In November 2010, the plaintiff and defendant entered into a consulting services agreement (the Agreement). The Agreement contained an arbitration clause under which the defendant’s executive director was designated as the arbitrator. After a dispute arose, the plaintiff preemptively filed an action in the Delaware Court of Chancery claiming that the defendant was not entitled to arbitration because (i) the disputes were time-barred under a statute of repose and (ii) the arbitration clause was unconscionable because it designated the defendant’s CEO as the arbitrator to decide the dispute. The defendant moved to dismiss the action and to compel arbitration, which the court eventually granted.
First, the court began its analysis by observing that under Delaware law, issues of substantive arbitrability are generally decided by courts. Some examples of substantive arbitrability include “a dispute over the scope of an arbitration provision” or “whether an arbitration clause is valid and enforceable.”
However, when issues of procedural arbitrability arise, they are generally decided by the arbitrator. Procedural arbitrability issues include “whether prerequisites such as time limits, notice, laches, estoppel, and other conditions precedent to an obligation to arbitrate have been met, as well as allegations of waiver, delay, or a like defense to arbitrability.”
Prior decisions from Delaware courts had not settled the issue of whether a statute of repose was a matter of procedural or substantive arbitrability. In deciding this issue, the court noted that the U.S. Supreme Court in Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002) held that time limits are presumptively an issue for the arbitrator. Relying on that analysis, the court held that the applicability of a statute of repose was procedural in nature and must be decided by the arbitrator, not the court.
Next, the court rejected the plaintiff’s claim that the arbitration clause was unconscionable, even though the defendant’s executive director was required to serve as the arbitrator. The court noted that demonstrating unconscionability requires a two-part showing: “To find unconscionability, the court must find both procedural and substantive unconscionability.” Procedural unconscionability relates to the procedures that led to the execution of the agreement containing the arbitration clause. Substantive unconscionability requires a finding of terms that are so one-sided that they shock the conscience.
The court held that neither procedural nor substantive unconscionability existed in this case. Perhaps most interestingly, the court held that “[t]he fact that the chosen arbitrator may be an employee of one of the parties is not sufficient to show unconscionability,” since both parties were sophisticated, had the opportunity to negotiate the terms of the Agreement, and agreed to the arbitration clause. Accordingly, the clause was enforceable.