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Keywords

contractlawsuitjurisdictionarbitrationliabilityfiduciary
contractdefendantjurisdictionarbitrationliabilitypartnership

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Elf Atochem North America, Inc. v. Jaffari, 727 A.2d 286, 79 A.L.R.5th 803

Facts

Elf Atochem North America, Inc. entered into a joint venture with Jaffari and Malek, Inc. to develop an environmentally-friendly maskant. They formed Malek LLC in Delaware, and a comprehensive agreement was created to govern the LLC's operations. Elf alleged that Jaffari breached his fiduciary duties and engaged in misconduct, leading to the lawsuit in the Delaware Court of Chancery. The court dismissed the case, stating that the agreement's arbitration and forum selection clauses governed the dispute.

On October 29, 1996, Malek, Inc. caused to be filed a Certificate of Formation with the Delaware Secretary of State, thus forming Malek LLC, a Delaware limited liability company under the Act.

Issue

Whether the Delaware Court of Chancery had subject matter jurisdiction over Elf's claims against Malek LLC and Jaffari, given the arbitration and forum selection clauses in the governing agreement.

We hold that: (1) the Agreement is binding on the LLC as well as the members; and (2) since the Act does not prohibit the members of an LLC from vesting exclusive subject matter jurisdiction in arbitration proceedings (or court enforcement of arbitration) in California to resolve disputes, the contractual forum selection provisions must govern.

Rule

The Delaware Limited Liability Company Act allows members to contractually agree to arbitration and forum selection provisions, which can limit the jurisdiction of the courts.

The Act's basic approach is to permit partners to have the broadest possible discretion in drafting their partnership agreements and to furnish answers only in situations where the partners have not expressly made provisions in their partnership agreement.

Analysis

The court determined that the claims brought by Elf arose under the agreement that governed Malek LLC, which included arbitration and forum selection clauses mandating that disputes be resolved in California. The court found that the LLC was bound by the agreement despite not being a signatory, as the members executed the agreement to govern their business relationship. Therefore, the court held that it lacked jurisdiction to hear the case.

Elf argues that the Court of Chancery erred in failing to classify its claims against Malek LLC as derivative. Elf contends that, had the court properly characterized its claims as derivative instead of direct, the arbitration and forum selection clauses would not have applied to bar adjudication in Delaware.

Conclusion

The Supreme Court affirmed the Court of Chancery's dismissal of Elf's complaint for lack of subject matter jurisdiction, upholding the validity of the arbitration and forum selection clauses in the agreement.

We affirm the judgment of the Court of Chancery dismissing Elf Atochem's amended complaint for lack of subject matter jurisdiction.

Who won?

Cyrus A. Jaffari and Malek LLC prevailed in the case because the court upheld the arbitration and forum selection clauses that required disputes to be resolved in California, thus dismissing Elf's claims in Delaware.

Defendants claim that Elf contracted with Malek, Inc. and Jaffari that all disputes that arise out of, under, or in connection with the Agreement must be resolved exclusively in California by arbitration or court proceedings.

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