Opinion ID: 339102
Heading Depth: 3
Heading Rank: 2

Heading: Application of the Act

Text: 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