Opinion ID: 705070
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Heading: The Franchisees' Challenges to the Arbitration Clause

Text: 57 The franchisees argue that the arbitration clause is void for lack of mutuality, in that it requires a franchisee to submit all controversies to arbitration but reserves to DAI (through its leasing companies) the right to seek summary eviction against the franchisees. The district court rejected this argument, finding no lack of mutuality: If the leasing companies were separable entities, then the arbitration clause will be enforceable only as to DAI and the [franchisees], obliging them to arbitrate, thus establishing mutuality. If, on the other hand, the leasing companies were indistinguishable from DAI, then they too would be bound to arbitrate. Either way, the court reasoned, mutuality was not an issue. 58 We agree that mutuality is not an issue, but for different reasons. Preliminarily, we note that the parties have not offered any reason why we should not apply the choice-of-law clause in the franchise agreements, which indicates that Connecticut law applies. Connecticut courts, however, have not addressed the precise question whether an arbitration clause may be void for lack of mutuality. 59 The term mutuality can refer to several different concepts in contract law. Although it is unclear whether the franchisees are referring to mutuality of obligation or mutuality of remedy, both doctrines are largely dead letters. The doctrine of mutuality of obligation requires a valid contract to be based on an exchange of reciprocal promises. 1A ARTHUR L. CORBIN, CORBIN ON CONTRACTS Sec. 152, at 3 (1963). As applied to arbitration clauses, that rule has been restated to mean that the consideration exchanged for one party's promise to arbitrate must be the other party's promise to arbitrate. Hull v. Norcom, Inc., 750 F.2d 1547, 1550 (11th Cir.1985) (interpreting New York law). But mutuality of obligation has been largely rejected as a general principle in contract law, as well as in the arbitration context. The latest Restatement of Contracts provides that [i]f the requirement of consideration is met, there is no additional requirement of ... 'mutuality of obligation.'  RESTATEMENT (SECOND) OF CONTRACTS Sec. 79 (1979). Option contracts, for example, are unquestionably valid under this modern rule despite their lack of mutuality of obligation. That is, one party's promise to honor a future offer to purchase an item is valid if supported by the other party's present payment of a sum of money. The promise to accept the offer need not be supported by a reciprocal promise to make that offer. The New York Court of Appeals essentially adopted the Second Restatement position in a case involving a challenge to an arbitration clause which bound only one of the parties to arbitrate. In Sablosky v. Edward S. Gordon Co., 73 N.Y.2d 133, 137, 538 N.Y.S.2d 513, 516, 535 N.E.2d 643, 645 (1989), the court held that 60 [i]f there is consideration for the entire agreement that is sufficient; the consideration supports the arbitration option, as it does every other obligation in the agreement.... Since it is settled that the validity of an arbitration agreement is to be determined by the law applicable to contracts generally ... there is no reason for a different mutuality rule in arbitration cases. 61 Most courts facing this issue have arrived at the same conclusion. See, e.g., Wilson Elec. Contractors, Inc. v. Minnotte Contracting Corp., 878 F.2d 167, 168 (6th Cir.1989); Becker Autoradio U.S.A., Inc. v. Becker Autoradiowerk GmbH, 585 F.2d 39, 47 (3d Cir.1978); W.L. Jorden & Co. v. Blythe Indus., 702 F.Supp. 282, 284 (N.D.Ga.1988); Willis Flooring, Inc. v. Howard S. Lease Constr. Co. & Assocs., 656 P.2d 1184, 1185 (Alaska 1983) (As one clause in a larger contract, the [arbitration] clause is binding to the same extent that the contract as a whole is binding.); LaBonte Precision, Inc. v. LPI Indus. Corp., 507 So.2d 1202, 1203 (Fla.Dist.Ct.App.1987); Kalman Floor Co. v. Jos. L. Muscarelle, Inc., 196 N.J.Super. 16, 481 A.2d 553 (1984), aff'd for reasons stated below, 98 N.J. 266, 486 A.2d 334 (1985). Contra Stevens/Leinweber/Sullens, Inc. v. Holm Dev. & Management, Inc., 165 Ariz. 25, 795 P.2d 1308, 1313 (Ct.App.1990); R.W. Roberts Constr. Co. v. St. Johns River Water Management Dist., 423 So.2d 630, 633 (Fla.Dist.Ct.App.1982). 