April 17, 2015
Edward M. McNally
Delaware Business Court Insider

Delaware has enacted the Delaware Rapid Arbitration Act, which is intended to address the increasing costs and delays associated with traditional arbitration of business disputes. It does so by: (1) requiring arbitration generally to be completed within 120 days of the arbitrator's acceptance of appointment (with only one extension of no more than 60 days); (2) penalizing arbitrators who fail to meet that deadline by reducing their fees substantially; (3) limiting pre-arbitration objections to the scope of the arbitration; and (4) limiting appeals of an award. While the parties to an agreement to arbitrate retain the freedom to choose much of how the arbitration is conducted, if they fail to do so, the DRAA provides the rules that apply by default. The following are the key aspects of the DRAA.

Who may use the DRAA?

Use of the DRAA is open to any parties that sign an agreement to arbitrate under the DRAA, when at least one of them is a business entity organized under Delaware law or with its principal place of business in Delaware, and is not a "consumer." The agreement (which may be a simple clause in a longer agreement) must adopt Delaware law to govern its provisions and refer to the DRAA.

Who is the arbitrator?

The parties are free to select anyone they want to be the arbitrator or to provide a method for selecting the arbitrator. But if they fail to do so (or their method fails or their selected arbitrator is unavailable), the Delaware Court of Chancery will promptly appoint an arbitrator who either is an expert selected by a method described in their agreement or a member of the Delaware bar for at least 10 years.

Where will the arbitration be held?

The arbitration hearing will be wherever the parties agree or, absent agreement, wherever the arbitrator decides. It may be within or out of the United States.

How does the DRAA speed up arbitration?

Traditional arbitration has often been delayed by arguments in court over the scope of the arbitration and by arbitrator-imposed scheduling and decision-rendering delays. The DRAA minimizes those delays by eliminating pre-arbitration objections to the scope of the arbitration and any appeals of interim ruling by the arbitrator, and by reducing the fees of arbitrators who do not issue decisions within the tight timeframe set by the DRAA.

How does the DRAA reduce costs?

By eliminating costly procedural battles and penalizing tardy arbitrators, the DRAA will reduce the cost of arbitrating any dispute. It is expected that arbitrators will control the scope of discovery and any hearings to permit the arbitrator to meet the DRAA's timeline for an award to be issued. For example, the arbitrators will often require that discovery be completed in about 60 days, to permit a hearing thereafter in 30 days and an award to issue shortly after the hearing if the arbitrator is to do so within 120 days of accepting his or her appointment and avoid a reduction in his or her fees.

What appeals are permitted?

The DRAA only permits an appeal of a final award to the Delaware Supreme Court, unless the parties have agreed to an intermediate appeal to one or more appellate arbitrators. The grounds for an appeal are limited to those permitted by the Federal Arbitration Act.

May the DRAA be forced on stockholders?

The DRAA may not be adopted by a corporate bylaw or certificate of incorporation to require that stockholders or class members who have also not signed an agreement arbitrate under the DRAA.

May the parties customize their arbitration?

The DRAA permits the parties to extensively structure how their arbitration will be conducted. For example, an arbitrator may only issue subpoenas or commission to permit depositions if the parties' agreement provides that power. Hence, the parties should consider these options when drafting their agreement to arbitrate.

Who might use the DRAA?

While the DRAA will be useful to any business dispute where cost and timeliness are important, it should be particularly attractive to certain types of investors. Some investors have comparatively short investment horizons and do not want to be tied up in long litigation. Private equity investors are an example. Using the DRAA will serve their needs for expedition, while preserving privacy.

Other investors may have long-term relationships they want preserved, such as joint venturers. Resolving a dispute privately and quickly will help to save those relationships. The DRAA will help to do so.

The DRAA offers the promise of expedited, less-costly arbitrations of business disputes. To get the most out of what the DRAA has to offer, an arbitration agreement should be drafted with care. But for all the reasons that arbitration has been used in the past, such as confidentiality, the DRAA should fulfill those expectations.

Delaware Business Court Insider  |  April 15, 2015