Facts of the Case
The plaintiff, Mark Gomes, is an investment analyst in the technology sector. He provided stock picks on a crowdsourced investment website that garnered thousands of followers. In 2013, the plaintiff and one of the defendants, Ian Karnell started a subscription service that circulated Gomes's stock picks. Shortly thereafter, the parties founded a separate venture that would own the web-based subscription service as well as a new subscription service.
In 2015, the parties executed an operating agreement for yet another new entity, Montext, which they planned to use to build a web-based platform to help other investment analysts monetize their own stock picks. The operating agreement for Montext contained an arbitration clause. Shortly after the formation of Montext, disputes arose regarding the ownership of the web-based platform that impacted all of the parties' business ventures.
In efforts to resolve the issues, the parties' respective counsel discussed potential dispute-resolution alternatives and ultimately verbally agreed to arbitrate any dispute if mediation was not successful. In fact, Gomes's counsel sent the Karnells' counsel an email titled "Agreement to mediate and arbitrate," which stated in pertinent part:
This will memorialize our agreement as to how to move this matter forward.
The parties (Mark Gomes, Jeremi Karnell, and Ian Karnell) agree to mediate all disputes between the three of them related to PTT and Montext. The parties, through counsel, agrees [sic] to use their best efforts to select a mediator by September 11.
The parties further agree that if an impasse is declared by the mediator, the parties will immediately initiate the binding arbitration process in an effort to resolve these disputes.
Id. The Karnells' attorney then responded: "I am happy to call this an agreement on the core point of mediating/arbitrating in lieu of litigation. That said, let's move on nailing down some particulars, including items already discussed such as location, at the same time we continue to discuss interim and final settlement terms." Id.
Thereafter, the parties engaged in suggesting possible mediators. Ultimately, the parties selected a mediator, set a date for mediation, agreed to the scope of the mediation, and engaged in limited discovery pursuant to the terms in the email communications.
Gomes suddenly cancelled the mediation days before the mediation was scheduled to begin. One month after canceling the mediation, Gomes filed a complaint alleging inter alia breach of fiduciary duty, waste, and aiding and abetting breach of fiduciary duty.
The Karnells filed a motion to dismiss for lack of subject matter jurisdiction and to compel arbitration under the arbitration agreement created by the email communications. Gomes contended that the email communications reflected preliminary negotiations and were missing "essential terms" to create a binding arbitration agreement.
Delaware Court of Chancery's Ruling
The court granted the defendants' motion to compel arbitration after examining several angles.
FAA rules govern interstate commerce disputes. Initially, the court noted that once parties agree to arbitrate a dispute involving interstate commerce, the rules of the FAA are applicable and govern the dispute. The FAA, 9 U.S.C. §§ 1 et seq., mandates that arbitration agreements be shall be "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." Accordingly, a party seeking to avoid arbitration bears the burden of establishing facts evidencing that the terms or conditions of the arbitration agreement can be invalidated due to grounds that exist at law or in equity for the revocation of any contract.
Essential terms are necessary to bind the parties. The court next focused on the plaintiff's contention that the arbitration agreement lacked essential terms to bind the parties. More specifically, the plaintiff argued that the following essential terms were lacking: "the identity of the arbitrator, the means of selecting an arbitrator, the location of the arbitration, the applicable rules/procedures, the effect of the arbitration, the governing law, the type of relief available, the scope of permissible discovery, and the payment of arbitration fees." Consequently, the plaintiff averred that there was no meeting of the minds that would allow valid contract formation. However, the plaintiff conceded that there was no consensus among the courts with respect to what constitutes "essential terms" for an arbitration agreement.
Gomes is distinguishable from Ramone and Leeds. Under Delaware law, it is well settled that a valid contract exists "when the parties intended that the contract would bind them, the terms of the contract are sufficiently definite, and the parties exchange legal consideration." In arguing against arbitration, the plaintiff relied primarily on two cases—Ramone v. Lang, 2006 WL 905347 (Del. Ch. Apr. 3, 2006), and Leeds v. First Allied Connecticut Corp., 521 A.2d 1095, 1102-03 (Del. Ch. 1986)—that found no valid contract existed.
In Ramone v. Lang, the parties disputed whether an email exchange formed an agreement that created a limited liability company. The court held that the email exchange did not form a binding agreement. The court reasoned that there was never a manifestation of objective assent to the essential contract terms. In that case, emails from the plaintiff evidenced a lack of understanding of certain details, expressed potential disagreement with other details, and in one instance suggested that the parties meet to "finalize the details." All of these facts illustrated quite clearly that there was no manifestation of objective assent to the essential contract terms or meeting of the minds. Consequently, there was no intent by the parties to be bound by the terms.
Likewise, in Leeds v. First Allied Connecticut Corp., the court held that although a number of terms and issues were agreed to in a letter, no contractual agreement was formed between the parties. The dispute in Leeds involved the sale of a nursing home business and its associated real estate. The court noted that "there are myriad topics and terms utterly conventional when a commercial seller in a significant transaction takes back a note" that were not present in the purported agreement. Id. at 1103. Furthermore, the court focused on the subsequent conduct of the parties. After drafting the one-page letter, the parties met a month later for the purpose of additional negotiations. Moreover, the parties "never seemed to discuss" a financing requirement that "would probably have been a deal breaker even had agreement been reached on the other points." Id. at 1101. As a result, the court held that the behavior of the parties after drafting the letter showed that they did not intend the letter to be the completion of all negotiations or reflect a final agreement.
In the instant case, the court held that Ramone is distinguishable becausethe parties' counsel expressed a mutual commitment to arbitrate "that was unconditional and without variation," despite the fact that certain specifics were still being "nailed down." Gomes, No. 11814-VCMR. In fact, the relevant email sent by Gomes' counsel used the following language: agreement, agree to mediate all disputes between the three of them related to PTT and Montext, parties further agree that if an impasse is declared by the mediator, and the parties will immediately initiate the binding arbitration process in an effort to resolve these disputes. Id. And the relevant response from the Karnells' attorney included similar language: I am happy to call this an agreement on the core point of mediating/arbitrating in lieu of litigation. Id.
Furthermore, the court noted that "[a]ll three parties acted with the understanding that 'an agreement on the core point of mediating/arbitrating in lieu of litigation' controlled their behavior." Id. The parties selected a mediator, chose a time and place for the mediation, and engaged in limited discovery—all pursuant to the arbitration agreement. In short, the overt actions of the parties in accordance with the arbitration agreement evidenced their intent to be bound.
Moreover, unlike in Leeds, the court found that no "extraordinary" terms were missing from the parties' arbitration agreement. Despite the fact that remaining issues like location were not final, the parties explicitly agreed to mediate and arbitrate disputes related to the parties' business ventures. They also agreed that arbitration was binding if mediation was unsuccessful. As such, the plaintiff failed to meet his burden of proving that terms or conditions of the arbitration agreement should be invalidated due to grounds that exist at law or in equity for the revocation of any contract.
In short, the Delaware Chancery Court solidified its intent to enforce arbitration agreements where it is clear even from email communications that the parties intend to be bound, the terms of the agreement are sufficiently definite, and the parties exchange legal consideration. Counsel should thus take care to craft language sufficiently specifying that email communications to solidify certain provisions are not final and binding and are subject to final approval by the client.