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DMS Properties-First v. P.W. Scott Assoc.

Court of Chancery of Delaware, New Castle County
Jun 21, 1999
Civil Action No. 16450 (Del. Ch. Jun. 21, 1999)

Opinion

Civil Action No. 16450.

Date Submitted: June 17, 1999.

Date Decided: June 21, 1999. Date Revised: July 19, 1999.

Francis J. Trzuskowski, TRZUSKOWSKI, KIPP, KELLEHER PEARCE, Attorney for Plaintiff.

Paul Cottrell, TIGHE, COTTRELL LOGAN, Attorney for Defendant.


OPINION


Plaintiff DMS Properties-First, Inc. ("DMS") seeks the vacation of an arbitration panel's award determining that there was no valid agreement to arbitrate between DMS and defendant P.W. Scott Associates, Inc. ("Scott").

I.

This dispute has its origins in a January 15, 1993 contract (the "Agreement"). Plaintiff's Ex. A (hereinafter "PX__"). The Agreement obligated Scott to provide certain architectural services regarding the conversion of a school building in Wilmington into an apartment building (the "Project"). Id. The Agreement was addressed to:

Mr. Dennis Salter Holcomb Salter 621 Delaware Street New Castle, DE 19720

The Agreement was signed by Peder W. Scott, the President of Scott, and by Dennis Salter. Id. The Agreement does not mention DMS. For the sake of brevity, I hereinafter solely refer to Holcomb Salter as the other party, besides Scott, to the Agreement.

By doing so, I make no implicit finding, one way or the other, whether Salter individually or Holcomb Salter, either as a partnership or a corporate entity, was the "party" to the Agreement.

The dispute resolution clauses of the Agreement state:

6. Any and all disputes between the parties to this contract shall be adjudicated by arbitration under the auspices of the American Arbitration Association [("AAA")]. Such proceeding shall take place in the State of Delaware. The award rendered by the arbitrator or arbitrators shall be fixed and judgment may be entered upon it in accordance with applicable law in any court having jurisdiction thereof.
7. If the client makes a claim against us for any act arising out of the performance of our professional services under this agreement, and the client fails to prove such claim, then the client shall pay all costs incurred by us in defense of such claim, including staff time, attorneys' fees and other claimrelated expenses.
PX A at Ex. A.

After the Agreement was executed, Salter used DM8 as the principal entity through which the Project proceeded. For example, DMS received mortgage financing for the Project from the Delaware State Housing Authority ("DSHA"). In fact, Scott submitted a letter to the DSHA in support of DMS making certain representations that Scott understood were a "condition of DSHA making the mortgage loan" to DMS. PX K. Yet, the Agreement was never revised to substitute DMS for Holcomb Salter.

This lack of substitution began to have significance on December 28, 1995 when "Dennis Salter, in his individual capacity, and DMS Properties-First, Inc., a Delaware corporation, and HSL, Inc., a Delaware corporation, t/a Holcomb Salter" filed a "notice of intention to arbitrate" (the "Notice") against Scott. PX A. The Notice was sent by Francis J. Schanne, Esquire in his "capacity as attorney for the above-named person and entities." PX A. It states in pertinent part that:

Pursuant to 10 Del. C. § 5703(c), unless you apply to enjoin [t]he arbitration within 20 days after service (which is permitted in the manner sent), you shall thereafter be precluded from objecting on grounds that a valid agreement was not made or has not been complied with and from asserting in Court bar of a limitation of time.
The subject matter of controversy concerns the drawings which were produced pursuant to the January 15, 1993 [A]greement. . . . These drawings are defective, and have caused damages. The amount involved is approximately $400,000.00. The remedy sought is money damages. Pursuant to the Agreement, arbitration is to take place in Delaware.

PX A. Scott did not file a motion to enjoin the arbitration in this court after receiving the Notice.

Despite the Notice, arbitration did not proceed in short order. Rather, it was not until April 17, 1997 that DMS filed a demand for arbitration (the "Demand") with the AAA requesting that a hearing be held. Conspicuously absent from the Demand was any reference to Salter or Holcomb Salter.

