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Elf Atochem N. Am., Inc. v. Jaffari - 727 A.2d 286 (Del. 1999)

Rule:

Section 18-1101(b) of the Delaware Limited Liability Company Act, like the essentially identical Section 17-1101(c) of the LP Act, provides that "it is the policy of [the Act] to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements."

Facts:

Plaintiff brought a purported derivative suit on behalf of a Delaware limited liability company (LLC) calling into question whether: (1) the LLC, which did not itself execute the LLC agreement in this case (Agreement) defining its governance and operation, was nevertheless bound by the Agreement; and (2) contractual provisions directing that all disputes be resolved exclusively by arbitration or court proceedings in California were valid under the Delaware Limited Liability Company Act (Act). The lower court granted defendants' motion to dismiss based on lack of subject matter jurisdiction. The lower court held that plaintiff's claims arose under the Agreement, or the transactions contemplated by the agreement, and were directly related to actions as manager of defendant LLC.

Issue:

(a) Was the LLC agreement valid?; (b) Were the arbitration and choice of forum provisions valid and enforceable?

Answer:

(a) Yes. (b). Yes.

Conclusion:

The court affirmed on appeal. The court held that (1) the Agreement was binding on defendant LLC as well as the members; and (2) since the Act did 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 governed.

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