Opinion ID: 1495908
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Heading: Validity of Arbitration Provision.

Text: By validity, as here discussed, is meant the judicial recognition of the lawfulness of an arbitration agreement. The method of legal enforcement will be discussed under the next heading. It can hardly be said that the decisions as to validity of provisions in contracts for arbitration of disputes between the parties thereto are in a very satisfactory condition. This unsatisfactory situation is brought about by opposing considerations. On one side are the judicial recognition of the desirability of parties settling their differences out of court; the danger of judicially remaking and enforcing a contract different from that to which the parties agreed by substituting the determination of a judge or a jury as to matters largely dependent upon expert qualifications for the determination of an expert agreed upon by the parties and who would have personal knowledge of all the matters bearing upon the dispute; and the practical utility and often necessity of such procedure in the case of construction contracts. On the other side is the supposed public policy that one cannot be held to an agreement restraining his resort to the courts to settle his justiciable rights. As to the encouragement of arbitration, it was long ago said that as a mode of settling disputes, it should receive every encouragement from courts of equity. Burchell v. Marsh, 17 How. 344, 349, 15 L. Ed. 96. As to the dangers of remaking a contract, the Supreme Court has said the contract did not contemplate that the opinion of the court should be substituted for that of the engineer (Ripley v. United States, 223 U. S. 695, 704, 32 S. Ct. 352, 356, 56 L. Ed. 614); and, concerning a similar matter, his action cannot, therefore, be subjected to the revisory power of the courts without doing violence to the plain words of the contract. Indeed, it is not at all certain that the government would have given its assent to any contract which did not confer upon one of its officers the authority in question (Kihlberg v. United States, 97 U. S. 398, 401, 24 L. Ed. 1106). The same conception has been expressed by this court in a similar situation: The courts cannot, without making a new contract for the parties, disregard such positive provisions, or set aside the action of the umpire, except for the most grave and cogent reasons. Choctaw & M. R. Co. v. Newton (C. C. A.) 140 F. 225, 233. As to the practical benefits of such provisions, the Supreme Court has said (regarding a contract for transportation of military stores): If the contract had not provided distinctly, and in advance of any services performed under it, for the ascertainment of distances upon which transportation was to be paid, disputes might have constantly arisen between the contractor and the government, resulting in vexatious and expensive and, to the contractor oftentimes, ruinous litigation (Kihlberg v. United States, 97 U. S. 398, 401, 24 L. Ed. 1106) and this court (in a railroad construction contract, like here involved) said: Such stipulations are evoked out of the experience of railroad companies in such construction work. From its very nature, extending over a long line of road, with diversified topography of country, encountering many varieties of geological formation, and difficulties impossible of anticipation, the variant views and notions of contractors and subcontractors respecting the infinite details of the work, the classification and measurement of material, the prevention of incessant wrangles over the work, with its annoyances and litigation, justified the railroad company in requiring, as a condition precedent to letting the construction of this work, the acceptance of the foregoing provisions of the contract (Choctaw & M. R. Co. v. Newton (C. C. A.) 140 F. 225, 233). Also see Hardware Dealers' Mut. Fire Insurance Co. v. Glidden Co., 284 U. S. 151, 159, 52 S. Ct. 69, 76 L. Ed. 214. As examples of cases announcing the rule that agreements which oust the jurisdiction of the courts are invalid see Home Insurance Co. v. Morse, 20 Wall. 445, 22 L. Ed. 365; Robert Grace Contracting Co. v. C. & O. N. R. Co., 281 F. 904, 905 (C. C. A. 6); Mitchell v. Dougherty, 90 F. 639 (C. C. A. 3); and see United States Asphalt Ref. Co. v. Trinidad Lake Petroleum Co., 222 F. 1006 (D. C. S. D. of N. Y.). The validity of arbitration or umpire provisions governing disputes arising in construction and similar contracts have been generally upheld. As said in United States v. Gleason, 175 U. S. 588, 602, 20 S. Ct. 228, 233, 44 L. Ed. 284,    It is competent for parties to a contract, of the nature of the present one [construction contract], to make it a term of the contract that the decision of an engineer, or other officer, of all or specified matters of dispute that may arise during the execution of the work, shall be final and conclusive, and that, in the absence of fraud or of mistake so gross as to necessarily imply bad faith, such decision will not be subjected to the revisory power of the courts. The validity of such contract provisions has been steadily supported in the Supreme Court [United States v. Mason & Hanger Co., 260 U. S. 323, 326, 43 S. Ct. 128, 67 L. Ed. 286; Plumley v. United States, 226 U. S. 545, 548, 33 S. Ct. 139, 57 L. Ed. 342; Ripley v. United States, 223 U. S. 695, 701, 704, 750, 32 S. Ct. 352, 56 L. Ed. 614; Chicago, S. F. & C. Railroad Co. v. Price, 138 U. S. 185, 11 S. Ct. 290, 34 L. Ed. 917; Hamilton v. Liverpool & L. & G. Insurance Co., 136 U. S. 242, 256, 10 S. Ct. 945, 34 L. Ed. 419; Martinsburg & P. R. Co. v. March, 114 U. S. 549, 5 S. Ct. 1035, 29 L. Ed. 255; Kihlberg v. United States, 97 U. S. 398, 401, 402, 24 L. Ed. 1106; Humaston v. American Telegraph Co., 20 Wall. 20, 27-29, 22 L. Ed. 279; United States v. Robeson, 9 Pet. 319, 326, 327, 9 L. Ed. 142] and the Courts of Appeals [cases in this court, Kennedy v. City of White Bear Lake (C. C. A.) 39 F.