Opinion ID: 773116
Heading Depth: 2
Heading Rank: 1

Heading: NAFT-Smoothline Disputes

Text: 41 The Supreme Court has directed that we are to construe the scope of arbitration clauses broadly. See Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983) (instructing that any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration). This presumption in favor of arbitration applies with special force in the field of international commerce. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 631 (1985). 42 Of course, the parties may limit by agreement the claims they wish to submit to arbitration. If the parties make such an intention clear, the federal policy favoring arbitration must yield. Federal policy alone cannot be enough to extend the application of an arbitration clause far beyond its intended scope. McDonnell Douglas Fin. Corp. v. Pennsylvania Power & Light Co., 858 F.2d 825, 831 (2d Cir. 1988) (internal quotation marks omitted). 43 The March 1993 agreement requires arbitration of any dispute between the parties with respect to the subject matter of this Agreement and Guarantee. The district court determined that the subject matter of the contract did not include disputes over whether Smoothline, with respect to phones manufactured by it, was required to produce high quality phones and repair or replace CRUs. This, we conclude, was error. 44 The March 1993 agreement does not contain a definition of the term subject matter. NAFT argues that, absent a contractual definition, it is appropriate to consider dictionary definitions of the term. C.f., Kerin v. United States Postal Serv., 116 F.3d 988, 991-92 (2d Cir. 1997). We agree. 45 Webster's defines subject matter as, inter alia, matter presented for consideration. Webster's Third New International Dictionary 2276 (1971). Smoothline accepts this definition. Smoothline's obligations to produce quality phones and to repair or replace CRUs are considered in the March 1993 agreement because the agreement expressly conditions NAFT's obligations on Smoothline's continuing to perform its obligations under the oral understandings. For example, NAFT is not required to open additional letters of credit in favor of the Welback companies unless Smoothline delivers the highest quality electronic goods and repairs or replaces all CRUs at no cost to NAFT. 46 It is clear from the district court's discussion that it thought the subject matter of the March 1993 agreement was limited to the motivating purpose behind the agreement, namely, Smoothline's desire to engage the Welback companies, as subcontractors, to manufacture goods for, and be paid by, NAFT. While the district court's definition of subject matter as purpose is not unreasonable, it is not the only reasonable definition. Reversal is required since it cannot be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute. Genesco, Inc. v. T. Kakiuchi & Co., 815 F.2d 840, 847 (2d Cir. 1987) (internal quotation marks omitted). 47 We need not decide whether obligations that were merely referenced in the March 1993 contract, without being made conditions precedent, are part of the subject matter of the contract. Smoothline's obligations to produce and deliver the highest quality electronic and telecommunications equipment, to meet all production and delivery schedules, and to repair or replace, at no cost to NAFT, any defective goods returned by NAFT to Smoothline, are conditions precedent to NAFT's performance under the March 1993 contract. Therefore, disputes over Smoothline's performance of these obligations must be submitted to arbitration. 3 48 NAFT only appealed from that portion of the district court's order which denied NAFT's petition to compel arbitration. Arguably then, the limited scope of NAFT's appeal does not allow us to consider the propriety of the district court's denial of NAFT's petition to enjoin Smoothline from proceeding in Liechtenstein. See Shrader v. CSX Transp., Inc., 70 F.3d 255, 256 (2d Cir. 1995). However, our determination that Smoothline is required to arbitrate its disputes with NAFT regarding Smoothline's obligations to produce high quality phones and to repair or replace CRUs necessarily means that Smoothline may not continue the Liechtenstein suit insofar as Smoothline seeks to challenge the validity of these obligations in that suit. Therefore, on remand, the district court should grant NAFT's petition insofar as NAFT seeks to enjoin Smoothline from litigating these issues in Liechtenstein. 49 The December 1993 agreement presents a separate question. That agreement, which contains no arbitration clause, provides that NAFT is not required to pay Smoothline's tooling costs until Smoothline repairs or replaces outstanding CRUs. In the Liechtenstein action, Smoothline alleges that NAFT failed to pay its share of Smoothline's tooling costs and seeks damages for this alleged breach. We have already determined that the issue of whether Smoothline is under any obligation to repair or replace CRUs is a matter that must be submitted to arbitration. NAFT argues that its obligation to pay Smoothline's tooling costs is inextricably linked with the CRU issue, and that the tooling dispute must thus also be submitted to arbitration. Because the district court did not have occasion to consider this argument, we remand for the district court to confront this argument in the first instance, taking into account our construction of the subject matter of the agreement. We express no opinion as to the argument's validity.