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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Chancery Balances the Obligation to Defend an Arbitral Award from Collateral Attack with the Obligation to Defer to a Broad Agreement to Arbitrate
Plaintiff (“Gulf”) invested over $1 billion to construct a facility designed to unload imported liquefied natural gas (“LNG”) in Pascagoula, Mississippi. Defendant (“Eni”) entered a “Terminal Use Agreement” (“TUA”) with Gulf to use the facility over a twenty-year period. When domestic production of LNG through shale boomed, importation became economically unfeasible and Eni did not use the facility other than one initial shipment. The TUA contained a provision requiring that any types of disputes under the agreement be arbitrated. In an initial arbitration, the panel determined that the purposes of the twenty-year TUA were “substantially frustrated,” terminated the agreement as of 2016, and awarded Gulf nearly $500 million in compensation for the benefits conferred upon Eni by Gulf’s partial performance. The arbitrators explicitly did not address Eni’s claims that Gulf had breached the TUA, finding the claim “academic” and deserving of no further consideration in light of the agreement’s termination.
After the award’s confirmation, Eni initiated a second arbitration. Two claims alleged a breach of the TUA because Gulf had engaged in LNG liquefaction and export-related activities at the Pascagoula facility. A third claim asserted “negligent misrepresentation” in connection with alleged misstatements made by Gulf before the first panel of arbitrators.
Gulf filed an action in the Delaware Court of Chancery seeking to enjoin the second arbitration, an action which highlighted the tension between a court’s ability to defend arbitral awards from collateral attack, and Delaware’s deference to the determination of parties to submit disputes to arbitration. Deferring to the broad arbitration language in the TUA, even for a claim that clearly was an attempt to undo a prior arbitral award, would undermine the finality of arbitral awards.
The Court of Chancery determined that the negligent misrepresentation claim clearly was a collateral attack on the prior award, and enjoined any further arbitration of that claim. The gravamen of the claim was that Gulf made false representations to the first panel that caused them to incorrectly calculate the compensation set forth in the award. The two contract claims very well may have been precluded by the determination of the first arbitration award, but the Court of Chancery concluded that such a question was to be determined by arbitration under the language of the TUA, and thus allowed those claims to proceed in arbitration.