New Arbitration Rules

The Court of Chancery adopted Rules 96'98, which provide for arbitration of any business dispute where: 1) the parties consent (orally or in writing) to the arbitration; 2) at least one party is a business entity formed or organized under the laws of Delaware or having its principal place of business in Delaware; and 3) the remedy involves solely a claim for money damages in excess of $1 million. Rule 96(d)(7) even provides the requisite “consent to arbitrate” language: “The 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.” If those conditions are met, the business dispute qualifies to be arbitrated before one of the current judges or masters of the Court of Chancery.

Flexibility and Speed Are the Watchwords

The new arbitration rules are designed for speed and flexibility in the alternative dispute resolution process. First and foremost, the arbitration hearing will be scheduled very quickly ' generally within 90 days of the filing of a petition. The linchpin for this “fast-track” approach is Rule 96(c), which allows the parties, with the consent of the Arbitrator, to customize the arbitration process to fit their particular needs or situation. In particular, the rules states that “[t]he parties with the consent of the Arbitrator may change any of these arbitration rules by agreement and/or adopt additional arbitration rules. Except to the extent inconsistent with these rules, or as modified by the Arbitrator or the parties, Court of Chancery Rules 26 through 37 shall apply to the Arbitration proceeding.” So, for example, if the parties wanted to follow certain rules of evidence or procedure such as the American Arbitration Association rules, the United Nations Commission on International Trade Law Arbitration rules or even the Federal Rules of Civil Procedure, they can either include that provision in their agreement or discuss the matter with the Arbitrator. If no particular rules are identified, the default provisions for the proceedings will be the Court of Chancery Rules 26 through 37 for discovery, and Rules 96-98.

Since the main goal of the court's arbitration and mediation procedures is to provide a vehicle for the parties to reach a final resolution of their business dispute, throughout the arbitration process the Arbitrator will confer with the parties to see if the process is working effectively. If it is not, the Arbitrator will discuss other options the parties might wish to pursue. At any stage of the process, the parties can agree to stop and go to mediation or some other non-adjudicative method for resolving the dispute. However, unless the parties otherwise agree, the Arbitrator cannot change hats and become a mediator and vice versa.

Confidentiality

The entire arbitration process is confidential from the filing of the petition up to and including the issuance of an award by the Arbitrator. When a petition is filed to start the arbitration process, it is sent to but not filed with the Register in Chancery; it does not become part of the public docketing system. All memoranda and work product contained in the file of the Arbitrator are confidential. In addition, all communications regarding the arbitration are confidential to allow for candid, frank and open discussions among the parties and the Arbitrator regarding the strengths and weaknesses of the parties' positions as well as the potential for settlement. Indeed, any communication made in connection with the arbitration that relates to the dispute being arbitrated, is confidential and not subject to disclosure in any court or administrative proceeding unless: 1) all parties to the arbitration agree in writing to waive the confidentiality; or 2) the information in question is otherwise subject to discovery. If there is an appeal of the Arbitrator's decision to the Delaware Supreme Court, the confidential nature of the proceedings changes. When an appeal is filed, the record from the Court of Chancery is filed with the Supreme Court in accordance with its Rules so it then becomes part of the public record.

The Petition and Filing Fee

To get the arbitration process started, a company, through its Delaware counsel, files a petition setting forth the nature of the dispute, the names and addresses of the parties, the claims, the amount in controversy, the remedy sought and a statement that “all parties have consented to arbitration by agreement or stipulation, that at least one party is a business entity, that at least one party is a business entity formed or organized under the laws of Delaware or having its principal place of business in Delaware, and that no party is a consumer with respect to the dispute.” The petition must be accompanied by a filing fee of $12,000, which covers the costs associated with the first day of the Arbitration. Each additional day (full or partial) that the court is engaged in the arbitration will cost $6,000 per day.

