The parties’ agreements and underlying dispute

In a Memorandum Opinion dated 6 October 2017 in UPM-Kymmene Corporation v. Renmatix, Inc., 1 chancellor Andre G. Bouchard of the Court of Chancery of the State of Delaware (the ‘Court’) determined that the courts, and not the arbitrators, should resolve the issue of substantive arbitrability of a dispute under the Federal Arbitration Act (‘FAA’) in the presence of conflicting arbitration agreements in two separate but related contracts.

The background is as follows: on 16 May 2013, UPM-Kymmene (‘UPM’), a Finnish renewable resources company, entered into a Joint Development Agreement (the ‘Bilateral Agreement’) with Renmatix, a biotechnology startup established in Delaware. The Bilateral Agreement incorporated two previous agreements between the same parties, namely a Material Transfer Agreement and a Confidentiality Agreement, and provided for arbitration under the ICC Rules:

This Agreement, including the [Confidentiality Agreement] and the [Material Transfer Agreement], shall be governed by and construed in accordance with the laws of England. The Parties agree to negotiate all disputes, controversies or claims (including breach, termination or validity of this Agreement) between them in good faith for a period of 30 days following written notice of such dispute. If the Parties fail to resolve such dispute during this negotiation period, then such dispute shall be finally settled by binding arbitration in accordance with the Rules of Arbitration of the International Chamber of Commerce. The language of the arbitration proceedings shall be English and the venue of the proceedings shall be in Toronto, Canada. There will be one arbitrator mutually agreed by the Parties, except that if the Parties cannot agree within fifteen days, then there will be a panel of three, with one being appointed by each Party and the third selected by the first two.

On 20 November 2013, UPM, Renmatix and a third party, the German chemical company BASF, entered into a separate contract (the ‘Trilateral Agreement’), in which the parties purported to ‘improve process steps’ of Renmatix’s technology. The Trilateral Agreement also incorporated several agreements as appendices (the Material Transfer Agreement between UPM and Renmatix, a Material Transfer Agreement between BASF and Renmatix, and a Confidentiality Agreement between the three parties) and provided for arbitration before the AAA:

The Parties agree that any dispute, claim or controversy arising pursuant to this Agreement, or the rights or obligations of the Parties hereunder shall be resolved solely by application of the procedures set forth in this Section 9.11. … If such representatives are unable to resolve such dispute within fifteen (15) business days following the first settlement meeting or call between the executives, any Party may demand arbitration by sending written notice to the other Parties. Such arbitration shall be administered by the American Arbitration Association (‘AAA’) in accordance with its Commercial Arbitration Rules. The arbitration proceedings shall be conducted before one arbitrator in Wilmington, Delaware or any other place selected by mutual agreement of the Parties. The arbitrator shall apply the governing law [of the State of Delaware].

On 24 April 2017, Renmatix commenced arbitration against UPM under the AAA Rules, relying on the arbitration agreement in the Trilateral Agreement. In its Demand for Arbitration, which according to the Court of Chancery was ‘not a model of clarity’, Renmatix mentioned the Bilateral Agreement in the description of the factual background but asserted claims solely under the Trilateral Agreement. 2

On 10 May 2017, UPM filed a motion with the Court seeking to (i) enjoin Renmatix from arbitrating its claims under the AAA Rules and (ii) compel arbitration pursuant to the ICC Rules in Toronto as provided in the Bilateral Agreement (the ‘motion for injunctive relief’). On 1 June 2017, Renmatix cross-moved to dismiss UPM’s motion for lack of subject-matter jurisdiction on the basis of the existence of an arbitration agreement and argued that the matter should proceed to arbitration under the AAA Rules pursuant to the arbitration agreement in the Trilateral Agreement.

Parties’ arguments

Renmatix’ position was that the Trilateral Agreement evoked a clear intent of the parties to refer questions of arbitrability to the arbitrator by incorporating the AAA Commercial Arbitration Rules. As such, according to Renmatix, the AAA tribunal should decide issues of substantive arbitrability arising from the Demand. Renmatix also represented to the Court that its Demand for Arbitration was intended to assert claims only under the Trilateral Agreement, and not under the Bilateral Agreement.

UPM, however, was ‘suspicious of Renmatix’s intentions’ and argued that the Trilateral Agreement was an agreement between three parties and therefore did not create obligations that Renmatix could enforce again UPM alone. UPM’s position was that Renmatix was trying to use the AAA arbitration to improperly bring claims against UPM under the Bilateral Agreement, which should be arbitrated before the ICC. According to UPM, the Willie Gary test (explained below) did not apply to the situation at hand and it was the Court’s task to follow ordinary principles of contract interpretation to determine which of the two arbitration agreements governed the parties’ dispute.

The Court’s decision on substantive arbitrability

In order to decide UPM’s motion under the FAA, the Court had to decide whether the parties had agreed to submit a particular dispute to arbitration, an issue known in the United States as ‘substantive arbitrability’. 3 Under the U.S. Supreme Court’s interpretation of the FAA as applied by Delaware courts, ‘courts should decide questions of substantive arbitrability’ unless ‘there is ‘clear and unmistakable evidence’ that the parties intended otherwise’, 4 namely that arbitrators should decide such issue.

