Elf Atochem North America v. Jaffari

Supreme Court of Delaware · 1999 · Corporations

CorporationsLimited liability companiesLLC agreementsArbitrationForum selectionDelaware LLC Actfreedom of contractLLC agreement

Facts

Malek, Inc. filed a Delaware certificate of formation for Malek LLC, and shortly thereafter Elf, Malek, Inc., and Jaffari executed a detailed LLC Agreement governing Malek LLC's affairs, although Malek LLC itself did not sign that agreement. The Agreement gave Jaffari managerial authority and required that any controversy arising out of the Agreement or the action or inaction of any member or manager be arbitrated in San Francisco, with court actions limited to compelling arbitration or enforcing an award, and otherwise requiring California courts for non-arbitrable claims. Elf later sued in Delaware, alleging misconduct by Jaffari as manager and styling some claims as derivative on behalf of Malek LLC. The Distribution Agreement lacked forum-selection language, but the claims still centered on Jaffari's conduct as manager and the transactions contemplated by the LLC Agreement.

Issue

Whether an LLC is bound by an LLC agreement executed by its members even though the LLC itself did not sign the agreement, and whether Delaware law permits LLC members to require that all disputes be resolved exclusively by arbitration or court proceedings in California. A related question was whether styling claims as derivative preserved Delaware Chancery jurisdiction despite those contractual provisions.

Rule

Under the Delaware LLC Act, the policy is to give maximum effect to freedom of contract and to the enforceability of LLC agreements. An LLC agreement executed by the members as to the affairs of the LLC and the conduct of its business binds the LLC even if the LLC did not separately sign it, and members may contract to require arbitration and exclusive out-of-state fora for disputes arising out of or connected with the agreement unless the Act expressly prohibits that arrangement. Statutory grants of Chancery jurisdiction in Sections 18-110(a), 18-111, and 18-1001 are default provisions that members may contract around.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Nora Kim and Devon Price formed Harbor Mesh LLC by filing a Delaware certificate of formation. Five days later, they signed an operating agreement governing the company's affairs and business, including a clause requiring arbitration in Phoenix for any dispute arising from the agreement or any manager's conduct, but Harbor Mesh LLC itself did not sign.

Nora later sues Devon derivatively in Delaware Chancery, alleging Devon diverted company cash while acting as manager. Devon moves to dismiss based on the Phoenix arbitration clause. What is the strongest argument for dismissal under Delaware law?

Explanation. Under the majority opinion, an LLC agreement is any agreement of the members as to the affairs of the LLC and the conduct of its business. Because the members executed the agreement to govern the LLC's operations, the LLC is bound even without separately signing. A derivative label does not avoid a broad arbitration/forum clause, and Chancery jurisdiction under the Act is treated as default, not nonwaivable.