Assignment of the Arbitrator

After the petition is filed, the Chancellor, who is the chief judge of the Court of Chancery, appoints the Arbitrator. While the parties do not participate in the selection of the Arbitrator, all of the members of the court are well-qualified with diverse backgrounds and very experienced based on the variety of sophisticated and complex matters that come before the Court of Chancery. For example, if the dispute involves intellectual property or technology, Vice Chancellor Donald F. Parsons Jr., would be particularly well-suited to address that type of dispute since he brings to the table not only his six and one-half years of experience on the Court of Chancery, he also has a B.S. degree in electrical engineering and over 24 years of experience in private practice specializing in intellectual property litigation.

Initial Scheduling Conference, Discovery and Preliminary Hearing

After the Arbitrator is assigned, the Arbitrator contacts the parties to set a date and time for the preliminary telephonic conference, which must occur within 10 days of the filing of the petition, unless the parties and the Arbitrator agree to extend that time. At the preliminary conference, the Arbitrator will discuss with the parties the nature of the dispute as well as the parties' view as to the timing and length of the arbitration hearing. While discovery is truncated given the expedited nature of the proceedings, the parties are free to set whatever parameters they want in terms of the exchange of information. This is also the time when the Arbitrator schedules a date for a preliminary hearing.

Preliminary Exchange of Information

While the Court of Chancery does not have a requirement that is comparable to a Rule 26(f) scheduling conference under the Federal Rules of Civil Procedures (and the requisite pre-conference meet and confers regarding the scope and form of discovery), for arbitrations, Court of Chancery Rule 97(f) comes close. Under Rule 97(f), unless the parties otherwise agree and the Arbitrator approves, before the preliminary hearing, the parties have to exchange “information necessary and appropriate for the parties to prepare for the arbitration hearing and to enable the Arbitrator to understand the dispute ' .” Since this exchange of information could take place less than two weeks from the date of the filing of the petition, a significant amount of planning, preparation and coordination by counsel and their clients in terms of identifying, preserving, collecting and preparing information for production that is “necessary and appropriate” for the arbitration hearing must occur. Cooperation is the key. The parties are required to “meet and confer” in an attempt to agree on the scope of the discovery, but time is of the essence so if the parties are unable to reach an agreement, the Arbitrator will mandate what information must be produced.

The Preliminary Hearing

At the preliminary hearing, which is done telephonically and as soon as practicable after the preliminary conference, the Arbitrator addresses substantive and procedural issues to set the course for completion of discovery and preparation for the arbitration hearing. Rule 96(d)(4) lists the following topics to be discussed at the preliminary hearing: “(i) service of statements of claims, damages and defenses, a statement of the issues asserted by each party and positions with respect thereto, and any legal authorities upon which the parties rely, (ii) stipulations of fact, (iii) the scope of discovery, (iv) exchanging and premarking of exhibits for the hearing, (v) the identification and availability of witnesses, including experts, and such matters with respect to witnesses, including their qualifications and expected testimony as may be appropriate, (vi) whether, and to what extent, any sworn statements and/or depositions may be introduced, (vii) the length of hearing, (viii) whether a stenographic or other official record of the proceedings shall be maintained, (ix) the possibility of mediation or other non-adjudicative methods of dispute resolution, and (x) the procedure for the issuance of subpoenas.” Soon after the preliminary hearing, the Arbitrator will issue a scheduling order memorializing the decisions from the preliminary hearing.

The Arbitration Hearing And the Award

The Arbitration hearing can be scheduled for a single day or multiple days (consecutive or not) depending on the needs of the parties. Unless the parties agree otherwise, the hearings are confidential so only the parties, their representatives and their counsel may attend the hearing. As with any proceeding in the Court of Chancery, Delaware counsel for each party is required to attend. Under Rule 98(f)(1), the Arbitrator has broad authority to “grant any remedy or relief that the Arbitrator deems just and equitable and within the scope of any applicable agreement of the parties.” Thus, the Arbitrator has the authority to issue a final, binding award as well as “other decisions, including interim, interlocutory, or partial rulings, orders and awards.” After the Arbitrator issues the award, a final judgment or decree is then entered with the Register in Chancery and can be enforced just like any other judgment or decree.