Under Delaware case law, this analysis is factual and must be effected in light of three questions (the Willie Gary test): whether the arbitration clause (i) ‘generally provides for arbitration of all disputes’, (ii) incorporates a set of rules that empowers arbitrators to decide arbitrability, and, if the first two are met, (iii) whether there are ‘non-frivolous’ arguments that the arbitration agreement covers the underlying dispute. 5 If all three questions are answered in the affirmative, the courts must decline jurisdiction to decide substantive arbitrability in favour of the arbitrator.

After it acknowledged that Willie Gary had never been applied in a multi-contract situation and noted that the arbitration agreements at issue were in conflict as both were broad and incorporated rules giving the arbitrators the authority to rule on their own jurisdiction but neither provided to resolve all the disputes between the parties, 6 the Court concluded that it was left with no choice but to decide the issue of substantive arbitrability:

In the face of such dueling arbitration clauses, I cannot discern an intention, much less a clear and unmistakable intention, that the parties wished to have one arbitrator rather than the other determine where the claims asserted in the Demand should be arbitrated. Accordingly, it falls to the Court to decide that issue. 7

Applying ordinary principles of contract interpretation, the Court then focused its analysis on whether the dispute should be adjudicated through arbitration under the ICC or the AAA Rules. Looking at the language of the two agreements, the Court concluded that, although ‘[t]his structure may not be the ideal of efficiency’, the parties had agreed that ‘any dispute arising under the second-in-time Trilateral Agreement logically would be subject to arbitration before the AAA, while any dispute arising under the earlier Bilateral Agreement would remain subject to arbitration before ICC’. 8

The Court ruled that Renmatix was entitled to decide which ‘contractual obligations it wishes to enforce against UPM and to avail itself of the dispute resolution mechanism associated with those contractual provisions’. 9 Accordingly, since Renmatix was asserting claims under the Trilateral Agreement and had sought arbitration under the arbitration agreement contained therein, the Court granted its motion to dismiss in favour of the arbitration under the AAA Rules seated in Delaware.

Conclusion

As is apparent from the decision, the notion of ‘arbitrability’ in the U.S. refers to the validity and scope of the arbitration agreement and diverges from the meaning given to that term elsewhere, which refers whether a specific subject-matter can be arbitrated. As noted by a commentator:

Outside the United States, the term ‘arbitrability’ has a reasonably precise and limited meaning: i.e., whether specific classes of disputes are barred from arbitration because of national legislation or judicial authority … However, ‘arbitrability’ in the United States also means – and in this the United States is different from the rest of the world, and the difference can create confusion – the preliminary question of whether an arbitral tribunal has the authority to decide, as an initial matter, that a given dispute should be submitted to arbitration for a determination of whether the arbitral tribunal has jurisdiction over the dispute. 10

In fact, it is clear that the issue brought before the Court is rather one of competence-competence, that is, whether the arbitrators have jurisdiction to determine their own jurisdiction:

Here, the core dispute between the parties is not whether the claims in Renmatix’s Demand should be arbitrated or litigated in court – the parties agree that the claims must go to arbitration – but whether those claims must be arbitrated before the ICC or AAA. Each of the agreements at issue, moreover, incorporates a set of arbitration rules empowering the arbitrator to decide arbitrability, albeit a different arbitrator.

Although the Court acknowledged that both sets of institutional rules empowered arbitrators to decide on their own jurisdiction, it proceeded by analysing which arbitral tribunal should hear the case. Perhaps a more efficient solution would have been to allow the matter to proceed to arbitration ab initio, considering that the AAA Rules (as well as those of ICC) clearly enable arbitrators to rule on their jurisdiction.

One may also wonder if disputes arising out of the parties’ conflicting – but related – arbitration clauses could in any manner be decided together, especially in light of recent proposals for cross-institutional consolidation of cases. 11

Under the ICC Rules for example, two or more cases can be consolidated if (i) the parties agree thereto, (ii) the claims in the arbitrations are made under the same arbitration agreement, or (iii) the claims in the arbitrations are made under more than one arbitration agreement but (a) the arbitrations are between the same parties, (b) the disputes in the arbitrations arise in connection with the same legal relationship and (c) the ICC Court finds the arbitration agreements to be compatible (Article 10). Virtually identical requirements exist under Article 8 of the 2014 AAA-ICDR Rules.

In the case at hand, the arbitration agreements in the Bilateral Agreement and in the Trilateral Agreement provide for different arbitration institutions, different places of arbitration and a different number of arbitrators. In such circumstances, it would appear extremely difficult to have matters relating to both contracts resolved in one and the same case absent an agreement of the parties. Such an inefficient and undesirable conclusion could only be – and should have been – avoided at the stage of the drafting of the arbitration agreements.



1
UPM-Kymmene Corporation v. Renmatix, Inc., No. CV 2017-0363-AGB, 2017 WL 4461130 (Del. Ch. Oct. 6, 2017).


2
UPM-Kymmene Corp. at *2.


3
Ibid. at *3 citing the U.S. Supreme Court’s decision in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995).


4
Ibid. at *4 quoting James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 78 (Del. 2006).


5
Ibid. at *4.


6
Ibid. at *5.


7
Ibid. at *7.


8
Ibid. at *8.


9
Ibid. at *9.


10
Laurence Shore, ‘Defining ‘Arbitrability’: The United States vs. the rest of the world’, New York Law Journal, 15 June 2009.


11
See, e.g., Singapore International Arbitration Centre, Memorandum Regarding Proposal on Cross-Institution Consolidation Protocol, 19 December 2017, available at http://www.siac.org.sg/component/content/article/69-siac-news/551-proposal-on-cross-institution-consolidation-protocol.