On February 6, 1998, Scott moved to dismiss the arbitration on the ground that Scott had no agreement with DMS to arbitrate. In its motion, Scott pointed out that DMS was not a party to the Agreement and that the prior Notice had included Salter and Holcomb Salter. Scott argued that the latter point was critical because the Agreement gave Scott the right to recover its fees and expenses if it prevailed in arbitration against the client under the Agreement. Since DMS was "subject to a [DSHA] mortgage," Scott contended that it was "extremely doubtful" that DMS could satisfy any liability for fees and expenses to Scott. PX C at ¶ 8. "The ruse here is that Mr. Dennis Salter, as President of DMS Properties-First, Inc., seeks to hold Scott responsible under the contract while he avoids all responsibility." Id. at ¶ 9.

Over the next several months, DMS and Scott presented their respective positions to the arbitrators regarding whether there was a contract between DMS and Scott providing for arbitration. DMS advanced two primary arguments in support of its position that Scott was required to arbitrate the dispute.

DMS also argued that, in the alternative, it was properly assigned Holcomb Salter's rights under the Agreement and/or that it was a third-party beneficiary of the Agreement and should be permitted to arbitrate the dispute. DX B.5 at 6-7. DMS did not renew these arguments in this court.

First, DMS argued that Scott's failure to file a motion in the Court of Chancery to enjoin arbitration in response to the Notice waived any right DMS had to claim that no agreement to arbitrate existed between Scott and DMS. Second, DMS took the position that a new contract, subsequent to the Agreement, arose between DMS and Scott by novation. According to DM5, this contract was identical to the Agreement, except that the contract ran between Scott and DMS, and not between Scott and Holcomb Salter.

DMS submitted documentary evidence and an affidavit by Dennis Salter designed to prove that there "was a novation to substitute or replace DMS Properties for Holcomb Salter" and argued that the "arbitrators [had] sufficient evidence to find that this was either an express agreement or clearly implied by Scott's complete abandonment of Holcomb Salter in favor of DMS Properties." DX B.4 at 5. In its arguments to the arbitrators, DMS expressly indicated that it was not asserting that DMS was a direct party to the Agreement but that DMS was a party to "a new contract including a verbal agreement to substitute DMS . . . for Holcomb Salter, i.e., the parties' (DMS['] . . . Scott['s]) mutual assent to reaffirm the prior writing, as between them." DX B.4 at 1-2. For its part, Scott relied upon, among other things, an affidavit by Scott's President, Peder Scott, denying that he had ever agreed to substitute DMS for Holcomb Salter. DXG at ¶ 4.

The Scott affidavit also sets forth the following explanation for Scott's apparent willingness to participate in the Project even though Salter was using DMS as the principal entity: "In projects of this nature, where public funding or quasi-public funding such as the [DSHA] is involved, the party contracting for the services of P.W. Scott Associates, Inc. may be only one of several entities involved in the project either as developer, owner, broker, contractor, lender, or some other function." DX G at ¶ 7.

The arbitration panel, which consisted of two attorneys and a construction industry representative, ultimately decided to dismiss DMS' demand for arbitration "in as much as there was no evidence of a binding agreement to arbitrate between Claimant [DMS] and Respondent [Scott]." DX A at ¶ 4.

The arbitrators considered DMS' argument that Scott had waived any objection on this ground by its failure to file a motion to enjoin in this court in the time frame required by 10 Del. C. § 5703(c). The arbitrators apparently treated Scott's failure as evidencing Scott's consent to the AAA's jurisdiction with respect to DMS' claim against it, but not as a waiver of Scott's right to assert in the arbitration the defense that no valid arbitration agreement existed between DMS and itself.

That is, the arbitrators concluded that Scott's failure did not bar them from examining whether the claim by DMS against Scott for breach of the Agreement was within "[t]he scope of the arbitrable issues between the parties." DXE at ¶ 2. Having determined that there were no such arbitrable issues between DMS and Scott — since there was "no evidence of a binding agreement to arbitrate" between DMS and Scott — the arbitrators issued an award dismissing the arbitration (the "Award").

II.

This matter comes before me on cross-motions. DMS seeks to compel Scott to arbitrate and/or to vacate the Award. Scott moves to dismiss DMS' complaint and to confirm the Award. Since both parties have submitted evidence — principally, the record in the arbitration — in support of their motions, I will treat the motions as ones for summary judgment.

