Background
Plaintiff Diamond Materials filed suit in the Delaware Superior Court against defendant Tutor Perini in connection with plaintiff acting as a subcontractor to defendant, a general contractor, in connection with Delaware highway projects. Plaintiff alleged that defendant breached the parties’ subcontracts (the Subcontracting Agreements) because defendant failed to make timely progress payments as required under the subcontracts.
The Subcontracting Agreements expressly incorporated and were governed by a “Prime Contract” between defendant and the Delaware Department of Transportation (the Department), and the Subcontracting Agreements contained an arbitration and forum selection clause that required any claims by the plaintiff “arising out of acts or omissions of [the Department of Transportation]” to be presented to the Department by defendant and “finally resolved through the claims procedure [culminating in arbitration].” The arbitration clause provided that defendant “shall decide whether [plaintiff’s] claims arise out of the acts or omissions of [the Department],” with any other claims to be submitted to a Delaware court:
All claims of Subcontractor arising out of acts or omissions of [the Department] shall be presented to [the Department] by Contractor on behalf of Subcontractor and finally resolved through the claims procedure...applicable between Contractor and Owner [to be finally resolved by arbitration]. For purposes of applying the preceding sentence, Contractor shall decide whether Subcontractor’s claims arise out of the acts or omissions of [the Department].... All other claims and disputes between the parties shall be decided by the appropriate court in New Castle County, Delaware.
A separate provision in the Subcontracting Agreements provides that the venue for claims to enforce the Subcontracting Agreements “shall lie in the appropriate Court in New Castle County, Delaware.”
Venue shall lie in the appropriate Court in New Castle County, Delaware. The parties expressly agree to submit to the service of process in and to the jurisdiction of the Courts of the State of Delaware in connection with any dispute, claim or controversy arising under the Subcontract.
Defendant moved to dismiss for lack of subject matter jurisdiction, arguing that plaintiff’s claims were subject to arbitration under the Subcontracting Agreements. Plaintiff argued that the arbitration clause was inapplicable because its claims did not “arise out of the acts or omissions of [the Department of Transportation],” and, regardless, giving defendant unfettered discretion to determine whether claims fall under the clause would unreasonably deprive plaintiff of the benefit of the venue provision in the Subcontracting Agreements, which provides that venue “shall lie in the appropriate Court in…Delaware.”
The court’s decision
The Superior Court rejected plaintiff’s attempt to avoid arbitration and held that arbitration was mandated because the Subcontracting Agreements provide defendant with unilateral authority to determine whether plaintiff’s claims fall within the scope of the arbitration provision. The court explained that disregarding defendant’s authority would effectively rewrite the parties’ agreements.
A court applying Delaware law will lack subject matter jurisdiction to adjudicate disputes that the parties have contractually agreed to arbitrate. Under Delaware law, “[a] strong presumption exists in favor of arbitration and, accordingly, contractual arbitration clauses are generally interpreted broadly by the courts…. In the case of contracts that contain arbitration provisions, ‘the policy in favor of arbitration requires that doubts regarding whether a claim should be arbitrated, rather than litigated, be resolved in favor of arbitration.”’
Although neither party raised the issue of whether the Superior Court or an arbitrator should decide whether plaintiff’s claims are arbitrable, the court considered the issue sua sponte and concluded that the court should decide arbitrability because the arbitration clause in the Subcontracting Agreements did not provide for arbitration of “all disputes”:
The parties do not dispute whether the issue of substantive arbitrability should be decided by the Court or an arbitrator. Nevertheless, the Court must determine this threshold question. Arbitrability “is an issue for judicial determination unless the parties clearly and unmistakably provide otherwise.” Contracting parties reserve the question of arbitrability for arbitrators only where: (1) “the arbitration clause generally provides for arbitration of all disputes;” and (2) the contract “incorporates a set of arbitration rules that empower arbitrators to decide arbitrability.”
Here, the Court must determine the question of arbitrability because the arbitration provision at issue...does not provide for the arbitration of all disputes. Rather, the only claims to be arbitrated are those that “ari[se] out of acts or omissions of [a third party].” It is unclear whether the [parties’ contracts]...include a set of arbitration rules that empower arbitrators to decide arbitrability, but the Court need not address this issue given that [the arbitration provision] does not provide for the arbitration of all disputes. As such, the Court will determine substantive arbitrability in this case.
The Superior Court rejected plaintiff’s argument that its claims did not fall within the scope of the arbitration clause in the Subcontracting Agreements based on the fact that defendant was granted under the clause the unilateral authority to determine whether the claims arose out of the customer’s acts or omissions and that the Court therefore may not determine the issue:
[Plaintiff’s] main argument is that its claims do not “aris[e] out of acts or omissions of [third-party customer]” and spends the bulk of its opposition providing evidence to bolster its assertion. But [plaintiff] ignores the plain language of the following sentence in the arbitration provision: “For the purposes of applying the preceding sentence, [defendant] shall decide whether [plaintiff’s] claims arise out of the acts or omissions of [customer].” The arbitration provision’s plain language requires that [defendant] determine whether [plaintiff's] claims arise out of the acts or omissions of [customer]. [Plaintiff] would have the Court classify the dispute and determine whether its claims arise out of the acts or omissions of [customer], something clearly not contemplated by the arbitration provision.”
The Superior Court rejected plaintiff’s argument that allowing defendant unfettered discretion to determine whether claims are subject to arbitration would negate a separate clause in the Subcontracting Agreements that requires disputes to be brought to Delaware courts:
[Plaintiff]...argues that allowing [defendant] “in its unfettered discretion” to [decide whether plaintiff’s claims fell under the arbitration provision] would “arbitrarily and unreasonably deprive [it] of the bargained-for venue provision….”
In essence, [plaintiff] asks the Court to rewrite the language of the provision. “Absent some ambiguity, Delaware courts will not distort or twist contract language under the guise of construing it,” and the Court declines to do so here. “When the language of a contract is clear and unequivocal, a party will be bound by its plain meaning because creating an ambiguity where none exists could, in effect, create new contract rights, liabilities and duties to which the parties had not assented.” While [plaintiff] might not like what the arbitration provision in the [Subcontracting Agreements] affords to [defendant], it cannot ignore it. “Delaware is a freedom of contract state, with a policy of enforcing the voluntary agreements of sophisticated parties in commerce.”
Takeaways
- Freedom of contract is a bedrock principle of Delaware law, and Delaware courts will generally enforce contracts voluntarily entered into between sophisticated parties.
- Delaware law also favors arbitration, which means that contractual arbitration clauses are generally interpreted broadly by Delaware courts.
- The Diamond case illustrates the interplay between Delaware’s public policy of favoring both arbitration of disputes and freedom of contract. Thus, even where a contract provides for unfettered discretion to one party, such as to determine whether claims are subject to arbitration, Delaware courts are hesitant to rewrite the language of that agreed-upon provision.
Client Alert 2021-158
