Thomas J. Gilmartin and Jill Singer v. Whaley Royce, LLC
CA 11356-MA
| Del. Ch. | Mar 28, 2017Background
- In Oct. 2013 Gilmartin contracted to buy Lot 27; contract required a 10% deposit and contained a broad arbitration clause selecting AAA Construction Industry Arbitration Rules. A Zadroga Funds Addendum made the contract contingent on Gilmartin receiving final September 11 settlement funds by Dec. 2, 2013, otherwise deposit would be returned. A later Revocation of Contingencies Addendum (Nov. 30, 2013) was executed by buyers.
- Buyers (Gilmartin and Singer) later disputed performance and sought return of the deposit in Sept. 2014; Seller (Whaley Royce) refused. Gilmartin pursued arbitration under the contract; the arbitrator awarded the deposit to Seller as liquidated damages and awarded fees/costs to Seller.
- Singer was excluded from the arbitration hearing; Gilmartin was represented by counsel, Whaley Royce by a non‑lawyer. The arbitrator’s award did not include a written explanation of reasoning.
- Plaintiffs filed in Chancery to vacate the award alleging: fraud in inducement, arbitrator partiality, arbitrator overreach (wrong AAA rules used; exclusion of Singer; allowing LLC to appear without counsel; failure to explain award), and that the arbitration clause was invalid or untimely.
- The Master recommended dismissal of the entire amended complaint: (1) Plaintiffs waived challenges to arbitrability/merits by participating in arbitration; (2) fraud allegations failed Rule 9(b) particularity and were an impermissible collateral attack; (3) no adequate pleading of evident partiality or arbitrator overreach causing prejudice; (4) challenges to the arbitration clause were untimely.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Validity of entire contract (fraud in inducement) | Gilmartin: Seller knew buyers could not close without Zadroga funds and never intended to refund deposit; induced contract and later revoked contingency. | Whaley Royce: Contract contains arbitration clause; challenges to contract validity are for arbitrator when not timely raised; fraud pleadings lack required specificity. | Dismissed — fraud claim is a collateral attack and fails Rule 9(b); issues as to contract validity were subject to arbitration and/or waived. |
| Evident partiality of arbitrator | Plaintiffs: AAA bio omitted material CV info; arbitrator primarily represents construction clients and was biased. | Whaley Royce: No nondisclosed substantial personal/financial relationship; biography not a basis for vacatur. | Dismissed — plaintiffs did not allege nondisclosure of a substantial relationship that would show evident partiality under 10 Del. C. § 5714(a)(2). |
| Arbitrator exceeded powers / imperfect execution (rules, exclusion, counsel, explanation) | Plaintiffs: Arbitrator used AAA Commercial Rules rather than Construction or Consumer Rules; excluded Singer though she was a party; allowed LLC to appear without counsel; failed to explain award. | Whaley Royce: Parties’ contract called for Construction Rules; plaintiffs show no specific prejudice from any rule choice; arbitrator has discretion to exclude non‑parties; private arbitration does not require LLC counsel; arbitrator needn't state reasons. | Dismissed — plaintiffs failed to show prejudice or statutory grounds for vacatur under § 5714(a)(3)–(4); exclusion of Singer was an arbitrable merits issue and plaintiffs did not show substantial prejudice. |
| Validity/timeliness of challenge to arbitration clause | Plaintiffs: Clause improperly required Construction Rules for consumer laypersons and was internally inconsistent with addenda. | Whaley Royce: Gilmartin initiated and participated in arbitration and did not object; challenges must be raised before or during arbitration or they are waived/estopped. | Dismissed — Plaintiffs waived and are estopped from belatedly attacking the arbitration clause; such challenges were untimely. |
Key Cases Cited
- Malekzadeh v. Wyshock, 611 A.2d 18 (Del. Ch.) (discusses limits on using contract breach evidence to bootstrap fraud claims)
- Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (U.S. 1967) (general rule that validity of entire contract containing arbitration clause is for arbitrator unless timely challenged)
- Rent‑A‑Center, W., Inc. v. Jackson, 561 U.S. 63 (U.S. 2010) (distinguishing challenges to delegation/validity of arbitration clause vs. merits)
- Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (U.S. 2006) (arbitrability of contract validity goes to arbitrator when clause is not timely challenged)
- Farnsworth v. Towboat Nantucket Sound, Inc., 790 F.3d 90 (1st Cir.) (challenges to validity of an agreement to arbitrate are for arbitrator if not timely raised)
- Abry P’rs V, L.P. v. F & W Acq. LLC, 891 A.2d 1032 (Del. Ch.) (standards for pleading fraud with particularity)
- Delaware Transit Corp. v. Amalgamated Transit Union Local 842, 34 A.3d 1064 (Del. 2011) (definition/standard for evident partiality of an arbitrator)
- Solomon v. Pathe Communications Corp., 672 A.2d 35 (Del. 1996) (standards governing Rule 12(b)(6) review)