Summary judgment should be granted to a moving party if that party establishes that no genuine issue of material fact exists regarding the dispute and that the moving party is entitled to judgment as a matter of law. Del.Ch.Ct.R. 56(c). The standards for evaluating an arbitration award on a motion for summary judgment are well-established. "Under [the Delaware Uniform Arbitration] Act, in reviewing an arbitration award, a Court may not pass on the merits of claims submitted to an Arbitrator." Malekzadeh v. Wyshock, Del.Ch., 611 A.2d 18, 20-21 (1992) (citing 10 Del. C. § 5701). "In considering an application to vacate an arbitration award, the Court is limited to a determination of whether there exists any of the five statutory grounds for vacating an award, as set forth in 10 Del. C. § 5714." Id. at 21. Summary judgment motions are an "appropriate judicial mechanism for reviewing an arbitration award, because the complete record is before the court and no de novo hearing is permitted to determine whether one of the five statutory exceptions [to vacate an award pursuant to 10 Del. C. § 5714] is applicable." Wier v. Manerchia, Del.Ch., C.A. No. 14836, 1997 WL 74651, at *7 Allen, C. (Jan. 28, 1997) (citations omitted), aff'd, Del.Supr., 700 A.2d 736 (1997).

In briefing on these motions, DMS renews its two principal arguments before the arbitrators: i) that by failing to file a timely motion to enjoin in this court, Scott waived its right to deny that an arbitration agreement exists between DMS and itself; and ii) that the arbitrators erred by concluding that no novation occurred creating a contract for arbitration between DMS and Scott. I address these issues in turn.

A.

DMS contends that the plain language of 10 Del. C. § 5703 (c) requires me to find that Scott's failure to file a motion to enjoin arbitration within 20 days of receiving the Notice "precluded]" Scott from asserting in arbitration that "a valid agreement [to arbitrate between DMS and Scott] was not made." Under this reading of § 5703(c), the arbitrators erred insofar as they premised their dismissal on the absence of a "binding agreement to arbitrate" between DMS and Scott.

Although DMS' argument in this respect has some facial appeal, I believe that a contrary reading of the Delaware Uniform Arbitration Act ("DUAA") better comports with the relevant statutory language and the General Assembly's intent in adopting the DUAA. My rejection of DMS' argument turns largely on the interplay among 10 Del. C. § 5703(b), (c) and § 5714 (a)(5) of the DUAA. In viewing § 5714(a)(5) as critical to the resolution of this case, I start from the premise that the answer to the statutory question should not turn on whether Scott prevailed on or lost the issue of the validity of the arbitration agreement before the arbitrators. That is, the fact that Scott is before me opposing a motion to vacate under § 5714, rather than before me supporting a motion to vacate, should not influence the effect of its prior failure to file a motion to enjoin in compliance with the time requirements of § 5703 (c).

Similarly, if Scott had filed suit to confirm the award pursuant to § 5713 this factor should have no influence since the party opposing a motion to confirm under § 5713 must do so by asserting grounds for vacating, modifying, or correcting the award in compliance with §§ 5714 and 5715, including those set forth in § 5714(a)(5).

Had Scott lost the issue before the arbitrators and had DMS obtained an award against it, Scott could have sought to vacate the award under § 5714(a)(5). Under § 5714(a)(5), a party may move to vacate an arbitration award on the ground that: "There was no valid arbitration agreement . . . and the issue was not adversely determined in proceedings under § 5703 and the party applying to vacate the award did not participate in the arbitration hearing without raising the objection."

The plain language of § 5714(a)(5) suggests that the preclusive effect of a failure to file a motion to enjoin arbitration within the time limits set forth in § 5703(c) is narrower than DMS asserts. Section 5714(a)(5) does not condition a party's right to move for vacation on the ground that no valid arbitration agreement exists on the party's filing of a timely motion to compel under § 5703(c). Instead, § 5714(a)(5) attaches only two conditions to that right: i) the absence of a prior adverse determination on the issue in this court on a motion to compel under § 5703(a) or to enjoin under § 5703(b); and ii) the requirement that the party raising the issue in its motion to vacate have also done so before the arbitrators.

Section 5714(a)(5)'s reference to "proceedings under § 5703" clearly seems to mean either a motion to compel arbitration initiated pursuant to § 5703(a) or a motion to enjoin arbitration initiated pursuant to § 5703(b).

