Opinion ID: 339102
Heading Depth: 2
Heading Rank: 1

Heading: Was Refusal to Dismiss Error?

Text: 29 The United States Arbitration Act was enacted in 1925. (R)eversing centuries of judicial hostility to arbitration agreements, (the Act) was designed to allow parties to avoid 'the costliness and delays of litigation,' and to place arbitration agreements 'upon the same footing as other contracts . . . .'  Scherk v. Alberto-Culver Co., 417 U.S. 506, 510-511, 94 S.Ct. 2449, 2453, 41 L.Ed.2d 270 (1974), citing H.R.Rep.No.96, 68th Cong., 1st Sess., 1, 2 (1924); see also S.Rep.No.536, 68th Cong., 1st Sess. (1924). In accordance with this legislative intent, federal courts have liberally construed arbitration clauses, Galt v. Libbey-Owens-Ford Glass Co., 376 F.2d 711, 714 (7 Cir. 1967), generally resolving doubts in favor of arbitration, Metro Industrial Painting Corp. v. Terminal Construction Co., 287 F.2d 382, 385 (2 Cir. 1961). 30 The key provisions of the Act are found in §§ 2, 3, and 4. Section 2 provides that: 31 A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, of an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. 32 Commerce, as employed in § 2, is defined in § 1 of the Act to mean in part commerce among the several states. Thus, the Federal Act is limited in its application to maritime transactions and transactions involving interstate commerce. 33 Section 3 requires a federal court, in which an action is brought involving an issue which is arbitrable pursuant to a written agreement between the parties, to stay trial of the action pending arbitration. Section 4 allows a party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration to petition a district court for an order compelling arbitration in accordance with the agreement. Upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court is required to make such order. 9 34 The district court, as well as the parties, have relied upon the leading case of Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967), which involved an arbitration clause in a Consulting Agreement between Prima Paint Corporation and Flood & Conklin Manufacturing Company. Prima Paint, alleging that the agreement had been fraudulently induced, sued in federal court for rescission, while Flood & Conklin cross-moved to stay the court action pursuant to § 3 of the Federal Act, pending arbitration. The district court granted the stay. In reviewing the Second Circuit's dismissal of the appeal, the Supreme Court discussed the policy considerations upon which the Federal Arbitration Act is based, and enunciated the role of the district court in ruling upon a § 3 motion to stay. 35 The Court, finding that federal law holds arbitration clauses to be separable from the contracts in which they are contained, affirmed the dismissal of Prima Paint's appeal. Prima Paint, supra at 402-404, 406, 87 S.Ct. 1801. In so doing, the Court stated that federal law does not permit a federal court to consider issues of fraud in the inducement of the contract generally, as opposed to fraud in the inducement of the arbitration clause. Id., at 403-404, 87 S.Ct. 1801. Rather, a federal court in passing upon a § 3 application for a stay pending arbitration, may consider only issues relating to the making and performance of the agreement to arbitrate. Id., at 404, 87 S.Ct. at 1806. 36 Considering next whether the holding was constitutionally permissible under the Erie doctrine, Erie R. R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Guaranty Trust Co. v. York, 326 U.S. 99, 65 S.Ct. 1464, 89 L.Ed. 2079 (1945), the Court framed the issue in terms of whether Congress may prescribe how federal courts are to conduct themselves with respect to subject matter over which Congress plainly has power to legislate, rather than whether Congress could establish federal substantive law to control questions arising in simple diversity cases. The Court concluded that Congress could so prescribe the conduct of federal courts in actions under the Federal Arbitration Act, based on Congress' power to control interstate commerce and admiralty. Prima Paint, supra, 388 U.S. at 405, 87 S.Ct. 1801. Thus, Prima Paint required federal courts to apply rules enacted by Congress with respect to matters . . . over which it has legislative power. Id., at 406, 87 S.Ct. at 1807. With respect to arbitration clauses in contracts involving admiralty and interstate commerce, Congress, through the Federal Act, has allocated to the federal courts the task of determining the issues involved in the making of and compliance with the arbitration agreement, while reserving to the arbitrators all other issues. Id., at 404, 87 S.Ct. 1801.