Conclusion

Arbitration clauses have long been popular provisions for inclusion in contracts to resolve such matters as construction and commercial disputes as well as intellectual property conflicts. Such clauses, however, have not been very popular in merger or acquisition agreements, but with the new arbitration rules for the Delaware Court of Chancery that may change. These new rules expand the court's traditional jurisdiction to the point that arbitration in the Delaware Court of Chancery may also appeal to a much broader audience, possibly even global companies with complex international disputes involving multiple parties. Unlike mediation, which is best addressed when the parties are either equally motivated or equally frustrated at the litigation process, arbitration that can be streamlined, fast-tracked and confidential. The Delaware Court of Chancery may be the perfect fit for those in-house counsel looking for a quick “close-the-deal” solution to their business dispute.

Kevin F. Brady is a Litigation Partner and Chair of the Business Law Group of the Wilmington, DE, office of Connolly Bove Lodge & Hutz LLP. Brady's practice includes corporate and complex commercial litigation. A member of the Court of Chancery Rules Committee, Brady is frequently requested to participate as an author, speaker and presenter in the areas of Delaware corporate law, electronic discovery, records management, data security, insurance, ethics and professionalism. He can be reached at [email protected].

The financial crisis has driven companies and their in-house counsel to focus on reducing costs and risks, especially when it comes to the ever-increasing legal costs and risks associated with litigation. While traditional alternative dispute resolution programs have been available for some time, they have drawbacks, such as: 1) timing (faster than traditional litigation but complex cases can take a long time to resolve); 2) substantial fees for experienced private arbitrators; and 3) the inability to appeal an arbitration award. Now there is a faster, less expensive, appealable option for in-house counsel to consider.

Following in the footsteps of its very successful mediation program, the Delaware Court of Chancery recently added a new weapon to its arsenal of alternative dispute resolution options to resolve business disputes with streamlined procedures that should reduce both the costs and the risks associated with the normal litigation process. Effective Feb. 1, 2010, that court implemented new fast-track arbitration procedures under 10 Del. C. ' 349, which provide for voluntary, confidential and binding resolution of business disputes before one of the members of the Court of Chancery usually within 90 days of requesting arbitration. With these new rules, the Court of Chancery now offers in-house counsel an opportunity to have a judge or master resolve a significant business dispute that would not otherwise qualify to be resolved by the Court of Chancery given its traditional equitable jurisdiction.

Qualifications for Arbitration

The Court of Chancery adopted Rules 96'98, which provide for arbitration of any business dispute where: 1) the parties consent (orally or in writing) to the arbitration; 2) at least one party is a business entity formed or organized under the laws of Delaware or having its principal place of business in Delaware; and 3) the remedy involves solely a claim for money damages in excess of $1 million. Rule 96(d)(7) even provides the requisite “consent to arbitrate” language: “The 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.” If those conditions are met, the business dispute qualifies to be arbitrated before one of the current judges or masters of the Court of Chancery.

Flexibility and Speed Are the Watchwords

The new arbitration rules are designed for speed and flexibility in the alternative dispute resolution process. First and foremost, the arbitration hearing will be scheduled very quickly ' generally within 90 days of the filing of a petition. The linchpin for this “fast-track” approach is Rule 96(c), which allows the parties, with the consent of the Arbitrator, to customize the arbitration process to fit their particular needs or situation. In particular, the rules states that “[t]he parties with the consent of the Arbitrator may change any of these arbitration rules by agreement and/or adopt additional arbitration rules. Except to the extent inconsistent with these rules, or as modified by the Arbitrator or the parties, Court of Chancery Rules 26 through 37 shall apply to the Arbitration proceeding.” So, for example, if the parties wanted to follow certain rules of evidence or procedure such as the American Arbitration Association rules, the United Nations Commission on International Trade Law Arbitration rules or even the Federal Rules of Civil Procedure, they can either include that provision in their agreement or discuss the matter with the Arbitrator. If no particular rules are identified, the default provisions for the proceedings will be the Court of Chancery Rules 26 through 37 for discovery, and Rules 96-98.