The reading of § 5703(c) that DMS advocates would require me to graft another condition on to these otherwise clear terms of § 5714(a)(5), not something a court should lightly do. 2A Norman J. Singer, Sutherland Statutory Construction § 47.23 (1992) (under the statutory interpretation maxim of expressio unius est exclusio alterius, the expression of conditions in a statute infers "that all omissions should be understood as exclusions"). Such judicial surgery is especially unjustified where the statutory provision DMS would have me read as being implicitly modified by § 5703(c) already references § 5703. That is, § 5714(a)(5) reflects the General Assembly's explicit determination that a party that unsuccessfully argues an issue "in proceedings under § 5703" should not get a second bite of the apple in proceedings under § 5714(a)(5). As a consequence, I find it implausible that the General Assembly implicitly intended to bar a party that failed to file a timely motion to enjoin pursuant to § 5703(c) from asserting the absence of an agreement to arbitrate as a defense in the arbitration and, thereafter, on a motion to vacate under § 5714(a)(5). Had the General Assembly wished to erect such a bar, I believe that it would have done so explicitly as it did with the other conditions in § 5714(a)(5).

I might be more inclined to adopt DMS' reading if it were necessary to give meaning to § 5703(c). However, a more plausible reading of the preclusion language in § 5703(c) is that it simply precludes a party from filing a motion to enjoin on the ground that no valid arbitration agreement exists more than 20 days after service of the notice of intention to arbitrate. This reading is supported by § 5703(b), which makes a party's right to file a motion to enjoin "[s]ubject to subsection (c) of [§ 5703]." Most important, this reading best harmonizes and gives meaning to the terms of §§ 5703 and 5714, without doing violence to the clear terms of either provision. It is also consistent with the pro-arbitration philosophy reflected in the DUAA, an efficiency-based philosophy that would be thwarted by a reading of the statute that would mandate that a party rush into Chancery Court to assert § 5714(a)(5) defenses whenever its adversary simply files an arbitration notice.

This reading is also consistent with the reading of § 5714(a)(5) rendered in W.B. Venables Sons, Inc. v. Bd. of Educ. of Seaford Sch. Dist., Del.Ch., C.A. Nos. 784, 786, 1981 WL 88263, at **5-6, Brown, V.C. (June 15, 1981); see also Hwang v. Tyler, 625 N.E.2d 243, 245 (Ill.App.Ct. 1993) (Interpreting the Uniform Arbitration Act ("U.L.A.") counterpart to § 5714(a)(5) as follows: "If the issue was not adversely determined under [a] section 2 [judicial proceeding] and if the party raised an objection in the arbitration hearing, a challenge to an alleged agreement to arbitrate may be raised in a [U.L.A.] § 12(a)(5) proceeding to vacate the award."). But see Church Home Founds., Inc. v. Victorine, Inc., Del.Ch., C.A. No. 6513, 1982 WL 17881, at *3, Marvel, C. (Jan. 27, 1982) (dicta indicating that failure to file a motion to enjoin within 20 days "apparently waived the [party's] right to rely" on a limitations defense in opposing a motion to confirm the arbitration award).
In Venables, a school district asserted that the statute of limitations barred the other party's claim in arbitration. However, the school district failed to file a motion to enjoin within 20 days of receiving the arbitration notice. On a motion to enjoin subsequent to the time deadline set forth in § 5703(c), the court had earlier refused to enjoin the arbitration, finding an effective waiver of the right to press such a motion. Id. at *2. Thereafter, the matter came before the court on the school district's motion to vacate an adverse arbitration award under § 5714(a)(5). The court interpreted § 5714(a)(5) as permitting judicial review because the statute of limitations issue was not decided adversely (or otherwise) to the school district when the prior motion to enjoin was adjudicated and because the school district asserted the limitations defense before the arbitrator. Id. at *4.
For the sake of completeness, I should add that the school district's success in obtaining judicial review on this ground was rendered hollow later in the opinion. The court decided that the specific language of § 5702(c) giving arbitrators the authority to apply the bar of a statute of limitations in their "sole discretion," when considered along with § 5714(a)(5)'s language allowing vacation of claims "barred by limitation under § 5702(c)" and § 5701, which barred the court from evaluating the merits of the claims, left the court without any standard by which to measure the propriety of the arbitrator's consideration of the school district's limitations defense. Id. at *5 "Boiled down, the Delaware Act seems to hold that unless a timely application is made to the Court under § 5703 to enjoin arbitration, the decision on a Statute of Limitations defense is left to the discretion of the arbitrators and is not subject to a later review on the merits by the Court." Id. at *7.
The language of § 5714(a)(5) pertaining to the lack of a valid arbitration agreement is not cross-referenced to any such limiting language. Therefore, an arbitration decision regarding that issue should be subject to the same, admittedly deferential, standard of review generally applicable on motions under § 5714.

