Parties in business transactions sometimes decide by contract that disputes relating to or arising out of their contractual relationship shall be resolved by arbitration. If and when a dispute arises, a threshold issue is whether the dispute is covered by arbitration and if so, whether any aspect may be resolved by a court. A less typical issue is whether, if both parties go forward in a court despite the existence of the arbitration clause and the court enters relief, the losing party may seek to undo the court’s work by claiming under Delaware Court of Chancery Rule 12(b)(1) that the arbitration provision divested the court of subject matter jurisdiction. The Court of Chancery addressed that issue in Gandhi-Kapoor v. Hone Capital, C. A. No. 2022-0881-JTL (Del. Ch., Nov. 22, 2023, corrected Dec. 4, 2023), holding in a scholarly opinion that by participating in litigation without raising the defense of arbitration, the respondent had waived its right to rely on the arbitration provision. The court thus denied respondent’s Rule 12(b)(1) motion to dismiss in favor of arbitration and to vacate the court’s orders under Rule 60.
Gandhi-Kapoor is an advancement action that petitioner initiated on Sept. 29, 2022, to recover fees and expenses defending a claim brought against her for alleged breach of fiduciary duty and fraud in the management of a Delaware LLC. The respondents initially stipulated that petitioner was entitled to advancement and answered the complaint without referring to the parties’ arbitration provision. Thereafter, respondents contended that its counsel lacked authority to stipulate to advancement, and retained new counsel who moved to vacate the stipulations. The petitioner then cross-moved for summary judgment. Following briefing in which respondents did not mention or rely upon the arbitration provision, the court on April 5 granted the summary judgment motion, holding that petitioner was entitled to advancement and finding it unnecessary to address the motion to vacate because petitioner was entitled to advancement under the summary judgment advancement order. On April 16, the petitioner sent a written demand for advancement. The respondents neither objected nor made any payment.. The petitioner then moved for sanctions. During briefing, no one mentioned the arbitration provision and the court issued an opinion dated July 19 granting in part the sanctions motion. The petitioner sent three other demands for advancement in May, June and July as to which respondents neither objected nor paid. On Aug. 10, the petitioner renewed her sanctions motion and on the same day new counsel entered its appearance for one of the respondents. New counsel then invoked the arbitration provision and moved for dismissal under Rule 12(b)(1) claiming that the court lacked subject matter jurisdiction and therefore all prior orders were void.
Court Holds That It Has Subject Matter Jurisdiction Over Claims for Advancement From a Delaware LLC
The court first denied the respondent’s motion that it lacked subject matter jurisdiction because by statute the General Assembly has allowed for advancement and indemnification and empowered the Court of Chancery to resolve actions to interpret the provisions of a limited liability company agreement and the obligations of a limited liability company to its members or managers. The court also determined that merely because respondent’s motion was brought under Rule 12(b)(1) did not mean that the court lacked subject matter jurisdiction. Rather, the court held that a motion to dismiss in favor of arbitration merely asks the court to abstain from exercising jurisdiction that the court has based on the parties’ agreement to arbitrate. It noted that courts outside of Delaware tend to treat motions to dismiss in reliance upon an arbitration provision under Rule 12(b)(3). The mere fact that cases have addressed motions to dismiss based on an arbitration agreement under 12(b)(1) therefore does not divest the court of its subject matter jurisdiction.
The Court Holds That Arbitration Provisions Can be Waived by Conduct in Litigation
The court determined after reviewing federal and state case law that a party can waive arbitration if it actively participates in litigation or takes other action inconsistent with the right to arbitration. The court determined that a decision regarding judicial conduct is substantive and not procedural and therefore the court and not the arbitrator makes the decision as to whether judicial conduct amounts to a waiver. The court distinguished the one Delaware decision that held to the contrary on the ground that the issue was not raised or briefed in that case. The court held that the parties here briefed that issue and also that the parties’ arbitration provision did not clearly delegate to the arbitrator the decision of whether judicial conduct has waived arbitration. The court also held that the issue over judicial conduct waiver amounts to a new agreement and therefore is always an issue for the court to decide. The court then held that the respondent’s filing of an answer, briefing a motion for summary judgment and briefing a motion for contempt without raising the arbitration provision constituted a judicial waiver.
The court noted that respondent provided no authority “in which a court permitted a party to invoke an arbitration provision after losing on the merits and being held in contempt.”
Advancement actions are summary in nature. That fact influenced the court’s decision in rejecting respondent’s argument that, because it took no discovery, there was no waiver by judicial conduct. The court thus noted that because advancement actions are summary in nature, parties typically do not take discovery. The primary lesson of this decision is that, particularly in a summary proceeding, a party cannot sit on its right to claim that a court should abstain from exercising jurisdiction, answer a complaint, respond to a summary judgment motion and oppose and lose a sanctions motion without mentioning the arbitration provision and then rely upon Rule 12(b)(1) to claim all prior actions of the court are void based on an arbitration provision.