A recent decision in the Delaware Court of Chancery compelled parties to arbitration based on a dispute resolution provision stating that a dispute between the parties under the contract “may be submitted … to binding arbitration.” The Court of Chancery found the use of “may” did not mean parties may choose to avoid arbitration and seek relief in court.
The Delaware Court of Chancery, in Williams-Sonoma Stores, Inc. v. DDK/WE Hospitality Partners, LLC and WE DDK Brand Co., LLC,1 recently held the use of the word “may” in an arbitration clause in an LLC Agreement should be interpreted to mean “must.” In other words, the Court of Chancery held when “may” appears in an arbitration clause or mediation provision, it does not necessarily mean parties can “opt-out” of arbitration and go to court to resolve their dispute.2 Rather, the parties’ contractual agreement to arbitrate disputes should be enforced as a mandatory requirement.3
In modern commercial agreements, parties often elect to arbitrate disputes arising in connection with the agreement rather than litigate. Arbitration is a confidential way to resolve disputes and is a way to avoid the expense and inconvenience of litigation. Delaware courts, including the Court of Chancery, give commercial parties broad authority and freedom to predetermine how and where their disputes will be resolved.4 “Delaware courts strive to honor the reasonable expectations of the parties and ordinarily resolve any doubt as to arbitrability in favor of arbitration.”5
Williams-Sonoma Stores, Inc. serves as a reminder that seemingly permissive contract terms can be construed to be mandatory. Plaintiff Williams-Sonoma Stores (“Plaintiff”) was a 50 percent member of WE DDK Brand Company, LLC (the “Company”), and it filed an action against the other 50 percent member, defendant DDK/WE Hospitality Partners (“Defendant”), to obtain dissolution of the Company. Plaintiff claimed the parties were deadlocked and it was no longer reasonably practicable to continue the Company’s business. Defendant moved to dismiss Plaintiff’s complaint under a dispute resolution provision in the LLC Agreement that required the parties address deadlock through arbitration:
The parties unconditionally and irrevocably agree that, with the exception of injunctive relief as provided herein, and except as provided in Section 16(c), all Disputed Matters that are not resolved pursuant to the mediation process provided in Section 16(a) may be submitted by either Member to binding arbitration administered by the American Arbitration Association (“AAA”) for resolution in accordance with the Commercial Arbitration Rules and Mediation Procedures of the AAA then in effect, ….6
Plaintiff argued, inter alia, the use of “may” in the arbitration agreement made arbitration permissive rather than mandatory. Defendant argued the provision was mandatory and the parties were required to arbitrate their dispute because it arose under the LLC Agreement.
The Court of Chancery interpreted the arbitration provision as mandatory and granted Defendant’s motion to dismiss Plaintiff’s complaint.7 The Court of Chancery found the parties were required to address their disagreements–and determine whether deadlock actually existed–in accordance with the arbitration clause.8 Importantly, the Court of Chancery noted the parties could still choose whether to invoke the arbitration clause to settle the dispute, but must use it as the chosen means as opposed to litigating in a Delaware court. In other words, the parties could choose to resolve the dispute on their own and wait to invoke the arbitration provision, but if they choose to resolve the dispute, it must be done through arbitration in accordance with the agreement.9
- Arbitration provisions are an important tool for commercial parties to predetermine how and where their disputes will be resolved.
- Delaware courts, including the Court of Chancery, favor enforcement of agreements to arbitrate disputes over litigation.
- Where a contract includes a dispute resolution provision indicating disputes “may” be resolved in arbitration, regardless of whether one party or both parties wish to bypass arbitration and resolve the dispute in a Delaware court, the provision is likely a mandatory requirement that parties seek resolution in arbitration before seeking to litigate in a Delaware court.
- In light of Delaware courts’ strong preference for arbitration, parties should be careful in drafting agreements and tailor the scope of the applicable provisions accordingly.