A recent decision rendered by the Delaware Court of Chancery, Preferred Sands of Genoa, LLC v. Outotec (USA) Inc., C.A. No. 6011-VCN (Del. Ch. July 29, 2011), provides an important analysis of whether the determination of the validity of a settlement agreement, entered into as a result of arbitration efforts, falls within the scope of authority contractually delegated to the arbitrator of the underlying dispute.
Preferred Sands of Genoa, LLC (“Preferred”) sought declaratory judgment against Outotec (USA) Inc. (“Outotec”) to determine the validity of, and specific performance of, a putative settlement agreement (“Settlement Agreement”), which, if deemed enforceable, would end its arbitration from the American Arbitration Association (“AAA”) of a dispute with Outotec that arose out of a commercial contract, the Professional Services and Procurement Agreement (“PSPA”).
Outotec asserted that the Settlement Agreement was never formally executed by the parties, and therefore moved to dismiss the case, based upon the fact that the AAA arbitrators must first determine whether the validity of the Settlement Agreement is an arbitrable issue. If the AAA arbitrators conclude that the issue is arbitrable, they then must determine the validity of the Settlement Agreement, as opposed to the Court of Chancery. Outotec further asserted that the case must be dismissed pursuant to the doctrine of forum non conveniens.
The Court agreed with Outotec that it lacked subject matter jurisdiction, and entered an order dismissing the case pending resolution of the arbitration process. In so ruling, the Court determined that the PSPA grants to the AAA arbitrators the authority to decide the scope of the arbitration in which the parties have been engaged.
Relying upon the Federal Arbitration Act and federal law—based upon the fact that the PSPA involves interstate commerce—the Court found: (i) that “clear and unmistakable evidence” demonstrates that the parties intended to grant the arbitrators the authority to determine questions of arbitrability, and (ii) the question of whether the Settlement Agreement is valid at least arguably arises out of, or relates to, the PSPA. Therefore, the Court held that the parties have contractually agreed to grant the AAA arbitrators the authority to determine whether the present controversy is arbitrable, and as a result, the Court lacks jurisdiction to address Preferred’s claims.
As to Outotec’s additional assertion that the case must be dismissed pursuant to the doctrine of forum non conveniens, this argument was rejected, with the Court observing that mere inconvenience is not a basis in Delaware to have a case dismissed, but rather that substantial hardship must be demonstrated to obtain a dismissal of an action based upon this doctrine.
The Preferred Sands case is important in that it reinforces the general deference given to arbitration agreements, along with the notion that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985). Accordingly, this decision should be taken into consideration by any party seeking to enter into a contract containing an arbitration clause, specifically those which grant arbitrators with the authority to determine their own jurisdiction.