Beware “Lite” Reasoning: Delaware Vice Chancellor Refuses to Disturb Arbitration Ruling Despite Concerns About Flawed Reasoning and Outcome
A recent Delaware Court of Chancery decision offers an important lesson on the limits of court review of an arbitration award, particularly when parties forego a fully reasoned award. Even though Vice Chancellor Glasscock found that “[t]he arbitration proceeding and the resulting award [were] flawed,” the court refused to overturn the award that appeared to find a contractual nonparty jointly and severally liable for breaches of the representations and warranties in a purchase agreement. The risk parties sometimes take when they contract for arbitration, the court found, is “receiving an arbitral decision that is questionable under the law and facts, but that is nonetheless—not coming within the narrow window of judicial oversight—not reviewable.”
In Evolve Growth Initiatives, LLC v. Equilibrium Health Solutions LLC, the court reviewed a challenge to the final award in an arbitration relating to the sale of a healthcare company. The purchasers brought claims against the sellers of the company and a “seller representative” that was granted power of attorney for the sellers, alleging misrepresentations made during the sale. Although the seller representative owned one of the sellers, he did not make any of the representations and warranties in the purchase agreement, which referenced only representations by the seller. A separate provision protected the seller representative from liability except in cases “of fraud, intentional misconduct or gross negligence.”
In the arbitration demand, the purchasers made no distinction between the sellers and the seller representative, naming both in each claim of the demand. Although the seller representative filed a declaratory judgment action seeking a ruling that the claims against him were not arbitrable, he eventually consented to the arbitration panel’s jurisdiction.
In the parties’ pre-hearing briefs and during the arbitration, the parties focused on the claims relating to the purchase agreement’s representations and warranties (where the seller representative was not a signatory), rather the intentional fraud claim. In fact, during the post-hearing oral argument, the arbitration panel questioned whether the purchasers were alleging fraud — or only breaches of the representations and warranties in the purchase agreement. The purchasers conceded to the arbitration panel that they were “not focused on the fraud issue,” because they did not want to undertake a “larger burden” than they would need to prove under their contract claims, although the purchasers nonetheless claimed that there was enough evidence to prove fraud. None of the parties raised the issue of whether the seller representative could be liable under the contract claims, and the seller representative did not assert that claims brought against him were subject to a heightened fraud or gross negligence standard under the agreement.
The panel’s final arbitration order found all of the defendants jointly and severally liable for the breaches of the representations and warranties under the purchase agreement:
Because we find the Buyer’s breach of contract claims meritorious in the ways described herein and grant the Buyer the relief to which it would, in any event, be entitled on its claims asserting the Seller’s intentional or negligent misrepresentation as a tort, we need not reach such claims in this Final Award.
We note in this regard that the Buyer told the Panel in the course of closing arguments that, while it is asserting the Seller’s fraud, it is proceeding primarily on its breach of contract claims rather than take on the heavier burden of establishing fraud, if that is not necessary. We also note that the Parties requested a reasoned award lite.
In these circumstances, we understand the Parties are not seeking a ruling as to the Buyer’s claims in the alternative rendered redundant by our above determinations in the case.
Notably, the parties consented to a “reasoned award lite” as opposed to a full reasoned award which would commonly set forth the grounds for the award in more detail. In this “lite” reasoned award, there was no mention of the fact that the seller representative did not make the representations underlying the contract claims. After the award was issued, the defendants argued in a post-award motion under American Arbitration Association Rule 50 that the seller representatives could not be held jointly and severally liable. However, the arbitration panel found that Rule 50 was limited to “ministerial errors,” and they could not make defendants’ requested correction.
Vice Chancellor Glasscock, reviewing the award, noted that a judge’s usual work of undertaking evidentiary-based decision making made reviews like this “difficult, for this judge at least.” Under well-settled law, the court found, “[q]uestionable legal support or a misreading of the law alone are insufficient to vacate an arbitration award.” And courts “do not sit to hear claims of factual or legal error by an arbitrator as an appellate court does in reviewing decisions of lower courts.”
In this case, the seller representative had “failed to raise as a defense lack of contractual liability for simple rep and warranty breaches at any point during the arbitration proceedings,” and the court found that he “knew, or should have known, that the matters before the Panel included fraud and misrepresentation which could support his liability.” And the court could not determine from the “lite” reasoned award whether the seller representative had been found liable under the fraud and misrepresentation theories. Notwithstanding the fact that there was no finding stated in the arbitration award that the seller representative acted intentionally or with gross negligence, the court noted that the panel had observed a “compelling picture” of intentionality. Thus, the court could not say for certain that the panel had not reached such a ruling, and held that it could not set aside the ruling.
This outcome underscores the tradeoffs inherent in bargaining for an arbitration with limited review in purchase agreements, especially where a full reasoned award is not requested. Post-closing disputes are often governed by arbitration agreements but, as the court noted here, “[a]rbitral awards are nearly impervious to judicial oversight.” Even where a clear or obvious error appears in the final ruling, a court will not find a manifest disregard of the law, and will refuse to disturb the award, where there is some possible basis to infer the award from the record. The decision offers a useful reminder to practitioners in arbitration to make clear records of the legal standards applicable, and defense asserted, with respect to each claim.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.