Other state courts operating in analogous circumstances have found that a party contesting whether an agreement to arbitrate exists may, but need not, raise that defense on a motion to stay or enjoin in the first instance. See Arrow Overall Supply Co. v. Peloquin Enter., 323 N.W.2d 1, 3 (Mich. 1982) ("Though it may be preferable and more orderly for a party denying the existence of an agreement to arbitrate to seek an injunction of a proceeding, it is not a mandatory requirement."); Mid-Am. Regional Bargaining Ass'n v. Modern Builders Indus. Concrete Co., 427 N.E.2d 1011, 1014 (Ill.App.Ct. 1981) (finding that the "question [of arbitrability] can be determined before the arbitration hearing in an action brought to . . . stay arbitration [but] it need not be.").

Hence, I conclude that Scott did not irrevocably waive its argument that there was no valid agreement to arbitrate between Scott and DMS.

Another basis exists for concluding that Scott did not waive its claim that there is no contract between DMS and itself to arbitrate. To the extent that DMS contends that Scott breached a new contract (formed by novation) between itself and DMS and not the Agreement, DM5' Notice does not appear to assert such a claim. See PXA ("The subject matter of the controversy concerns the drawings which were produced pursuant to the January 15, 1993 agreement."). DMS also named three claimants (Salter, Holcomb Salter, and DMS) in the Notice, but only DMS in the Demand filed well over a year later. Taken together, these factors lead me to believe it would be inequitable to find that Scott irrevocably waived this defense since DMS' approach was, at the very least, highly confusing.

B.

In its motion, DMS seems to raise a claim under § 5714(a)(5) that the arbitrators' decision was not in compliance with the agreement to arbitrate. The basis for this claim appears to rest on the arbitrators' alleged error in rejecting DMS' claim that a novation occurred that created a new contract between DM8 and Scott.

Under the DUAA, the authority of this court to review an arbitration award is "narrowly circumscribed" and the award will be upheld if "any grounds for the award can be inferred from the record." Audio Jam, Inc. v. Fazelli, Del.Ch., C.A. No. 14368, 1997 WL 153814, at *1, Chandler, V.C. (Mar. 20, 1997) (citations omitted). "In reviewing an arbitration award, the Court is not to pass an independent judgment on the evidence or applicable law that was submitted to the arbitrator." Id.

Yet, "an Arbitrator's decision may be vacated if it is in manifest disregard of the law or if the record shows no support for the award." Falcon Steel Co., Inc. v. HCB Contractors, Inc., Del.Ch., C.A. No. 11557, 1991 WL 50139, at *2, Hartnett, V.C. (Apr. 4, 1991). "Manifest disregard of the law occurs if the Arbitrator is aware of the governing law and clearly decides to ignore it. Mere error of law or fact is, however, not sufficient grounds to vacate an award." Id. The burden to demonstrate that grounds exist that justify vacation of an arbitration award rests on the party challenging the award. Id. at *3.

