Elf Atochem North America, Inc. v. Jaffari
727 A.2d 286 (Del. Sup. Ct. 1999).

Facts:
P manufactured and distributed solvent-based maskants to the aerospace and aviation industries. D developed an innovative, environmentally-friendly alternative. When the EPA classified solvent-based maskants as hazardous, the two decided to go into business together and form a Malek LLC.

  • Elf later sued Jaffari and Malek LLC individually and derivatively on behalf of Malek LLC, in Delaware, alleging among others, breach of fiduciary duty.

Note:

  • The LLC agreement was signed by Elf and Jaffari, but Malek LLC was not a party to the agreement.
  • There was an arbitration clause.

Issues:
(1) Whether the LLC, which did not itself execute the LLC agreement in this case, is nevertheless bound by the Agreement.
(2) Whether the contractual provisions directing that all disputes be resolved exclusively by arbitration or court proceedings in California are valid under the Act.

Holding:
Yes.

Reasoning:

  • “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.”
  • “Only where the agreement is inconsistent with mandatory statutory provisions will the members agreement be invalidated.”
  • The court held that the LLC need not be a party to the agreement – it’s the members who are the real parties in interest, and the LLC is simply their joint business vehicle.
  • As for arbitration, there is strong public policy in favor of them.