Delaware Supreme Court Finds Validity of Contract Containing Arbitration Clause to Be Decided By Arbitrator

In a December 2022 decision, the Delaware Supreme Court considered whether the validity of an arbitration agreement is an issue to be decided by the court or by an arbitrator.

The plaintiff, Agspring LLC, was formed in 2012 by the defendant, NGP X US Holdings, LP, and two nonparties, Ranal Linville and Bradley Clark. In connection with Agspring’s formation, the parties entered into an LLC agreement and a related “services agreement,” both of which contained arbitration provisions providing for the use of JAMS arbitration rules. In 2015, NGP sold Agspring to a group of investors pursuant to a purchase agreement, which provided that any disputes regarding the purchase were to be submitted to state or federal court in Wilmington, Delaware. The 2015 purchase agreement contained an integration clause which stated in relevant part, “this agreement and the related agreements constitute the entire agreement between the parties hereto pertaining to the subject matter hereof and supersede all prior negotiations, agreements, and understandings of the parties with respect to the subject matter hereof.”

In 2019, Clark and Linville sued Agspring in Kansas over matters related to their employment. NGP, Clark, and Linville were subsequently sued by Agspring’s new owners in Delaware state court, alleging fraud and unjust enrichment in connection with the 2015 sale of Agspring. NGP demanded indemnification of costs related to these two actions and Agspring refused, resulting in NGP initiating arbitration under the 2012 LLC agreement and services agreement. The arbitration panel ultimately found that the parties’ 2012 arbitration agreements survived the execution of the 2015 purchase agreement and concluded that NGP was entitled to indemnification for costs incurred in the above referenced lawsuits. Agspring filed a motion to vacate the arbitration award, which the trial court denied.

On appeal, Agspring argued that the trial court erred in concluding that the validity of the parties’ arbitration agreement was an issue for the arbitrator in the first instance. In considering this argument, the Delaware Supreme Court held that “whether a later in time agreement, in this case the [2015 purchase agreement], superseded the 2012 agreements, causing them no longer to exist, would, in our view, be a question to be decided by the court, unless the 2012 agreements show that the parties clearly and unmistakably agreed that such a question would be decided by arbitration.”

The Delaware Supreme Court ultimately concluded that the issue of the continued viability of the 2012 agreements was properly submitted to the arbitration panel, noting that “this result follows from the parties’ agreement [in the 2012 agreements] that the JAMS rules would apply,” including Rule 11(b) of those rules that “disputes, including disputes over the . . . existence . . . of the agreement under which arbitration is sought . . . shall be submitted to and ruled on by the arbitrator.” The Delaware Supreme Court rejected Agspring’s other arguments and affirmed the trial court’s denial of Agspring’s motion to vacate the arbitration award.

Agspring, LLC v. NGP X US Holdings, L.P., No. 2019-1021 (Del. Dec. 2, 2022).