As litigation and arbitration continue to become more expensive and time-consuming, many commercial parties are looking for more cost-effective, efficient dispute resolution methods. Responding to these concerns, Delaware has passed a new law creating an expedited arbitration process. The law, known as the Delaware Rapid Arbitration Act (“DRAA”), will become effective on May 4, 2015.
The DRAA responds to concerns that modern incarnations of arbitration suffer from many of the ills arbitration initially was intended to cure. They can be time consuming and expensive, often on the same order of magnitude as litigation. Furthermore, parties who initially agreed to arbitration under a contract regularly find themselves in court before, during, and after the arbitration—dealing with motions to compel arbitration, motions to enjoin arbitration, appeals, and confirmation proceedings—raising questions about why they agreed to arbitration in the first place.
The DRAA is available only in certain types of cases. One of the parties to the arbitration must be an entity organized under Delaware law, like a corporation or partnership, or have its principal place of business in Delaware. In addition, such an entity may not arbitrate a dispute under the DRAA with a consumer.
At the outset of an arbitration, the DRAA ensures a swift appointment of an arbitrator. The parties may agree to a specific arbitrator or a procedure for selecting an arbitrator by contract. If the parties fail to do so, or the chosen arbitrator is unable or unwilling to serve, any party may petition the Court of Chancery to appoint an arbitrator. The Court of Chancery has only 30 days to act on the petition.
To encourage the quick resolution of the dispute, the DRAA imposes a strict time limit on an arbitrator for issuing an award. The default rule is that an arbitrator must issue an award within 120 days of appointment. The parties may agree during the arbitration to extend the deadline by 60 days, but no more. Parties may agree to a longer period before the arbitration begins, but not once the arbitrator is appointed. Arbitrators are given a strong incentive to comply with the deadline—they lose a percentage of their fees if they fail to issue a timely award.
The DRAA minimizes the time that parties spend in court in connection with an arbitration. It authorizes arbitrators to decide all questions of arbitrability and simultaneously divests courts of that same authority. It prohibits interlocutory appeals. It also eliminates confirmation proceedings altogether. An award is deemed confirmed five days after the fifteen-day time to challenge the award has passed.
But while the DRAA is restrictive on timing, it accords parties broad discretion to decide how the actual arbitration proceeds. Parties decide, among other things, the location of the arbitration, the scope of document and other discovery, whether third-party discovery is permitted, and the manner in which the parties will present evidence, including the extent to which there is an actual hearing or whether the arbitration is on submission. These decisions must be made by the parties prior to the time the arbitrator accepts the appointment. Otherwise all agreements on procedure are subject to arbitrator approval. Absent any agreement before or during the arbitration, such procedural decisions are left to the arbitrator.
The court review process is both expedited and circumscribed. A party challenging an award must file within 15 days of the award. The review skips the lower courts and goes directly to the Delaware Supreme Court. The Delaware Supreme Court’s review of an award is narrow. It may “vacate, modify, or correct” an award only as permitted under the Federal Arbitration Act (“FAA”). (See 9 U.S.C. §§ 10-11). The grounds for vacating, modifying, or correcting an award under the FAA are narrow, and are generally limited to egregious arbitrator misconduct, arbitrator bias, and technical errors, like whether the award was incorrectly calculated due to mathematical error.
Parties can alter the appeals process by contract. They can agree to appellate review by an arbitrator or by an arbitral panel. They also can agree to a different standard of review by an arbitrator or arbitral panel. They even can contract to waive appellate review entirely.
DRAA V. NY’S ACCELERATED PROCEDURE
Through these processes, the DRAA eliminates the most inefficient aspects of traditional arbitration and provides an attractive option to parties seeking an expedited procedure. The DRAA, however, is not the only expedited dispute resolution procedure available to commercial parties. For example, the Commercial Division of the Supreme Court of New York has an “accelerated adjudication” procedure that aims to have cases trial-ready in nine months. Parties can agree to the accelerated procedure either as the dispute resolution mechanism for disputes arising under a contract, or at the outset of an action, as long as, in each case, the dispute meets the jurisdictional requirements for the Commercial Division. By agreeing to the accelerated procedures, parties waive the right to: challenge personal jurisdiction or object on forum non conveniens grounds; a jury trial; punitive or exemplary damages; interlocutory appeals; and full-scale discovery. Discovery is limited to seven interrogatories, five requests for admission, and seven depositions per side. Parties, however, may alter these discovery limitations by agreement. With respect to electronically stored information (“ESI”), collection shall be narrowly tailored to those individuals whose ESI may reasonably be expected to contain material evidence.
New York’s accelerated program has two distinct advantages over Delaware’s program. First, provided that the amounts in controversy meet New York’s requirements, no special connection with New York is required to access its courts and this program. Thus, if a contract value is more than $250,000, parties may choose New York’s law without any New York connection, and if the contract value exceeds $1,000,000, then the parties may access New York courts without any other connection. (N.Y. Gen Oblig. Law §§ 5-1401-02). Second, the State pays for the judge; in arbitration the parties are responsible for the arbitrator’s fees. Note that the DRAA authorizes the arbitrator to retain counsel (with advice of the parties). This could drive up costs further.
Delaware’s procedure is likely to be faster and accords the parties far more discretion in shaping the dispute resolution process. It can also be confidential.
The other major difference is appeals. New York offers a meaningful right of appeal; Delaware does not. The implications of the right of appeal are significant. On the one hand, it gives the parties more protection from an erroneous verdict. On the other hand, a right of appeal greatly extends the time and expense required to resolve the matter.
While parties can elect either procedure after a dispute arises, the best and typical practice is to negotiate and determine the resolution procedure at the time of contracting. If the parties choose the DRAA, the following points should be considered:
- The number of arbitrators, 1 or 3 (1 is the default);
- The process for selecting the arbitrator (the default authorizes the Court of Chancery to appoint a Delaware attorney with 10 or more years of experience);
- Who bears the cost of the arbitrator (the default is that the arbitrator will determine in the award);
- Whether the arbitrator will have the power to issue subpoenas and authorize depositions (the default is no subpoenas or depositions), and if so, how many;
- Where and when the arbitration will take place (the default leaves this to the discretion of the arbitrator);
- Whether there will be an evidentiary hearing (the default is there is one);
- The form of the award and whether the arbitrator authority should include both law and equity (the default leaves this to the discretion of the arbitrator);
- Whether and how an award can be challenged on appeal.
Any contractual provision regarding forum, whether DRAA or New York’s Commercial Division accelerated adjudication program, should be complemented by the other “miscellaneous” contract clauses, including attorney fee shifting, damage waiver, notice provisions, entire agreement, confidentiality, and the like. Contracting parties and lawyers often minimize these clauses, treating them as mere boilerplate to be cut and pasted from other agreements. But when a dispute happens, these miscellaneous provisions often become dominant factors.