tit. 8, § 2731.

[3] Viacom Int’l Inc. v. Winshall, 72 A.3d 78, 82 (Del. 2013).

[4] See Ener-Core, Inc. Indemnification Agreement § 5.1 (Nov. 5, 2015) (“Alternatively, Indemnitee, at Indemnitee’s option, may seek an award in arbitration to be conducted pursuant to the Delaware Rapid Arbitration Act.”).

[5] See Mentor Capital, Inc., Preliminary Information Statement (Schedule 14C) 3 (June 23, 2015); PICO Holdings, Inc., Definitive Proxy Statement (Schedule 14A) 18 (May 27, 2015).

The preceding post comes to us from Christopher R. Drahozal, Associate Dean for Research & Faculty Development and John M. Rounds Professor of Law at The University of Kansas School of Law.  This post is based on an article forthcoming in the Pepperdine Law Review, which is entitled “Innovation in Arbitration Law: The Case of Delaware” and available here.