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Is Rescission an Arbitral Remedy?

Is recission a proper arbitral remedy? Even if recission would primarily benefit non-parties to the proceeding?

Maybe so, answers the Delaware Court of Chancery in the matters of RBC Capital Markets v. Thomas Weisel Partners and Merrill Lynch v. Thomas Weisel Partners (Feb 25, 2010).

The opinion of Vice Chancellor John W. Noble provides an overview of the arbitral process under FAA and FINRA rules, and cites to some of the key arbitral case law including Nagrampa.

The opinion is worth reading in its entirety. The court notes that "the lodestar of arbitration is consent of the parties" and that grounds for vacatur include not only "manifest disregard" for the terms of the contract, but also "where the arbitrator's ruling is 'so palpably faulty that no judge, or group of judges, could have conceivably made such a ruling...'" [citing Safeway Stores 390 F.2d 79).

It should be noted that not all jurisdictions are in accord with the latter ground for vacatur, particularly in the wake of Hall Street---a confusing decision which franchise attorney Ron Gardner termed "abhorrent" in a recent interview with BMM.

The most intriguing part of the decision regards the debate over rescission.

Weisel is a broker who sold clients certain securities originated by investment bankers RBC and Merrill Lynch. In this action, the investment bankers said that the purpose of Weisel seeking rescission was so that the Weisel clients would get their money back and thus be able to once again buy products from Weisel, on which Weisel would get a broker's commission.

In short, RBC and Merrill argued that Weisel was really attempting to arbitrate the claims of third parties who were not named parties to the arbitral proceeding, and that if Weisel's customers purchased securities which were unsuitable then that is a matter properly between Weisel and its own customers--not the responsibility of RBC and Merrill.

Vice Chancellor Noble was conflicted as to whether such a remedy (if granted by the arbitrator) would exceed the authority of the arbitrator. He suggests that it would exceed, but balances that implication by stating that "Ultimately, the Court must balance its own concerns with this remedy against the broad deference afforded arbitrators."

Will the arbitrator tempt fate by granting rescission? If the arbitrator does, it will put the Court of Chancery in the position of having to address the matter directly.

RBC Capital v. Thomas Weisel Partners.pdf160.96 KB
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About Corbin Williston

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Corbin is the online pen name of a contracts aficionado who needs to get a better hobby.

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