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Delaware Court of Chancery Adopts New Arbitration Rules

March 15, 2010

New rules recently adopted by the Delaware Court of Chancery allow business entities to consent to voluntary binding arbitration before one of the Court’s experienced jurists.  The rules provide three distinct advantages that may appeal to many companies: confidential proceedings, swift resolution, and the opportunity to resolve a purely monetary dispute before the Court.

The new arbitration rules allow parties to voluntarily submit their dispute for resolution before a judge or master sitting permanently on the Delaware Court of Chancery.  The agreement to arbitrate before the Court may predate the dispute and be contained in a contract between the parties, or may take the form of a stipulation entered into after the dispute arises.  The rules and the enabling statute establish three preconditions to arbitration: (1) all of the parties must consent to arbitration; (2) at least one party must be a business entity formed or organized under the laws of Delaware or having its principal place of business in Delaware; and (3) no party may be a consumer.  In addition, if the dispute seeks purely monetary relief, the amount in controversy must exceed one million dollars.

All aspects of the arbitration are confidential and not part of the public record, unless and until the proceedings are the subject of an appeal.  The rules provide for a rapid path toward resolution of the dispute.  After the appointment of an arbitrator (which will be one of the Vice Chancellors, the Chancellor or a Master sitting permanently on the Court), the parties and the arbitrator shall participate within 10 days in a preliminary conference to discuss the nature of the dispute and scheduling, and shortly thereafter will hold a preliminary hearing to address the conduct of discovery and the arbitration hearing.  The rules require the parties to “exchange information” necessary and appropriate to prepare for the arbitration hearing and indicate that the discovery rules of the Court of Chancery shall apply unless the parties otherwise agree.  The arbitration hearing will generally occur no later than 90 days after the petition is filed.  The rules recognize that all disputes are different and specifically allow parties to agree upon different or additional provisions so as to resolve the dispute in an efficient manner. 

In light of the significant benefits provided by the rules, companies who are drafting new agreements may wish to consider stipulating to arbitration under the new rules in the event any dispute arises.  The rules provide that a consent to arbitrate is sufficient if it contains the following language: “[t]he parties agree that any dispute arising under this agreement shall be arbitrated in the Court of Chancery of the State of Delaware, pursuant to 10 Del. C. § 349.”  In addition, companies currently facing a dispute may wish to consider stipulating to an arbitration under the rules, particularly if confidentiality and/or swift resolution are important considerations.

To view the order creating the new rules, click here.