The Delaware Court of Chancery, in Williams-Sonoma Stores, Inc. v. DDK/WE Hospitality Partners, LLC and WE DDK Brand Co., LLC,1 recently held the use of the word “may” in an arbitration clause in an LLC Agreement should be interpreted to mean “must.” In other words, the Court of Chancery held when “may” appears in an arbitration clause or mediation provision, it does not necessarily mean parties can “opt-out” of arbitration and go to court to resolve their dispute.2 Rather, the parties’ contractual agreement to arbitrate disputes should be enforced as a mandatory requirement.3
In modern commercial agreements, parties often elect to arbitrate disputes arising in connection with the agreement rather than litigate. Arbitration is a confidential way to resolve disputes and is a way to avoid the expense and inconvenience of litigation. Delaware courts, including the Court of Chancery, give commercial parties broad authority and freedom to predetermine how and where their disputes will be resolved.4 “Delaware courts strive to honor the reasonable expectations of the parties and ordinarily resolve any doubt as to arbitrability in favor of arbitration.”5
Williams-Sonoma Stores, Inc. serves as a reminder that seemingly permissive contract terms can be construed to be mandatory. Plaintiff Williams-Sonoma Stores (“Plaintiff”) was a 50 percent member of WE DDK Brand Company, LLC (the “Company”), and it filed an action against the other 50 percent member, defendant DDK/WE Hospitality Partners (“Defendant”), to obtain dissolution of the Company. Plaintiff claimed the parties were deadlocked and it was no longer reasonably practicable to continue the Company’s business. Defendant moved to dismiss Plaintiff’s complaint under a dispute resolution provision in the LLC Agreement that required the parties address deadlock through arbitration:
The parties unconditionally and irrevocably agree that, with the exception of injunctive relief as provided herein, and except as provided in Section 16(c), all Disputed Matters that are not resolved pursuant to the mediation process provided in Section 16(a) may be submitted by either Member to binding arbitration administered by the American Arbitration Association (“AAA”) for resolution in accordance with the Commercial Arbitration Rules and Mediation Procedures of the AAA then in effect, ….6
Plaintiff argued, inter alia, the use of “may” in the arbitration agreement made arbitration permissive rather than mandatory. Defendant argued the provision was mandatory and the parties were required to arbitrate their dispute because it arose under the LLC Agreement.
The Court of Chancery interpreted the arbitration provision as mandatory and granted Defendant’s motion to dismiss Plaintiff’s complaint.7 The Court of Chancery found the parties were required to address their disagreements–and determine whether deadlock actually existed–in accordance with the arbitration clause.8 Importantly, the Court of Chancery noted the parties could still choose whether to invoke the arbitration clause to settle the dispute, but must use it as the chosen means as opposed to litigating in a Delaware court. In other words, the parties could choose to resolve the dispute on their own and wait to invoke the arbitration provision, but if they choose to resolve the dispute, it must be done through arbitration in accordance with the agreement.9
Key takeaways
- Arbitration provisions are an important tool for commercial parties to predetermine how and where their disputes will be resolved.
- Delaware courts, including the Court of Chancery, favor enforcement of agreements to arbitrate disputes over litigation.
- Where a contract includes a dispute resolution provision indicating disputes “may” be resolved in arbitration, regardless of whether one party or both parties wish to bypass arbitration and resolve the dispute in a Delaware court, the provision is likely a mandatory requirement that parties seek resolution in arbitration before seeking to litigate in a Delaware court.
- In light of Delaware courts’ strong preference for arbitration, parties should be careful in drafting agreements and tailor the scope of the applicable provisions accordingly.
Reed Smith has significant experience representing parties in business and complex litigation in the Delaware courts, including private arbitrations, mediations, and expert determinations.
- Transcript of Oral Argument, No. 2019-0038 (Del. Ch. June 27, 2019; filed Aug. 8, 2019).
- Id. at 48-50.
- Id.
- See NAMA Holdings, LLC v. Related World Mkt., 922 A.2d 417, 429 (Del. Ch. 2007) (“A strong presumption exists in favor of arbitration, and, accordingly, contractual arbitration clauses are generally interpreted broadly by the courts.”); see also Pettinaro Constr. Co. v. Harry C. Partridge, Jr. & Sons, Inc., 408 A.2d 957, 961 (Del. Ch. 1979); Scherk v. Alberto-Culver Co., 417 U.S. 506, 519 (1974) (The United States Supreme Court found “[a]n agreement to arbitrate before a specified tribunal is, in effect, a specialized kind of forum selection clause that posits not only the situs of suit but also the procedure to be used in resolving the dispute”).
- See Parfi Holding AB v. Mirror Image Internet, Inc., 817 A.2d 149, 155-56 (Del. 2002) (citing SBC Interactive, Inc. v. Corp. Media Partners, 714 A.2d 758, 761 (Del. 1998)).
- Def.’s Opening Br. at 31, Williams-Sonoma Stores, Inc., No. 2019-0038 (Del. Ch. Apr. 5, 2019) (emphasis added).
- See Transcript of Oral Argument at 52-53, Williams-Sonoma Stores, Inc., No. 2019-0038 (noting complaint was “premature” because it was not sufficiently alleged by Plaintiff there was a “level of discord and dysfunction” that could create grounds for dissolution, but it was not inconceivable such grounds could eventually arise); see also NAMA Holdings, LLC, 922 A.2d at 430 (noting Court of Chancery “lack[s] subject matter jurisdiction to resolve disputes that litigants have contractually agreed to arbitrate,” and a motion to dismiss for lack of subject matter jurisdiction will be granted if the “dispute is one that, on its face, falls within the arbitration clause of the contract”).
- See In re Arrow Inv. Advisors, LLC, 2009 WL 1101682, at *1 (Del. Ch. Apr. 23, 2009) (noting plenary dispute should be resolved first, and identifying complications could arise if dissolution were ordered first).
- The Court of Chancery also pointed out the use of “may” avoids the drafting problems that come with “shall.” On the one hand, “shall” suggests whenever there is a dispute, the parties must act and cannot opt to wait. On the other hand, “may” still requires parties use the dispute resolution mechanism when acting, but allows an opportunity to opt-out and attempt resolution amongst themselves. See Transcript of Oral Argument at 48-50, Williams-Sonoma Stores, Inc., No. 2019-0038.
Client Alert 2020-002