62 It has been argued that, according to the Supreme Court's decision in Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395, 403-04, 87 S.Ct. 1801, 1805-06, 18 L.Ed.2d 1270 (1967), an arbitration clause is separable from its underlying contract, and therefore must be supported by separate consideration. Stevens, 795 P.2d at 1312-13. In Prima Paint, the Court held that a claim of fraud in the inducement of an underlying contract must be left to the arbitrators, but that a claim of fraud in the inducement of the arbitration clause should be decided by the court. Prima Paint, 388 U.S. at 403-04, 87 S.Ct. at 1805-06. In reaching this conclusion, the Court endorsed the result reached by our court in Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402 (2d Cir.1959) (Medina, J.), cert. granted, 362 U.S. 909, 80 S.Ct. 682, 4 L.Ed.2d 618, cert. dismissed for mootness, 364 U.S. 801, 81 S.Ct. 27, 5 L.Ed.2d 37 (1960). 10 In Robert Lawrence, we described the FAA as distinguishing between the entire contract between the parties on the one hand and the arbitration clause of the contract on the other, 271 F.2d at 409--the latter being described as a separable part of the contract. Id. at 410. At one point in Robert Lawrence, we speculated that 63 we would suppose that generally where the arbitration provision of the contract is sufficiently broad to encompass the issue of fraud, the mutual promises to arbitrate would form the quid pro quo of one another and constitute a separable and enforceable part of the agreement. We do not decide this point, however, as it is not necessarily before us. 64 Id. at 411. This passage, one might argue, indicates that an arbitration clause must be treated as a contract supported by independent consideration. For the following reasons, however, we reject this characterization. 65 First, of course, we clearly labelled our statement in Robert Lawrence as dicta. Second, though we suggested that mutual promises to arbitrate could constitute sufficient consideration to support an arbitration agreement, we did not exclude the possibility that other consideration could support the agreement. Third, we indicated only that arbitration clauses are separable from void or voidable provisions of a contract--not that they are independent contracts. Although we consider an arbitration clause separately for the limited purpose of evaluating a claim of fraudulent inducement, we do not do so for all purposes. For example, when determining the parties' intent in the arbitration clause, we must read the contract as a whole. Mastrobuono v. Shearson Lehman Hutton, Inc., --- U.S. ----, ----, 115 S.Ct. 1212, 1217, 131 L.Ed.2d 76 (1995) (quoting RESTATEMENT (SECOND) OF CONTRACTS. Sec. 202(2) (1979)). State law generally governs the determination of whether the parties agreed to arbitrate a certain matter, First Options of Chicago, Inc. v. Kaplan, --- U.S. ----, ----, 115 S.Ct. 1920, 1924, 131 L.Ed.2d 985 (1995), and Connecticut courts construe the contract as a whole and consider all relevant provisions ... when determining the intent of the parties. White v. Kampner, 229 Conn. 465, 641 A.2d 1381, 1385 (1994). 66 Wilson Electrical Contractors, Inc. v. Minnotte Contracting Corp., 878 F.2d 167, 169 (6th Cir.1989), rejected the contention that under Prima Paint, an arbitration clause is an independent contract that is separable from the main contract in which it is found and therefore must have all of the essential elements of a contract, including consideration. As the Wilson court pointed out, more recent decisions of the Supreme Court have consistently emphasized that the FAA is grounded in a strong federal policy favoring arbitration. Id. at 169. A doctrine that required separate consideration for arbitration clauses might risk running afoul of that policy. In any event, because the franchisees make no claim that the underlying contract was the result of fraud, we have no occasion to consider the arbitration clause in isolation from the larger contract. Accordingly, we need not decide whether the arbitration clause must be supported by independent consideration. 