Delaware Supreme Court Finds that Court of Chancery Had Jurisdiction To Enjoin a Collateral Attack on a Prior Arbitration Award Under the Federal Arbitration Act
This decision confirms that the Court of Chancery has jurisdiction to enjoin a collateral attack on a prior arbitration award. The Delaware Supreme Court also reasons that the determination of whether a second arbitration collaterally attacks a prior arbitration does not depend on the res judicata or collateral estoppel effect of claims raised or decided in the prior arbitration, but rather whether the claimant asserts irregularities in the prior arbitration or seeks to rectify the harm it suffered, which are issues subject to exclusive review under the post-award procedure in the Federal Arbitration Act (“FAA”).
Plaintiff and defendant had entered into an agreement relating to the importation of liquefied natural gas. The agreement contained broad arbitration provisions for disputes. Due to advancements in the domestic shale gas industry, the market for gas imports changed dramatically, and defendant filed for arbitration on the grounds that the principal purpose of the agreement had been substantially frustrated and on grounds of breach of the agreement. The arbitration panel agreed as to frustration of purpose and opted not to reach the issue of breach of contract. Plaintiff filed suit in the Court of Chancery seeking confirmation of the arbitration award. After plaintiff prevailed in Chancery, defendant filed a second notice of arbitration that included contract-based counts and a count alleging that plaintiff had made negligent misrepresentations in the prior arbitration. Plaintiff then sought injunctive relief in the Court of Chancery, which enjoined the misrepresentation count of the second arbitration, but declined to enjoin defendant’s contract-based counts since the first arbitration panel had not reached a decision on them.
On appeal, the Delaware Supreme Court affirmed the enjoinder of the second arbitration’s negligent misrepresentation count, but reversed the Chancery decision not to enjoin the contract-based counts. The Supreme Court first ruled that the Court of Chancery had jurisdiction to enjoin a second arbitration that collaterally attacks a prior arbitration award. The Supreme Court reasoned that the collateral attack violated the FAA’s time-limited and exclusive review procedure for a prior arbitration award. The Supreme Court also found that broad language in an arbitration agreement relating to arbitrability of disputes does not mean that the decision of whether a second arbitration collaterally attacks a prior arbitration must be decided by an arbitrator, as opposed to a court. The Supreme Court then held that defendant’s second arbitration notice was effectively an appeal of the prior arbitration award, and thus, the second arbitration constituted a collateral attack of the prior arbitration award. Defendant should have brought its misrepresentation count as a misconduct-based challenge to the prior arbitration award under the FAA’s exclusive review procedure, together with the contract-based counts, because they sought to modify the prior award by revisiting the core issues in the prior arbitration of whether the agreement had been terminated and the appropriate remedy.