(2d) 608, 610; Warner Const. Co. v. Louis Hanssen's Sons (C. C. A.) 20 F. (2d) 483, 488; Road Improv. Dist. v. Roach (C. C. A.) 18 F.(2d) 755, 759; United States v. Geo. A. Fuller Co. (C. C. A.) 14 F.(2d) 813, 827; A. R. Young Const. Co. v. Road Improv. Dist. (C. C. A.) 297 F. 127, 137; Frisco Lumber Co. v. Hodge (C. C. A.) 218 F. 778, 780; United States v. Hurley (C. C. A.) 182 F. 776, 777; General Fireproofing Co. v. L. Wallace & Son (C. C. A.) 175 F. 650, 662; Cook v. Foley (C. C. A.) 152 F. 41, 51; Roberts, Johnson & Rand S. Co. v. Westinghouse El. & Mfg. Co. (C. C. A.) 143 F. 218; Choctaw & M. R. Co. v. Newton (C. C. A.) 140 F. 225, 235; Guild v. Andrews (C. C. A.) 137 F. 369, 371 (opinion by Judge Van Devanter); United States v. Bonness (C. C. A.) 125 F. 485, 489; Elliott v. Mo., K. & T. R. Co. (C. C. A.) 74 F. 707, 710]  also see opinion by Judge (afterwards Chief Justice) Taft in Mundy v. L. & N. R. Co., 67 F. 633, 637 (C. C. A. 6). Nearly all of the above citations involved construction contracts where various or all matters of dispute arising from performance thereunder were, by contract provision, determinable by an engineer or other designated person. A distinction is made between executed (where an arbitration award has been made) and executory (where no award has been made) provisions, but this has to do with the remedy rather than the validity. Red Cross Line v. Atlantic Fruit Co., 264 U. S. 109, 121, 44 S. Ct. 274, 68 L. Ed. 582. Having the above law rules in mind, we examine the contract provision here to determine whether it is valid. Section 35 of this contract constitutes the chief engineer of the railroad company as an umpire to decide all matters arising or growing out of this agreement. The declared purpose of this provision is to prevent all disputes and misunderstandings in relation to any stipulations contained in this agreement, or in reference to any of the specifications and plans made a part thereof or their performance by either of said parties. The decision of the chief engineer is made final and conclusive between the parties hereto, and each and every of said parties hereby waives any and all right of action, suit or suits, or other remedy, in law or otherwise, under this agreement, or arising out of the same. It is in the last just quoted provision we are interested. In so far as the waiver provision is concerned, it is ineffective to prevent judicial actions, whatever may be the effect of the provision or action taken under it upon such actions. It is thus ineffective because it seeks to deny the parties judicial remedies and, as such, is contrary to public policy. But this failure of the waiver clause does not necessarily mean that the entire arbitration provision is dragged down by the weight of that invalidity. It is the duty of the court to preserve as much of the contract as may properly survive. If the remainder of the provision is complete and it can be gathered that the parties intended it to operate irrespective of the waiver clause, then the balance of the provision should be preserved. It is obvious that the place of the waiver clause was purely to give added effect to the decision of the engineer. The provision for arbitration is complete without it. The expressed purpose of the provision is to care for disputes during the performance of the contract. Not only has this court (Choctaw & M. R. Co. v. Newton, 140 F. 225, 235) recognized the object of arbitration arrangements in this kind of contracts, but it is common knowledge that arbitration provisions of this character are almost universal in construction contracts to prevent the harassments, delays, and losses likely to result to some or all of the parties thereto arising from differences occurring during progress of the work. All construction contracts involve matters as to character of materials, of work, and of methods of doing the work. Determination of such is necessarily a matter of judgment and often the diverse interests of the parties cause difference of opinion with resulting disputes concerning them. It is to the interest of all parties that these disputes be promptly determined and by some one having special knowledge of such matters and who can act upon personal knowledge of the controlling facts. With this decided and well recognized usefulness, if not necessity, for such arrangements in construction contracts and with the complete provision as to arbitration with the above waiver clause eliminated, we cannot believe that the parties here had in mind that arbitration would be undesirable if decisions thereunder did not bar legal remedies. The waiver was intended to add effectiveness to an award or decision but the declared purposes of the entire provision were made highly effectual without the waiver clause. We think the arbitration provision without the waiver clause is valid and should be upheld.