In compelling arbitration of an arbitrability dispute, a Delaware Chancery Court ruled that party intent to submit arbitrability questions to the arbitrator is established by an arbitration agreement which references a body of arbitration rules authorizing the arbitrator to decide questions of arbitrability, unless the arbitration agreement contains broad and substantial carve-outs or exceptions.

In McLaughlin v. McCann, Civ. A. No. 3067-VCS, 2008 WL 483457 (Del. Ch. Feb. 21, 2008), McLaughlin purchased a business from McCann. The parties executed a company purchase contract that included an arbitration agreement referencing American Arbitration Association (AAA) rules. These rules explicitly authorize the arbitrator to decide questions of arbitrability. See AAA Commercial Arbitration Rule R-7(a).

Upon discovering that all of McCann’s business assets were not conveyed by the original company purchase agreement, the parties executed a second instrument – a corporation purchase contract – which did not contain an arbitration agreement. Two years later, McLaughlin was unable to make the required periodic payments to McCann for the purchase, and he returned the business to McCann.

After McLaughlin filed a five-count suit against McCann on various tort and contract grounds, McCann filed a demand for arbitration with the AAA and petitioned the court to dismiss the matter and compel arbitration. McLaughlin opposed the motion, maintaining that the court should first decide whether the dispute was arbitrable.

In 2006, the Delaware Supreme Court held that referencing a body of arbitration rules which authorize the arbitrator to decide arbitrability questions "evidences a clear and unmistakable intent to submit arbitrability issues to an arbitrator," but that this intent would only be inferred "in those cases where the arbitration clause generally provides for arbitration of all disputes." James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 80 (Del. 2006).

The Court applied the Willie Gary standard, but expressed concern that a literal reading of the "arbitration of all disputes" prong of the Willie Gary arbitrability test would give no weight to the other prong regarding the parties’ rule reference. To the Court, rendering the "reference" prong superfluous would be contrary to well-settled precedent. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995).

Instead, the Court interpreted the Willie Gary test to mean that (1) the incorporation of arbitration rules authorizing the arbitrator to decide arbitrability questions overcomes the initial presumption against allowing an arbitrator to decide questions of arbitrability, and (2) only if there are "broad and substantial" exceptions to arbitration of disputes within the agreement should a court reserve authority to determine arbitrability.

Here, the Court found that McLaughlin and McCann had "clearly and unmistakably agreed to submit the issue of arbitrability to the arbitrator" by referencing the AAA rules in the agreement. Furthermore, the Court found that breadth of the arbitration agreement – namely, any disputes "aris[ing] under this agreement" – did not evince any exceptions that required the court to reserve authority to decide arbitrability. Finally, the Court noted that a "plain reading" of the corporation purchase contract suggested it was merely a clarification of the original company purchase contract, and was equally subject to the arbitration agreement.

As this case indicates, a broadly worded arbitration agreement referring to the National Arbitration Forum Code of Procedure would establish the parties’ intent to submit arbitrability questions to the arbitrator because Rule 20(F) of the Code of Procedure authorizes the arbitrator to "rule on all . . . questions of arbitrability."

To maximize efficiency and avoid litigation over arbitrability questions, parties may clarify their intent by drafting an arbitration agreement that expressly reserves questions of arbitrability for the arbitrator. Under Delaware law, this clarification is essential if the arbitration agreement contains broad or substantial carve-outs.