Delaware Business Litigation Report

Chancery Court Offers Guidance on Arbitration Provision Carve-Outs

The Innovation Institute, LLC v. St. Joseph Health Source, Inc., C.A. No. 2019-0156 JRS (Del. Ch. Aug. 28, 2019).

Despite the plaintiff’s request for specific performance and an arbitration provision that carved-out equitable claims, the Court of Chancery stayed the action and deferred to the arbitrator the decision on arbitrability.  The limited liability company operating agreement at issue contained a mandatory arbitration provision that referred all disputes to arbitration “[e]xcept to the extent that a party is entitled to equitable relief…” and incorporated the AAA arbitration rules.  In reaching his decision, the Vice Chancellor evaluated the arbitration provision under the standard set forth in James & Jackson, LLC v. Willie Gary, LLC, and clarified in McLaughlin v. McCann.  Willie Gary set forth a two-part test to determine whether the parties agreed to submit the issue of arbitrability to an arbitrator:  the arbitration provision must (1) resolve all disputes; and (2) incorporate rules that permit an arbitrator to determine arbitrability.  McLaughlin later clarified Willie Gary by cautioning against an overly narrow reading of the first prong of Willie Gary, ruling that courts should only determine arbitrability when the carve-out is so “obviously broad and substantial” that it overcomes the presumption in favor of permitting the arbitrator to decide arbitrability.  The Vice Chancellor concluded that the scope of the equitable relief carve-out in the operating agreement was not “so obviously broad and substantial as to overcome the heavy presumption” that the parties intended to submit the issue of arbitrability to an arbitrator to decide whether their dispute is subject to arbitration under the arbitration provision. The Court therefore held the equitable carve-out did not apply to enable the Court to decide arbitrability.    

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