67 The doctrine of mutuality of remedy affords no greater relief for the franchisees. That rule, which provides generally that a plaintiff shall not get specific enforcement unless the defendant could also have obtained it, 5A ARTHUR L. CORBIN, CORBIN ON CONTRACTS Sec. 1181, at 336 (1964), is also defunct. See, e.g., Sablosky, 73 N.Y.2d at 137, 538 N.Y.S.2d 513, 535 N.E.2d 643 (Mutuality of remedy is not required in arbitration contracts.). As explained in the latest Restatement, 68 the law does not require that the parties have similar remedies in case of breach, and the fact that specific performance or an injunction is not available to one party is not a sufficient reason for refusing it to the other party. The rationale of the supposed requirement of mutuality of remedy is to make sure that the party in breach will not be compelled to perform without being assured that he will receive any remaining part of the agreed exchange from the injured party. It is therefore enough if adequate security can be furnished. 69 RESTATEMENT (SECOND) OF CONTRACTS Sec. 363 cmt. c (1979). 70 In view of Connecticut's strong policies favoring arbitration, see, e.g., White v. Kampner, 229 Conn. 465, 471, 641 A.2d 1381, 1384 (1994); Garrity v. McCaskey, 223 Conn. 1, 7, 612 A.2d 742, 746 (1992), we believe that the Connecticut courts would conclude that where the agreement to arbitrate is integrated into a larger unitary contract, the consideration for the contract as a whole covers the arbitration clause as well. W.L. Jorden & Co., 702 F.Supp. at 284. The franchisees do not contest that the franchise agreement as a whole is supported by consideration. Absent a failure of consideration, in this instance, we cannot invalidate the agreement in whole or in part.
71 The district court held that regardless of whether the leasing companies were DAI's alter egos, DAI had not waived its right to compel arbitration under the franchise agreement. On the one hand, if the leasing companies were not DAI's alter egos, then their pursuit of eviction proceedings against the franchisees could not be imputed to DAI. On the other hand, even if the leasing companies were DAI's alter egos, DAI nevertheless invoked its arbitration rights as soon as it was named a party in the various state court actions commenced by the franchisees. Somewhat opaquely, the court held that DAI cannot be held to have waived a right of arbitration by an after-the-fact holding that it is the alter ego of the leasing companies. We disagree. 72 There is no authority to support the notion that a party is liable for acts of its alter ego only if a court has previously found that an alter-ego relationship exists. As we have explained in the context of contractual liability, it is clear that the consequence of applying the alter ego doctrine is that the corporation and those who have controlled it without regard to its separate entity are treated as but one entity, and ... the acts of one are the acts of all. Fisser v. International Bank, 282 F.2d 231, 234 (2d Cir.1960) (holding parent corporation bound to arbitrate, where its alter-ego instrumentality signed arbitration agreement); see also Interocean Shipping Co. v. National Shipping & Trading Corp., 523 F.2d 527, 539 (2d Cir.1975) (holding that company may be compelled to arbitrate even if not party to agreement containing arbitration clause, where company is alter ego of another party that clearly is subject to arbitration), cert. denied, 423 U.S. 1054, 96 S.Ct. 785, 46 L.Ed.2d 643 (1976). We believe that this principle applies with equal force in the present context. If DAI and its leasing companies should be treated as one and the same, then the initiation of eviction proceedings by the leasing companies must be imputed to DAI. 73 There remain two further questions: (1) whether the district court or the arbitrators should determine the waiver issue, and (2) what standard should be used by the appropriate decisionmaker. As to the first question, we note that the defense of waiver is generally referable to the arbitrators in cases involving petitions to compel under Sec. 4 of the FAA--with one important exception which we shall shortly explain. In World Brilliance Corp. v. Bethlehem Steel Co., 342 F.2d 362 (2d Cir.1965), we squarely held that issues of waiver, like issues of fraud in the inducement of the entire contract, were properly resolved by the arbitrators, not the district court. Id. at 364-65. In reaching this conclusion, we pointed out that Sec. 2 of the FAA makes an arbitration agreement enforceable  'save upon such grounds as exist at law or in equity for the revocation of any contract.'  