37 The contract here is clearly one evidencing a transaction involving commerce, and thus falls within the scope of the Federal Act. As the district court noted, all parties agree that the agreement to arbitrate was entered into by the litigants and nobody disputes the fact that one party is unwilling to commence arbitration proceedings. As a general rule, under § 4 of the Arbitration Act, this is all the district court need consider in making its order. 38 Appellants General, Gulf and Scallop, however, contend in effect that the parties by the choice of law provision have altered the allocation of functions between arbitrators and courts. They argue that (1) in a diversity case federal courts are bound to apply state law according to the rules of Erie R. R. Co. v. Tompkins, supra, and cases following, and (2) the Federal Arbitration Act allows the parties to contract regarding the law which is to govern the contract, including the arbitration clause, and even in the absence of a choice of law provision, the Act leaves interpretation and enforcement of arbitration agreements to state law. 10 From this it is argued that the Illinois Uniform Arbitration Act governs the contract and that according to Illinois law, the question of the present existence of an agreement to arbitrate is one for court determination. 39 Appellee Edison, on the other hand, contends that the Federal Act is applicable to any contract involving interstate commerce, notwithstanding a choice of law clause, and that the question of allocation of disputes must be resolved by resort to the Federal Act and its policy of facilitating arbitration whenever possible. We find appellee's position to be the more persuasive. 40 While the Court in Prima Paint did not consider a choice of law clause, it did hold expressly that with respect to arbitration clauses in contracts involving interstate commerce, a federal court may consider only issues relating to the making and performance of the agreement to arbitrate. The Court stressed also the policy underlying the Federal Arbitration Act that the arbitration procedure, when selected by the parties to a contract, be speedy and not subject to delay and obstruction in the courts. 388 U.S. at 404, 87 S.Ct. at 1806. Parties are not free to burden the arbitration process under the Federal Act by adopting state law which shifts the determination of disputes from arbitrators to courts. To allow parties to so contract would undermine the provisions of the Federal Act. Congress, in enacting the Federal Arbitration Act, exercised its power over admiralty and interstate commerce. Any arbitration contract involving one of those areas is governed by the Federal Act. To permit the parties to contract away the application of the Act by adopting state law to govern their agreement would be inconsistent with the Act itself and with the holding in Prima Paint. 41 Subsequent to Prima Paint other courts, both federal and state, have concluded that the Federal Act controls despite a choice of law provision, although none involved the precise question presented in this case. 42 For example, the Eighth Circuit in Collins Radio Co. v. Ex-Cell-O Corp., 467 F.2d 995, 997 (8 Cir. 1972), held that the Federal Act bars resort to state arbitration rules to determine the validity of arbitration clauses in interstate contracts. The contract involved in the suit contained a clause providing that Texas law governed the agreement. Id., at 996. The court continued: The plain meaning of § 2 is that federal courts are no longer to apply state statutes and decisions which limit arbitration agreements with rules not applicable to other contracts. Id., at 998; accord, Medical Development Corp. v. Industrial Molding Corp., 479 F.2d 345, 348 (10 Cir. 1973). While appellants General, Gulf, and Scallop contend that this latter statement limits the holding of Collins, it merely evidences the Congressional policy, as interpreted by the courts, that the Federal Act is not to be restricted by state law which is hostile to arbitration agreements. 43 Similarly, in American Airlines, Inc. v. Louisville & Jefferson County Air Board, 269 F.2d 811, 815 (6 Cir. 1959), which involved disputes arising from lease agreements adopting Kentucky law, the court said of the Federal Arbitration Act: Within the scope of the statute circumscribed by the Constitution, Federal law is of course paramount under the Supremacy Clause, and State law must give way. (citations omitted). As appellants note, the court did look to Kentucky law regarding the Air Board's capacity to contract. Id., at 817. Appellants argue that consideration of state law regarding this issue indicates that state law chosen by the parties is to govern over federal law. But consideration of state law with respect to that issue did not invade the province of the Federal Act since it involved the making of the entire contract, rather than just the arbitration clause. Clearly, under Prima Paint and other decisions, a federal court must