I note harboring some personal concern about an issue the parties did not brief — the apparent incongruity between the traditional scope of review under § 5714 and that which would exist had this issue come before me on a motion by Scott to enjoin the arbitration. On a motion to enjoin, I would have been required to determine de novo whether there was an agreement to arbitrate. By asserting this issue as a defense before the arbitrators, Scott has arguably obtained some advantage, because the standard of review by which this court evaluates the decisions of arbitrators is quite deferential.
After considering this issue without the benefit of any substantial briefing by counsel on this score, I believe that the standard of review typically used by this court under § 5714 remains appropriate for at least three reasons. First, a party that fails to raise a defense on a motion to enjoin and elects to raise that defense in arbitration, thereby submits its defense to an adjudication in the arbitral forum chosen by the claimant. Having selected that forum, the claimant should not be heard to complain about having defenses heard there as an initial matter.
Second, § 5714(a)(5) clearly contemplates that this court would review decisions by arbitrators regarding whether a valid arbitration agreement exists. While this does not answer whether a de novo or a more deferential form of review should be applied, § 5714(a)(5) coexists with clear statutory language calling for a great deal of deference to be given to the decisions of arbitrators. See, e.g., 10 Del. C. § 5714 ("But the fact that relief was such that it could not or would not be granted by a court of law or equity is not ground for vacating or refusing to confirm the award."). Therefore, it seems unlikely that the General Assembly contemplated that this court would undertake a de novo review of the underlying issues upon a motion to vacate pursuant to 10 Del. C. § 5714(a)(5). See also Wier, 1997 WL 74651, at *7 ("no de novo hearing is permitted to determine whether one of the five statutory exceptions [to vacate an award pursuant to 10 Del. C. § 5714] is applicable.").
Finally, such a de novo; review would be awkward at best, because, if performed faithfully, it would — depending on the state of the arbitral record — potentially require the court to hold its own evidentiary hearing to resolve disputed issues of fact. In this case, for example, I could not employ a de novo standard of review without resolving the factual issues necessary to determine for myself, in the first instance, whether there was a novation. Moreover, unlike an appellate court, this court will not ordinarily be in a position to employ a traditional mixed standard of review that gives substantial deference to the factual decisions of arbitrators but affords no deference to legal decisions by arbitrators. Stegemeier v. Magness, Del. Supr., 728 A.2d 557, 561 (1999) (review of trial court's legal conclusions is de novo; review of trial court's factual findings "will be accepted if they are sufficiently supported by the record and are the product of an orderly and logical deductive process;" trial court's decisions based on the live testimony of witnesses, determinations of credibility, and expert witness presentations are afforded substantial deference).
Such an approach is generally not feasible since arbitrators are not required to, and thus rarely, write detailed decisions articulating the legal and factual basis for their awards. See, e.g., Falcon Steel, 1991 WL 50139, at *2 (Even when an arbitration award is so ambiguous as to require a reward, "it is not appropriate for a court to direct the Arbitrator to disclose his reasoning for the decision."). In some ways, review of an arbitration award is akin to review of a general jury verdict without any capacity to examine the legal propriety of the jury instructions.
In this particular case, to the extent I employed a mixed standard, I could review the arbitration record to ensure that there was adequate evidence to support the Award's underlying factual conclusion that no agreement to arbitrate existed. VonFeldt v. Stifel Fin. Corp., Del.Supr., 714 A.2d 79, 82-83 (1998) (whether parties entered into an indemnification agreement is an issue of "pure fact" which is entitled to "great deference"); see also Holiday Inn Downtown v. Clark, Del. Super., C.A. No. 97A-11-006, 1999 WL 167789, at *3 Toliver, J. (Jan. 12, 1999) (In appeals from the Industrial Accident Board the court will defer to "the experience and specialized competence of the Board" on questions of fact.). I do not understand such a review as (properly applied) to be markedly different from the standard typically employed under § 5714 and the Award in this case would survive scrutiny under such review.
All that being said, there is an undeniable tension between the conclusion I reach about the appropriate standard of review and the general rule that the question of whether a dispute is substantively arbitrable or not is usually for the court to decide in the first instance. Of course, most of the case law articulating that general rule occurs in the pre-arbitration context and does not address the precise question raised in this case. See, e.g., SBC Interactive, Inc. v. Corporate Media Partners, Del.Supr., 714 A.2d 758, 761 (1998) ("In a proceeding to stay or compel arbitration, the question of whether the parties agreed to arbitrate, commonly referred to as `substantive arbitrability,' is generally one for the courts and not for the arbitrators.") (emphasis added); but see Pettinaro Constr. Co., Inc. v. Harry C. Partridge, Jr., Sons, Inc., Del.Ch., 408 A.2d 957, 963 (1979) ("[W]here ambiguities relating to the issue of arbitrability exist, the question of arbitrability itself may be submitted to the arbitrators."); James Julian, Inc. v. Raytheon Service Co., Del.Ch., 424 A.2d 665, 667 (1980) (scope of arbitration agreement usually determined by arbitrator, not the court). At the post-arbitration stage, the pro-arbitration public policy reflected in the language of the DUAA is best served by affording substantial deference to all issues decided by arbitrators. Otherwise, much of the efficiency arbitration is designed to achieve will be lost through extensive court proceedings at the motion to confirm and/or vacate stage.