Id. at 364 (quoting 9 U.S.C. Sec. 2). Waiver, we explained, does not constitute a ground for revocation of a contract within the meaning of Sec. 2, and thus is not a basis for invalidating an arbitration contract. Id. Likewise, we explained that under Sec. 4, a court is required to grant a petition to compel arbitration except where a question of fact exists as to (1) the making of the arbitration agreement or (2) the failure, neglect, or refusal of another [i.e., the respondent to the Sec. 4 petition] to arbitrate. Id. at 364-65 (quoting 9 U.S.C. Sec. 4 (emphasis added)). Because acts by the petitioner constituting waiver of the right to arbitrate did not fall within either of these enumerated categories, a district court cannot refuse to order arbitration under Sec. 4 on a theory of waiver. Id. at 365. We reaffirmed this restrictive interpretation of Sec. 4 in Trafalgar Shipping Co. v. International Milling Co., 401 F.2d 568, 571 (2d Cir.1968), where we held that most questions regarding the defense of laches should be decided by the arbitrators, not the courts. In that case, we repeated that [t]he only issues which the court is authorized to consider on a motion to compel arbitration are ones which pertain to 'the making of the arbitration agreement or the failure, neglect, or refusal to perform the same,'  id. at 571, and that the latter phrase referred to the failure of the respondent in a Sec. 4 action to submit to arbitration, id. at 572. 74 Our decision in World Brilliance did not call into question, however, a parallel line of cases that considers waiver to be an equitable defense to a stay application under Sec. 3 of the FAA, which a court is empowered to consider. Section 3 authorizes a court to stay proceedings pending arbitration, providing the applicant for the stay is not in default in proceeding with such arbitration. 9 U.S.C. Sec. 3. For example, in Kulukundis Shipping Co. v. Amtorg Trading Corp., 126 F.2d 978 (2d Cir.1942), a defendant sought to amend his answer nine months into the litigation and two months before trial, raising for the first time the defense that the case was arbitrable. Id. at 986. We construed the defendant's motion to amend as an application for a Sec. 3 stay of proceedings. Id. at 986 n. 29. We explained that the proviso in Sec. 3--that a stay shall be granted providing the applicant for the stay is not in default in proceeding with such arbitration--referred to a party who, when requested, has refused to go to arbitration or who has refused to proceed with the hearing before the arbitrators once it has commenced. Id. at 989. We also noted with approval that, in other courts, 75 [a] plaintiff who brought suit on a contract, without seeking to avail himself of its arbitration clause, has been held to have waived his rights thereunder, so that he could not subsequently, after a long delay, ask the court, under Section 3, to stay the action pending arbitration. 76 Id. We also indicated our agreement with a Fourth Circuit decision finding waiver of the right to arbitrate by a counterclaim defendant who participated at length in litigation, but on the eve of trial moved for a stay under Sec. 3 of the FAA. Id. (describing Radiator Specialty Co. v. Cannon Mills, Inc., 97 F.2d 318 (4th Cir.1938)). The defendant in Kulukundis did not waive its right to arbitrate, we held, because it had not pursued litigation as extensively as had the parties in these other cases. 126 F.2d at 989. 77 We again equated a waiver of the right to arbitrate with a default in proceeding with such arbitration under Sec. 3 in Robert Lawrence, 271 F.2d at 412; see Carcich v. Rederi A/B Nordie, 389 F.2d 692, 696 (2d Cir.1968) (deciding waiver issue where defendant moved for stay). The Court of Appeals for the District of Columbia Circuit apparently took the same view, when it explained that 78 [t]he right to arbitration, like any other contract right, can be waived. A party waives his right to arbitrate when he actively participates in a lawsuit or takes other action inconsistent with that right. Once having waived the right to arbitrate, that party is necessarily in default in proceeding with such arbitration. 79