Since the main goal of the court's arbitration and mediation procedures is to provide a vehicle for the parties to reach a final resolution of their business dispute, throughout the arbitration process the Arbitrator will confer with the parties to see if the process is working effectively. If it is not, the Arbitrator will discuss other options the parties might wish to pursue. At any stage of the process, the parties can agree to stop and go to mediation or some other non-adjudicative method for resolving the dispute. However, unless the parties otherwise agree, the Arbitrator cannot change hats and become a mediator and vice versa.

Confidentiality

The entire arbitration process is confidential from the filing of the petition up to and including the issuance of an award by the Arbitrator. When a petition is filed to start the arbitration process, it is sent to but not filed with the Register in Chancery; it does not become part of the public docketing system. All memoranda and work product contained in the file of the Arbitrator are confidential. In addition, all communications regarding the arbitration are confidential to allow for candid, frank and open discussions among the parties and the Arbitrator regarding the strengths and weaknesses of the parties' positions as well as the potential for settlement. Indeed, any communication made in connection with the arbitration that relates to the dispute being arbitrated, is confidential and not subject to disclosure in any court or administrative proceeding unless: 1) all parties to the arbitration agree in writing to waive the confidentiality; or 2) the information in question is otherwise subject to discovery. If there is an appeal of the Arbitrator's decision to the Delaware Supreme Court, the confidential nature of the proceedings changes. When an appeal is filed, the record from the Court of Chancery is filed with the Supreme Court in accordance with its Rules so it then becomes part of the public record.

The Petition and Filing Fee

To get the arbitration process started, a company, through its Delaware counsel, files a petition setting forth the nature of the dispute, the names and addresses of the parties, the claims, the amount in controversy, the remedy sought and a statement that “all parties have consented to arbitration by agreement or stipulation, that at least one party is a business entity, that at least one party is a business entity formed or organized under the laws of Delaware or having its principal place of business in Delaware, and that no party is a consumer with respect to the dispute.” The petition must be accompanied by a filing fee of $12,000, which covers the costs associated with the first day of the Arbitration. Each additional day (full or partial) that the court is engaged in the arbitration will cost $6,000 per day.

Assignment of the Arbitrator

After the petition is filed, the Chancellor, who is the chief judge of the Court of Chancery, appoints the Arbitrator. While the parties do not participate in the selection of the Arbitrator, all of the members of the court are well-qualified with diverse backgrounds and very experienced based on the variety of sophisticated and complex matters that come before the Court of Chancery. For example, if the dispute involves intellectual property or technology, Vice Chancellor Donald F. Parsons Jr., would be particularly well-suited to address that type of dispute since he brings to the table not only his six and one-half years of experience on the Court of Chancery, he also has a B.S. degree in electrical engineering and over 24 years of experience in private practice specializing in intellectual property litigation.

Initial Scheduling Conference, Discovery and Preliminary Hearing

After the Arbitrator is assigned, the Arbitrator contacts the parties to set a date and time for the preliminary telephonic conference, which must occur within 10 days of the filing of the petition, unless the parties and the Arbitrator agree to extend that time. At the preliminary conference, the Arbitrator will discuss with the parties the nature of the dispute as well as the parties' view as to the timing and length of the arbitration hearing. While discovery is truncated given the expedited nature of the proceedings, the parties are free to set whatever parameters they want in terms of the exchange of information. This is also the time when the Arbitrator schedules a date for a preliminary hearing.