consider any question regarding the making of the contract, 9 U.S.C. § 4, and in determining what is necessary to make a contract, the court may look to relevant state law. Questions of the validity of an arbitration agreement, however, are governed by the Federal Act and are to be determined by arbitrators. Since this case involves an issue regarding the validity, not the making, of an arbitration agreement, American Airlines directs that it be resolved under federal rather than state law. 44 In other cases federal courts have considered the parties' choice of state law with respect to equitable defenses to enforcement of a contract, Necchi Sewing Machine Sales Corp. v. Carl, 260 F.Supp. 665 (S.D.N.Y.1966), and the proper court for confirmation of an arbitration award, Monte v. Southern Delaware County Authority, 321 F.2d 870 (3 Cir. 1963). 11 But those courts have also recognized that federal law is controlling on the issue of the enforceability of the arbitration agreement. Necchi, supra at 667; Monte, supra at 874. 45 Several state court decisions have found the Federal Act to be controlling over state law chosen by the parties. For example, in Pinkis v. Network Cinema Corp., 9 Wash.App. 337, 512 P.2d 751 (1973), involving a contract in interstate commerce which the parties agreed would be governed by New York law, the Washington Court of Appeals concluded: 46 In any event, we need not decide whether New York law would require arbitration or permit court proceedings to decide the issues raised in view of our decision that the federal act controls. Further, our discussion has set forth the primacy of the federal arbitration act substantively and procedurally over state law when interstate commerce is the subject matter of the contract in dispute. Id., at 756. 47 Similarly, in Mamlin v. Susan Thomas, Inc., 490 S.W.2d 634 (Tex.Civ.App.1973), the court found the Federal Act to be applicable in spite of the parties' selection of New York law: 48 The Federal Arbitration Act is the law of New York and also the law of Texas with respect to any 'contract evidencing a transaction involving commerce,' as defined in that act. The federal act has been held to be substantive rather than procedural, and equally applicable in state and federal courts, even though the contract provides that any dispute should be settled by arbitration under the laws of a particular state. Id., at 637. 49 Of the many cases cited by appellants, only one, Lummus Co. v. Commonwealth Oil Refining Co., 280 F.2d 915 (1 Cir. 1960), cert. denied, 364 U.S. 911, 81 S.Ct. 274, 5 L.Ed.2d 225 (1960), involved the application of the parties' choice of state law in the resolution of a question of the arbitrability of a dispute concerning fraud in the inducement of a contract. Id., at 924-925. There the court followed New York law, which was chosen by the parties, to the effect that an arbitration clause cannot be treated as separable from the other parts of the contract, contrary to federal law which recognizes the severability of arbitration clauses. Id., at 925. Lummus, however, was decided before Prima Paint. The Supreme Court in Prima Paint rejected the rule of Lummus with respect to cases brought in federal courts involving maritime or interstate commerce contracts. 12 50 Having determined that the contract is governed by the Federal Act, we turn to the question of whether the dispute regarding termination of the contract is arbitrable under the contract and the Federal Act. On this issue we find it sufficient to quote from the opinion in Island Territory of Curacao v. Solitron Devices, Inc., 356 F.Supp. 1, 11 (S.D.N.Y.1973), aff'd, 489 F.2d 1313 (2 Cir. 1973), cert. denied, 416 U.S. 986, 94 S.Ct. 2389, 40 L.Ed.2d 763 (1974): 51 It has been determined by highest authority that 'claims of fraud in the inducement of the contract generally' are exclusively for the arbitrators. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404, 87 S.Ct. 1801, 1806, 18 L.Ed.2d 1270 (1967). 52 If fraud in the inducement is for the arbitrators, then even more so is any issue, such as frustration and termination, arising after an admitted execution of an agreement. This follows from the reasoning of Prima Paint. It has been held that 'whether circumstances have arisen which have discharged one or both parties from further performance' is a question for the arbitrators. Heyman v. Darwins, (1942) A.C. 356, 366, quoted with approval in In re Pahlberg Petition, 131 F.2d 968, 970 (2 Cir. 1942). It has been specifically held that 'frustration of performance of the contract' is an issue solely for the arbitrators. Goldhill etc. v. Caribbean Shipping Co., 56 F.Supp. 31 (S.D.N.Y.1944). 53 Not only is the termination dispute arbitrable according to the Federal Act, it is also arbitrable under § 16 of the contract which allows arbitration of any dispute arising from this Contract. The attempted termination of the contract by General was clearly a dispute arising from the contract and was arbitrable. 13