Delaware Rapid Arbitration Act

On April 2, 2015, Delaware Governor Jack Markell signed legislation enacting the Delaware Rapid Arbitration Act (“DRAA”) which became effective on May 2, 2015. 10 Del. C. § 5801, et seq.¹ On June 17, 2015, the Delaware Supreme Court adopted the Delaware Rapid Arbitration Rules (the “Rules”), which went effective on June 22, 2015, to govern procedure for arbitrations brought under the DRAA.² This eUpdate outlines the key provisions of the DRAA and the Rules, which together are designed to fulfill the DRAA’s purpose of providing parties an innovative option for speedy, inexpensive and confidential arbitration proceedings.

Delaware’s adoption of the DRAA follows the rise and fall of a 2009 arbitration act that provided for the speedy, confidential, non-public arbitration of business disputes by sitting members of the Delaware Court of Chancery. See 10 Del. C. § 349; Varallo, et al., The Practitioner’s Guide to the Delaware Rapid Arbitration Act (2015) (hereinafter “Practitioner’s Guide”). In an action brought against the then-sitting Chancellor and Vice Chancellors by the Delaware Coalition for Open Government, in 2013 the U.S. District Court for the District of Delaware deemed the 2009 act unconstitutional because it denied public access to government-sponsored proceedings in violation of the First Amendment. Del. Coal. for Open Gov’t v. Strine, 894 F.Supp.2d 493 (D. Del. Aug 30, 2012). U.S. Court of Appeals for the Third Circuit affirmed that decision, and the Supreme Court denied certiorari. Del. Coal. for Open Gov’t v. Strine, 733 F.3d 510 (3d Cir. 2013), cert. denied 134 S.Ct. 1551.

The DRAA is designed to resolve the constitutional issues addressed by the Federal Courts, and provide an innovative and flexible arbitration scheme designed to redress delays and costs that have come to plague conventional arbitration processes. For example, the DRAA addresses delays in the conventional arbitration processes by prohibiting challenges to an arbitrator’s interim orders, requires entry of a final decision within a default 120 days from commencement of the arbitration (absent agreement(s) extending the default 120-day period for no more than 60 days in the aggregate), eliminates the need for a separate proceeding to confirm a final judgment and allows for limited review of final decisions. Given its speed and efficiency, the DRAA is an ideal mechanism for parties seeking a dispute resolution process that is straightforward, flexible and promotes a speedy process free from typical delay tactics.

Parties that want to avail themselves of the DRAA procedures should be aware that the operative agreement through which arbitration under the DRAA is elected must include certain language in order to qualify for arbitration under the DRAA. Specifically, an arbitration agreement must contain at a minimum: (1) an agreement to arbitrate disputes pursuant to the DRAA that specifically references the DRAA by name; (2) a statement that the agreement to arbitrate is governed by Delaware law; and (3) signatures by parties to the arbitration. In addition, at least one party to arbitration must have principal offices in Delaware or be a Delaware-organized business entity. The definition of a “business entity” is broad and encompasses a corporation, statutory trust, business trust or association, a real estate investment trust, a common-law trust, or any other unincorporated business, including limited or general partnerships, or a limited liability company.” 10 Del. C. § 346(b). Notably, neither the DRAA nor the Rules prohibits the formation of a special purpose Delaware entity for the purpose of invoking the DRAA. See Practitioner’s Guide at 17. The DRAA, however, may not be used to resolve disputes with consumers, which is defined as individuals who purchase or lease merchandise primarily for personal, family or household purposes.

The DRAA contains innovative provisions to accomplish its goals of being prompt, cost-effective, and efficient. 10 Del. C. § 5802. In addition, the DRAA offers flexibility to accommodate not only a variety of disputes, but also the resolution of disputes on the parties’ agreed terms. The following is an overview of some key DRAA provisions.

Fast Selection of Arbitrators. The DRAA permits parties to freely contract as to the identity of one or more arbitrators or the process to choose arbitrators. Parties may agree for a non-legal professional, i.e. financial specialist, accountant, or industry expert, to be appointed as an arbitrator. In the absence of agreement of the parties, the DRAA provides for the parties or the Court of Chancery to implement a swift process to select the arbitrator(s). Notably, the Court of Chancery is limited to selecting a senior member of the Delaware bar. These time-saving mechanisms eliminate delays that can arise from disputes in selecting arbitrators.

