Delaware Business Litigation Report

Chancery Defers Substantive Arbitrability Question to Arbitrator

Hagler v. Evolve Acquisition LLC, et al., C.A. No. 2021-0431-SG (Del. Ch. Dec. 28, 2021)
A party to a purchase agreement filed an arbitration relating to certain indemnities for alleged breaches of representations and warranties in the agreement. A few months later, another party to the purchase agreement filed an action in the Delaware Court of Chancery seeking a declaratory judgment relating to the same financial figures at issue in the arbitration and seeking an injunction (and other relief). The defendant in the Court of Chancery action moved to dismiss for lack of subject matter jurisdiction, claiming that the arbitration provision in the purchase agreement deprived the Court of jurisdiction and that any questions about arbitrability were for the arbitrator. Plaintiff argued that there was a broad equity carve-out from arbitration in the purchase agreement, which indicated that substantive arbitrability was an issue for the Court, not for the arbitrator.

The Court agreed with the defendant. As the Court noted, “[t]he right to invoke arbitration to defeat jurisdiction of [the] Court arises, if at all, from contract” and that the “default rule is that arbitrability is a question for the courts, unless the contract at issue provides otherwise.” Here, the purchase agreement was silent regarding arbitrability determinations. But, under Delaware law, if an agreement generally provides for arbitration of all disputes and adopts specific comprehensive arbitration rules—as the purchase agreement did here—there is a “strong presumption” that arbitrability is a question for the arbitrators, not the Court. Here, the agreement met that standard and created such a presumption. And the language of the equity carve-out in this case, according to the Court, was not so broad as to overcome the presumption. Accordingly, the Court found that it was without jurisdiction to consider substantive arbitrability. 

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