As 2019 drew to a close, one of the Delaware Court of Chancery’s final opinions of the decade clarified certain issues surrounding when the courts of Delaware are the proper fora for adjudicating matters that are—or might be—subject to the parties agreement to arbitrate their disputes. On Dec. 30, 2019, Chancellor Andre Bouchard issued his memorandum opinion in Gulf LNG Energy v. ENI USA Gas Marketing, C.A. No. 2019-0460, in which he enjoined, in part, the prosecution of a second arbitration between the parties as a later, and impermissible, collateral attack on the final award in a prior arbitration.
In 2007 the plaintiffs and defendant had entered into an agreement pursuant to which the plaintiffs would construct a terminal in Mississippi to handle the importation of liquefied natural gas, and defendant would contract to use the facility and pay certain fees to the plaintiffs. Plaintiffs spent over $1 billion to construct the facility, but because of changes in the natural gas markets, the defendant sought to have the agreement declared terminated because its fundamental purpose had become frustrated. To that end, in March 2016, the defendant here filed an arbitration proceeding before the American Arbitration Association’s International Centre for Dispute Resolution seeking a declaration that the purpose of the agreement had been frustrated and that the agreement had been terminated, and a declaration that the agreement could be terminated by the defendant at any time because the plaintiffs had breached certain terms of the agreement (the First Arbitration). In June 2018, the arbitration tribunal issued its final award, in which it declared that the purpose of the agreement had been frustrated by the change in the natural gas markets; and, therefore, the agreement had been terminated. The arbitration tribunal did not, however, decide the contractual claim before it, as it deemed it "academic and deserving of no further consideration … ." The arbitration tribunal also ordered the defendant to pay the plaintiffs $462 million as restitution for certain benefits the defendant received from the plaintiffs’ partial performance of the terms of their agreement related to the terminal facility. On Feb. 1, 2019, the Court of Chancery confirmed the final award from the First Arbitration.
On June 3, 2019, the defendant filed a second notice of arbitration with the AAA asserting claims that the plaintiffs breached their agreement (which corresponded to the contract claims that were left undecided in the First Arbitration), and claims for negligent misrepresentation that allege the plaintiffs engaged in "wrongful conduct" before the arbitration tribunal in the First Arbitration (the Second Arbitration). Shortly thereafter, on June 17, 2019, the plaintiffs filed this proceeding in the Court of Chancery seeking to enjoin the Second Arbitration. The court’s memorandum opinion addresses the motion for judgment on the pleadings filed by the plaintiff.
Ultimately the parties relied upon two lines of arbitration authority to support their respective positions. The plaintiffs’ argued that the Second Arbitration was nothing more than a collateral attack on what should be a final, determinative award in arbitration, and therefore the collateral attack doctrine compelled the Court of Chancery to enjoin the defendant from prosecuting the Second Arbitration. The defendant argued that authority holding that broad arbitration clauses that compel the submission of the issue of "arbitrability" to the arbitrators themselves controls and compels the Court of Chancery to reject the requested injunction of the Second Arbitration so that the arbitrators could decide, in the first instance, whether the matters submitted were properly before them.
The collateral attack doctrine flows from the premise that the Federal Arbitration Act (FAA), and parties’ consent to use arbitrations thereunder to resolve their disputes, are characterized by "limited review of and a tight deadline to challenge an arbitration award to ensure that finality is achieved promptly and efficiently." To foster those goals, the FAA permits parties to challenge arbitration awards or decisions in very limited circumstances. For instance, Section 10 of the FAA allows a party to seek to vacate an arbitration award only where "the award was procured by corruption, fraud, or under means," "there was evident partiality or corruption in the arbitrators," "the arbitrators were guilty of … misbehavior by which the rights of any party have been prejudices," or "the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter was not made." Similarly, a party may seek to modify an arbitration award under the FAA where "there was an evident material miscalculation of figures or an evident material mistake," "the arbitrators have awarded upon a matter not submitted to them," or "the award is imperfect in matter of form not affecting the merits of the controversy." Not only are the standards high for vacating or modifying an arbitration award, but also any such challenges to an arbitration award must be submitted within three months of the award. The collateral attack doctrine, however, has been applied where parties dissatisfied with an arbitration award have taken subsequent action (either in later litigation or a later arbitration) that is deemed to be nothing more than an attempt to vacate or modify the earlier award outside the narrowly permissible bounds within the FAA—hence a "collateral attack." In such situations, and on appropriate facts, courts have acted to enjoin the collateral attack as a forbidden "arbitral mulligan."
As noted, however, in defending its choice to initiate the Second Arbitration, the defendant relied on equally venerable legal principles addressing who—as between the courts or the arbitrators—is to decide in the first instance what matters are properly subject to arbitration (i.e., "the question of arbitrability"). Thus, the defendant argued that the Court of Chancery should refuse to enjoin the Second Arbitration because the question of whether the claims of the Second Arbitration were previously and conclusively arbitrated in the First Arbitration was to be answered by the arbitrators in the Second Arbitration. The general rule is that the question of arbitrability is one for judicial determination, "unless the parties clearly and unmistakably provide otherwise." Under Delaware law, such clear and unmistakable evidence of an intent to submit the question of arbitrability to the arbitrator—rather than a court—turns on whether the specific arbitration clause: "generally provides for arbitration of all disputes," and "incorporates a set of arbitration rules that empowers arbitrators to decide arbitrability." The chancellor found that the arbitration clause at issue here met both prongs of this test, and therefore, the parties intended the question of arbitrability be decided by the arbitrators.
In applying these two theories to the matter before it, the Court of Chancery found that each was properly invoked when applied to the two types of claims being asserted in the Second Arbitration. The negligent misrepresentation claim was enjoined as being an improper collateral attack on the arbitration award, but the contract claim was allowed to proceed so that the arbitrators in the Second Arbitration could determine whether the claim was precluded by the prior award.
The Court of Chancery reasoned that the defendant’s negligent misrepresentation claim in the Second Arbitration was founded upon a theory that the plaintiff had made false representations to the arbitrators in the First Arbitration that directly affected the amount of the arbitration award. Given this foundation, the Court of Chancery found that the negligent misrepresentation claim was a collateral attack on the award from the First Arbitration for two reasons. First, the Chancellor found to be the "epitome of a collateral attack" the reality that the defendant, through the negligent misrepresentation claim, sought to essentially "claw back some or all of the damages that were awarded to plaintiff in an arbitration proceeding that is supposed to be concluded." The court also found critical the fact that even though the negligent misrepresentation claim alleged "misconduct that tainted" the arbitration award in the First Arbitration, the defendant had made no effort to seek to vacate the award on those grounds. Because the Court of Chancery found the negligent misrepresentation claim to be a collateral attack, it enjoined the defendant’s prosecution of those claims in the Second Arbitration.
In evaluating the contract claim, however, the court found that it was not a collateral attack on the award, as the contract claim—while asserted in the First Arbitration—was never ruled on in the award, as it was deemed moot by the arbitrators based on their rulings on other issues. Therefore, the court found that the broad arbitration clause in the agreement between these parties required that the arbitrators in the Second Arbitration decide whether the contract claim was justiciable or precluded by the award in the First Arbitration, and thus the chancellor refused to enjoin the presentation of the contract claim in the Second Arbitration.
Richard L. Renck, a partner at Duane Morris, has nearly 20 years of experience litigating matters in both the state and federal courts in Delaware. His practice focuses on complex corporate and commercial litigation with a particular emphasis on corporate governance disputes and statutory actions arising under the Delaware General Corporation Law.
Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.