Chuang v. OD Expense, LLC, No. 16-cv-00915, 2017 U.S. Dist. LEXIS 40913 (D. Del. Mar. 22, 2017) [click for opinion]  

Plaintiff Pei Chuang entered into two agreements as part of what he expected would be the purchase of pre-initial public offering shares in a Chinese company, OD Dragon Corporation ("OD Dragon"). However, Plaintiff actually acquired shares in a separate company, OD Expense, LLC ("OD Expense"), which was created to raise money to pay off the pre-existing obligations to OD Dragon that were owed by a separate entity, Defendant, Regeneration Capital Group, LLC ("RCG"). Plaintiff's ownership interest in OD Expense only entitled him to obtain shares in OD Dragon in the event of OD Dragon's successful initial public offering.  

The first agreement that Plaintiff, in fact, signed (the "Subscription Agreement") was executed with an individual co-defendant, Mr. Kaufman ("Kaufman"), who purported to be acting on behalf of OD Expense. The Subscription Agreement provided that 796 shares in OD Expense would be issued for an aggregate price of $398,000, and attached the OD Expense Operating Agreement (the "Operating Agreement"). The second agreement that Plaintiff signed, on the same day as the Subscription Agreement, was a Supply of Consulting Services Agreement (the "Supply Agreement"), which was counter-signed by Kaufman purportedly acting on behalf of non-party Regeneration Capital Group LLC Shanghai Office ("Regeneration Shanghai"). The Supply Agreement stated that Regeneration Shanghai would provide Plaintiff with "comprehensive investment consulting services … for the purpose of conducting due diligence on potential investments in Chinese businesses."  

After the Subscription and Supply Agreements were each executed, Plaintiff wired $100,000 to OD Expense in accordance with the Subscription Agreement's terms. Plaintiff also wired the equivalent of $298,000 to Regeneration Shanghai in accordance with the Supply Agreement's terms, totaling the $398,000 value expressed in the Subscription Agreement. Plaintiff was later informed that there would be no IPO for OD Dragon. Plaintiff learned that the whole of his $398,000 investment was spent by OD Expense on due diligence, and his requests for a refund were fruitless. Plaintiff then filed an action in the United States District Court for the District of Delaware against OD Expense, RCG, and others, to recover the $398,000. Defendants responded with a motion to compel arbitration and stay the instant action pending the outcome of those requested arbitrations.  

The district court denied Defendants' motion to compel arbitration. The central issue before the court was the applicability of the arbitration clauses contained, respectively, in the Operating Agreement appended to the Subscription Agreement, and the Supply Agreement. The Operating Agreement stated, in relevant part:  

Except as otherwise provided in this Agreement, any dispute arising out of this Agreement shall be submitted to the American Arbitration Association for resolution. The arbitration shall be scheduled to take place in New York, New York….

The Supply Agreement, in turn, required good faith efforts by the parties to resolve any dispute arising in connection with such agreement, and stated further:  

If both parties fail to settle the dispute through such negotiation, either party may submit the dispute to China International Economic and Trade Arbitration Commission, Shanghai Sub-commission ("CIETAC") for arbitration in Shanghai in accordance with its rules and regulations then effective.

Defendants argued that these agreements mandated arbitration. The district court rejected this argument for three reasons. First, the court held that the Operating Agreement's language "is ambiguous and cannot be enforced as written." Observing that "arbitration clauses must be clear and unequivocal in order to force parties to arbitrate their disputes," the court determined that the qualifying clause, "except as otherwise provided" in the Operating Agreement came without "a convincing explanation" from Defendants. In contrast, Plaintiff pointed to the Operating Agreement's jurisdiction and venue clause, which stated that each member "agrees to submit to the exclusive jurisdiction of the federal and the state courts of Delaware in any action arising out of a dispute or in connection with this Agreement or any transaction contemplated by this Agreement." The court adopted Plaintiff's interpretation as the "reasonable" one, explaining further that Defendants, who drafted the Operating Agreement, should have done so differently "had they wanted [their] interpretation to govern." As it stood, the Operating Agreement's jurisdiction and venue clause "makes no reference to the arbitration clause."  

Second, the court noted that "the arbitration clause in the Supply Agreement"—entered into solely by Kaufman, purportedly on behalf of Regeneration Shanghai, and Plaintiff—"does not cover" the named Defendants. The court observed that the Supply Agreement's arbitration clause "is clear by its terms," but it "cannot be enforced because Regeneration Shanghai is not a party to this litigation and Kaufman's relationship to Regeneration Shanghai is unclear." The court refused to accept Defendant's agency argument that Kaufman signed the Supply Agreement on Regeneration Shanghai's behalf, noting that other "than the signature page of the Supply Agreement," "Defendants present no evidence of any agency relationship between Kaufman and Regeneration Shanghai, and no evidence at all of any relationship between the other Defendants and Regeneration Shanghai."  

Third, the court held that Defendants lacked standing to enforce the arbitration clause in the Supply Agreement. This determination came despite Defendants' assertion that such agreement was incorporated by reference into the Subscription Agreement, which OD Expense signed. The court deemed that assertion "unpersuasive because the Supply Agreement was only referenced in the recitals portion of the Subscription Agreement and the Subscription Agreement lacked an incorporation by reference clause."   The district court thus denied Defendants' request to compel arbitration.