Resolution of a Wide Range of Disputes. The DRAA does not have a dollar amount threshold. This allows parties to use the DRAA to arbitrate non-monetary disputes, including seeking declarations. Final awards are promptly entered by the Court of Chancery or, in cases where there are only money damages, in the Delaware Superior Court.

Compressed Timeframe. Absent a provision in an arbitration agreement fixing the time for issuance of a final award, the arbitrator must issue a final award within 120 days of accepting his or her appointment. Parties can stipulate to extensions of the 120-day frame by no more than a total of 60 days. The arbitrator’s fees are reduced for late issuance of awards - by 25% if 30 days late, 75% if between 30 and 60 days late, and 100% if more than 60 days late. Unless the parties have contracted for fee-shifting or allocation of fees and expenses in their arbitration agreement, the arbitrator’s fees and expenses, and allocation thereof, are included in the final award.

Empowering Arbitrators. The DRAA vests arbitrators with broad authority, facilitating quick resolution of disputes that arise during the arbitration process. Under the DRAA, arbitrators resolve issues of arbitrability and determine the scope of their own remedial authority. Arbitrators can also oversee the discovery process and issue discovery orders.

Preemption of Delay Tactics. The parties to arbitration under the DRAA are automatically deemed to waive objections to personal and subject matter jurisdiction for the arbitration and for certain purposes to the Delaware courts. These provisions avoid time consuming jurisdiction disputes. Other rights automatically waived are the rights to enjoin the arbitration, remove it to federal court, appeal interim rulings and orders, or challenge whether the arbitration was properly held. Removing these procedures from the realm of possibility in DRAA arbitration ensures a streamlined process and finality in the result.

Limitations on Review of Final Awards. Absent a party seeking appellate review, a final award is confirmed on the fifth business day following the challenge period. If the arbitration agreement waives appellate review, a final award is automatically confirmed on the fifth business day following its issuance. Where appellate review is available to parties under their agreements, a challenge to a final award can only be made to the Delaware Supreme Court within 15 days of issuance of the final award. The Delaware Supreme Court may only vacate, modify, or correct a final award under the standards provided by the Federal Arbitration Act.

The underlying policy of the DRAA is to give maximum effect to the principle of “freedom of contract” and to “the enforceability of agreements” among the parties electing arbitration under the DRAA. 10 Del. C. § 5811. The Rules complement this goal while maintaining focus on the goals of speed, cost effectiveness, and efficiency. Therefore, as discussed herein, parties can contract for procedures governing arbitrations between them, so long as those contracted-for provisions are not inconsistent with the DRAA. Rule 3. The Rules govern arbitration procedures for DRAA arbitrations to the extent parties’ arbitration agreements are silent. The following is an overview of key Rules that drive the DRAA process.

Confidentiality. DRAA arbitrations are, by default, confidential, meaning no work product prepared for or communications relating to the arbitration, or information made part of conferences or hearings can be disclosed in judicial or administrative proceedings, absent consent or waiver by the parties. Practitioners should be aware, however, that an appeal to the Delaware Supreme Court will not preserve that confidentiality.

Short Timeframe for Filing Pleadings. Under the Rules, an arbitration claimant must serve a complaint within two days of the appointment of an arbitrator. Answers must be served within five days of service of the complaint. Replies for counterclaims and affirmative defenses are due within three business days following service of the answer.

Minimizing Discovery and Discovery Disputes. The Rules require parties to attempt to agree on the pre-hearing exchange of information. To the extent the parties cannot agree, the arbitrator can resolve disputes regarding the discovery process, as well as discovery disputes. The Rules dictate that the scope of information exchanged “should ordinarily be substantially less broad than the scope of information that might be subject to discovery in civil litigation.” Rule 17.

Quick Hearings. Parties are free to agree on the duration and location of the arbitration hearing in their arbitration agreement. The default under the Rules is that an arbitration hearing takes place in one day, and would take place at location designated by the arbitrator and in person unless the arbitrator determines otherwise in an order after consulting the parties.

Parties wishing to take advantage of the DRAA by invoking it in either newly-drafted or revised agreements should take notice of the provisions outlined in this eUpdate. Should you have any questions regarding the information provided, please contact Robert W. Mallard, Mike Maxwell or Alessandra Glorioso in Dorsey & Whitney’s Delaware office.