Preliminary Exchange of Information

While the Court of Chancery does not have a requirement that is comparable to a Rule 26(f) scheduling conference under the Federal Rules of Civil Procedures (and the requisite pre-conference meet and confers regarding the scope and form of discovery), for arbitrations, Court of Chancery Rule 97(f) comes close. Under Rule 97(f), unless the parties otherwise agree and the Arbitrator approves, before the preliminary hearing, the parties have to exchange “information necessary and appropriate for the parties to prepare for the arbitration hearing and to enable the Arbitrator to understand the dispute ' .” Since this exchange of information could take place less than two weeks from the date of the filing of the petition, a significant amount of planning, preparation and coordination by counsel and their clients in terms of identifying, preserving, collecting and preparing information for production that is “necessary and appropriate” for the arbitration hearing must occur. Cooperation is the key. The parties are required to “meet and confer” in an attempt to agree on the scope of the discovery, but time is of the essence so if the parties are unable to reach an agreement, the Arbitrator will mandate what information must be produced.

The Preliminary Hearing

At the preliminary hearing, which is done telephonically and as soon as practicable after the preliminary conference, the Arbitrator addresses substantive and procedural issues to set the course for completion of discovery and preparation for the arbitration hearing. Rule 96(d)(4) lists the following topics to be discussed at the preliminary hearing: “(i) service of statements of claims, damages and defenses, a statement of the issues asserted by each party and positions with respect thereto, and any legal authorities upon which the parties rely, (ii) stipulations of fact, (iii) the scope of discovery, (iv) exchanging and premarking of exhibits for the hearing, (v) the identification and availability of witnesses, including experts, and such matters with respect to witnesses, including their qualifications and expected testimony as may be appropriate, (vi) whether, and to what extent, any sworn statements and/or depositions may be introduced, (vii) the length of hearing, (viii) whether a stenographic or other official record of the proceedings shall be maintained, (ix) the possibility of mediation or other non-adjudicative methods of dispute resolution, and (x) the procedure for the issuance of subpoenas.” Soon after the preliminary hearing, the Arbitrator will issue a scheduling order memorializing the decisions from the preliminary hearing.

The Arbitration Hearing And the Award

The Arbitration hearing can be scheduled for a single day or multiple days (consecutive or not) depending on the needs of the parties. Unless the parties agree otherwise, the hearings are confidential so only the parties, their representatives and their counsel may attend the hearing. As with any proceeding in the Court of Chancery, Delaware counsel for each party is required to attend. Under Rule 98(f)(1), the Arbitrator has broad authority to “grant any remedy or relief that the Arbitrator deems just and equitable and within the scope of any applicable agreement of the parties.” Thus, the Arbitrator has the authority to issue a final, binding award as well as “other decisions, including interim, interlocutory, or partial rulings, orders and awards.” After the Arbitrator issues the award, a final judgment or decree is then entered with the Register in Chancery and can be enforced just like any other judgment or decree.

Conclusion

Arbitration clauses have long been popular provisions for inclusion in contracts to resolve such matters as construction and commercial disputes as well as intellectual property conflicts. Such clauses, however, have not been very popular in merger or acquisition agreements, but with the new arbitration rules for the Delaware Court of Chancery that may change. These new rules expand the court's traditional jurisdiction to the point that arbitration in the Delaware Court of Chancery may also appeal to a much broader audience, possibly even global companies with complex international disputes involving multiple parties. Unlike mediation, which is best addressed when the parties are either equally motivated or equally frustrated at the litigation process, arbitration that can be streamlined, fast-tracked and confidential. The Delaware Court of Chancery may be the perfect fit for those in-house counsel looking for a quick “close-the-deal” solution to their business dispute.

Kevin F. Brady is a Litigation Partner and Chair of the Business Law Group of the Wilmington, DE, office of Connolly Bove Lodge & Hutz LLP. Brady's practice includes corporate and complex commercial litigation. A member of the Court of Chancery Rules Committee, Brady is frequently requested to participate as an author, speaker and presenter in the areas of Delaware corporate law, electronic discovery, records management, data security, insurance, ethics and professionalism. He can be reached at [email protected].