Court of Chancery issues stay pending committee determination of ADR provision

17 May 2022 Reed Smith Client Alerts

Page d'accueil Perspectives Court of Chancery issues stay pending committee determination of ADR provision

In Terrell v. Kiromic Biopharma, Inc., C. A. No. 2021-0248-MTZ (Del. Ch. Jan. 20, 2022), the Delaware Court of Chancery stayed a lawsuit because the plain text of the underlying alternative dispute resolution provision required that the designated committee – not the court – determine its scope.

Auteurs: Brian M. Rostocki Benjamin P. Chapple

Case background

The parties’ dispute in Terrell v. Kiromic Biopharma, Inc. turned on competing interpretations of a suite of documents granting stock options in a biotechnology company to its former director. The company – Kiromic Biopharma, Inc. – argued that language in the notice granting the director’s most recent options extinguished two earlier, more lucrative option grants. The director argued that the language preserves those earlier options. The company filed a motion to dismiss, seeking to confirm its interpretation.

At the hearing on the motion to dismiss, the Court of Chancery raised a threshold issue that the parties did not brief: whether the Stock Option Agreement permitted the court to interpret the scope of an alternative dispute resolution (ADR) provision, or whether the committee should interpret that provision. Specifically, section 15.1 in the Stock Option Agreement required the parties to submit “[a]ny dispute regarding the interpretation of this Agreement” to a committee of the company’s board:

Interpretation. Any dispute regarding the interpretation of this Agreement shall be submitted by Optionee [Terrell] or the Company to the Committee for review. The resolution of such a dispute by the Committee shall be final and binding on the Company and Optionee.

The parties submitted supplemental briefing following oral argument on the motion to dismiss, disagreeing as to whether the ADR provision governed their dispute over the option grant language.

The Court of Chancery’s decision

The court referred to the ADR provision in the case at hand as a “circular problem,” because interpreting the dispute resolution provision would require the court to resolve a “dispute regarding the interpretation” of the Stock Option Agreement, violating that dispute resolution provision. In reaching its decision, the court explained that Delaware’s ADR jurisprudence required asking three questions:

(1) “What type of provision is Section 15.1: an arbitration provision, or something else?”;

(2) “Who decides whether a non-arbitration ADR provision applies to the dispute at hand?”; and

(3) “Who does the plain text of Section 15.1 charge with deciding its applicability?”

As to the first question, the court found that the ADR provision in the Stock Option Agreement did not call for arbitration. The court also noted that the ADR provision was not squarely an expert determination, though it did give the committee the authority to interpret the Stock Option Agreement.

Determining what type of dispute resolution mechanism the parties agreed to presents a question of contract interpretation, and Delaware follows an objective theory of contracts.The court explained that there was no basis to conclude the parties intended section 15.1 to be an arbitration provision because it did not grant the committee powers to resolve all legal and factual disputes, “analogous to the powers of a judge in a judicial proceeding.” Rather, section 15.1’s scope was narrower and limited to disputes over the Stock Option Agreement’s interpretation. The court also explained that section 15.1 did give the committee the power to award a remedy, but did not bind the committee to “the strict judicial investigation of an arbitration.”

As to the second question, the court explained that the plain text of section 15.1 dictates who decides its scope. The court noted the importance of deciding whether section 15.1 was an arbitration provision first, because that informed who decides its applicability to the parties’ dispute.

Where, as here, an ADR provision calls for something other than arbitration (e.g., an expert determination), Delaware courts apply contract interpretation principles to determine who – the court or the designated person or body – construes its scope. Well-established Delaware law provides that questions of substantive arbitrability are presumptively decided by a court absent “clear and unmistakable” evidence of the parties’ intent to have the arbitrator make that decision instead. Thus, if section 15.1 were an arbitration provision, the Court of Chancery would presumptively decide whether the court or the committee should determine its scope. Because section 15.1 did not call for arbitration, the presumption of judicially determined substantive arbitrability was inapplicable.

And as to the third question, the court determined that the plain text of section 15.1 provides that the committee must determine section 15.1’s scope. The court noted that the parties specifically delegated the committee the authority to interpret the “Agreement,” which unquestionably included the Stock Option Agreement. Because section 15.1 is a provision of the Stock Option Agreement, under its plain text, a dispute over its scope is a decision for the committee.

For those reasons, the court determined that the matter must be stayed pending the committee’s determination of the scope of the ADR provision and whether that provision should apply to the parties’ dispute. The court noted that if the committee determines the ADR provision applies to the parties’ dispute, the parties shall submit their dispute to the committee, not the court, for its review.

Key takeaways

Substantive arbitrability issues are gateway questions about the scope of an arbitration provision and its applicability to a given dispute. Delaware courts presume that parties intended courts to decide issues of substantive arbitrability unless the parties clearly and unmistakably provide otherwise.
Consistent with Delaware’s position as a freedom of contract state, where an ADR provision calls for something other than arbitration, Delaware courts apply contract interpretation principles to determine who – i.e., the court or the person or body specified in the provision – may construe its scope.

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