To prove that DMS had a contract to arbitrate with Scott under a novation theory, DMS bore the burden to demonstrate: "(1) a previous valid debt; (2) extinguishment of the old contract; 3) agreement of all parties to a new contract; and 4) validity of a new one." Transportes Aereos de Angola v. Ronair, Inc., 693 F. Supp. 102, 107 (D.Del. 1988); see also Berg v. Liberty Fed. Say. Loan Ass'n, Del.Supr., 428 A.2d 347, 349 (1981) (burden to prove novation rests on proponent).

Given the deference I must give to the arbitrators' determination, I cannot find that it was manifestly erroneous for the arbitrators to conclude that no novation occurred giving rise to an agreement to arbitrate between DMS and Scott. While there is evidence in the arbitral record that would have supported a contrary finding, the arbitral record also includes substantial evidence supporting the arbitrators' decision. Such evidence includes the lack of any writing documenting the creation of a new contract between DMS and Scott that extinguished the Agreement, as well as the continued reference to and reliance upon the supposedly extinguished Agreement by Dennis Salter well after the time the novation supposedly occurred. In assessing the competing evidence of the parties, the arbitrators could have considered the likelihood that Scott, which had insisted on a written contract with Holcomb Salter, would have orally agreed to substitute the apparently newly created Project-specific corporate shell, DMS, as the sole contracting party, in lieu of Holcomb Salter. Such a substitution could well have reduced the extent to which Scott could have obtained recourse in the event of a breach of the Agreement by Holcomb Salter.

This evidence clearly demonstrates that Scott knew that Dennis Salter was using DMS to complete the Project and Scott's non-objection to that conduct. It does not, by any means, demonstrate that Scott contractually agreed to create a new oral contract with DMS based on the January 15, 1993 Agreement, in place of its prior written contract with Holcomb Salter, and thereby relinquish Scott's right of recourse against Holcomb Salter. Moreover, Salter's own affidavit in support of the novation theory is quite tentative about this supposed meeting of the minds. See PXF at ¶¶ 7-8.

I note that DMS has not challenged the procedures used by the arbitrators to resolve this issue, including the fact that the arbitrators decided the issue on a record consisting of briefs, oral presentations by counsel, and documentary and affidavit evidence. In the absence of such a challenge, I will not consider the question of whether it was proper for the arbitrators to reach a conclusion on this issue without hearing live witness testimony or giving the parties the opportunity to take depositions and present deposition testimony. In any event, to the extent that DMS had wished to challenge the process used by the arbitrators, it should have done so before the arbitrators in the first instance.

Therefore, DMS' motion to vacate will be denied and the Award will be confirmed pursuant to 10 Del. C. § 5714(d). In so finding, I wish to emphasize my understanding of the narrowness of the Award I hereby confirm. I read the Award as no broader than what it states: that there is no "binding agreement to arbitrate between" DMS and Scott. I do not read the Award to preclude DMS' opportunity to assert, in a court of law, any claims it arguably possesses against Scott.

In that regard, DMS has requested that I transfer this action to the Superior Court in the event that I deny its motion. I will not grant this request because the complaint in this action does not plead DMS' claims against Scott and, therefore, an entirely new amended complaint would be required upon transfer to Superior Court. In lieu of transfer, the order I enter below states that this case is being dismissed without prejudice to DMS' right to file an action against Scott in the Superior Court. The order should not be read as in any way recognizing the validity of any alleged claims by DMS against Scott or preventing Scott from raising any defenses to such claims.

III.

For the foregoing reasons, DMS' motion to vacate is DENIED; Scott's motion for summary judgment is GRANTED; the June 3, 1998 Award of the Arbitrators is CONFIRMED; this action is DISMISSED without prejudice to DMS' right to file an action against Scott in the Superior Court, but otherwise with prejudice. IT IS SO ORDERED.


Summaries of

DMS Properties-First v. P.W. Scott Assoc.

Court of Chancery of Delaware, New Castle County
Jun 21, 1999
Civil Action No. 16450 (Del. Ch. Jun. 21, 1999)
Case details for

DMS Properties-First v. P.W. Scott Assoc.

Case Details

Full title:DMS PROPERTIES-FIRST, INC., Plaintiff, v. P.W. SCOTT ASSOCIATES, INC.…

Court:Court of Chancery of Delaware, New Castle County

Date published: Jun 21, 1999

Citations

Civil Action No. 16450 (Del. Ch. Jun. 21, 1999)

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