Parties in business transactions sometimes decide by contract that disputes relating to or arising out of their contractual relationship shall be resolved by arbitration. If and when a dispute arises, a threshold issue is whether the dispute is covered by arbitration and if so, whether any aspect may be resolved by a court. A less typical issue is whether, if both parties go forward in a court despite the existence of the arbitration clause and the court enters relief, the losing party may seek to undo the court's work by claiming under Delaware Court of Chancery Rule 12(b)(1) that the arbitration provision divested the court of subject matter jurisdiction. The Court of Chancery addressed that issue in Gandhi-Kapoor v. Hone Capital, C. A. No. 2022-0881-JTL (Del. Ch., Nov. 22, 2023, corrected Dec. 4, 2023), holding in a scholarly opinion that by participating in litigation without raising the defense of arbitration, the respondent had waived its right to rely on the arbitration provision. The court thus denied respondent's Rule 12(b)(1) motion to dismiss in favor of arbitration and to vacate the court's orders under Rule 60.

Background

Gandhi-Kapoor is an advancement action that petitioner initiated on Sept. 29, 2022, to recover fees and expenses defending a claim brought against her for alleged breach of fiduciary duty and fraud in the management of a Delaware LLC. The respondents initially stipulated that petitioner was entitled to advancement and answered the complaint without referring to the parties' arbitration provision. Thereafter, respondents contended that its counsel lacked authority to stipulate to advancement, and retained new counsel who moved to vacate the stipulations. The petitioner then cross-moved for summary judgment. Following briefing in which respondents did not mention or rely upon the arbitration provision, the court on April 5 granted the summary judgment motion, holding that petitioner was entitled to advancement and finding it unnecessary to address the motion to vacate because petitioner was entitled to advancement under the summary judgment advancement order. On April 16, the petitioner sent a written demand for advancement. The respondents neither objected nor made any payment.. The petitioner then moved for sanctions. During briefing, no one mentioned the arbitration provision and the court issued an opinion dated July 19 granting in part the sanctions motion. The petitioner sent three other demands for advancement in May, June and July as to which respondents neither objected nor paid. On Aug. 10, the petitioner renewed her sanctions motion and on the same day new counsel entered its appearance for one of the respondents. New counsel then invoked the arbitration provision and moved for dismissal under Rule 12(b)(1) claiming that the court lacked subject matter jurisdiction and therefore all prior orders were void.