DocketNumber: 343
Citation Numbers: 18 L. Ed. 2d 1270, 87 S. Ct. 1801, 388 U.S. 395, 1967 U.S. LEXIS 2750
Judges: Fortas, Black, Douglas, Stewart
Filed Date: 6/12/1967
Status: Precedential
Modified Date: 11/15/2024
delivered the opinion of the Court.
This case presents the question whether the federal court or an arbitrator is to resolve a claim of “fraud in
The question arises from the following set of facts. On October 7, 1964, respondent, Flood & Conklin Manufacturing Company, a New Jersey corporation, entered into what was styled a “Consulting Agreement,” with petitioner, Prima Paint Corporation, a Maryland corporation. This agreement followed by less than three weeks the execution of a contract pursuant to which Prima Paint purchased F & C’s paint business. The consulting agreement provided that for a six-year period F & C was to furnish advice and consultation “in connection with the formulae, manufacturing operations, sales and servicing of Prima Trade Sales accounts.” These services were to be performed personally by F & C’s chairman, Jerome K. Jelin, “except in the event of his death or disability.” F & C bound itself for the duration of the contractual period to make no “Trade Sales” of paint or paint products in its existing sales territory or to current customers. To the consulting agreement were appended lists of F & C customers, whose patronage was to be taken over by Prima Paint. In return for these lists, the covenant not to compete, and the services of Mr. Jelin, Prima Paint agreed to pay F & C certain percentages of its receipts from the listed customers and from all others, such payments not to exceed $225,000 over the life of the agreement. The agreement took into account the possibility that Prima Paint might encounter financial difficulties, including bankruptcy, but no corresponding reference was made to possible financial problems which might be encountered by F & C. The agreement stated that it “embodies the entire understanding of the parties
“Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in the City of New York, in accordance with the rules then obtaining of the American Arbitration Association . . . .”
The first payment by Prima Paint to F & C under the consulting agreement was due on September 1, 1965. None was made on that date. Seventeen days later, Prima Paint did pay the appropriate amount, but into escrow. It notified attorneys for F & C that in various enumerated respects their client had broken both the consulting agreement and the earlier purchase agreement. Prima Paint’s principal contention, so far as presently relevant, was that F & C had fraudulently represented that it was solvent and able to perform its contractual obligations, whereas it was in fact insolvent and intended to file a petition under Chapter XI of the Bankruptcy Act, 52 Stat. 905, 11 U. S. C. § 701 et seg., shortly after execution of the consulting agreement. Prima Paint noted that such a petition was filed by F & C on October 14, 1964, one week after the contract had been signed. F & C’s response, on October 25, was to serve a “notice of intention to arbitrate.” On November 12, three days before expiration of its time to answer this “notice,” Prima Paint filed suit in the United States District Court for the Southern District of New York, seeking rescission of the consulting agreement on the basis of the alleged fraudulent inducement.
The District Court granted F & C’s motion to stay the action pending arbitration, holding that a charge of fraud in the inducement of a contract containing an arbitration clause as broad as this one was a question for the arbitrators and not for the court. For this proposition it relied on Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F. 2d 402 (C. A. 2d Cir. 1959), cert. granted, 362 U. S. 909, dismissed under Rule 60, 364 U. S. 801 (1960). The Court of Appeals for the Second Circuit dismissed Prima Paint’s appeal. It held that the contract in question evidenced a transaction involving interstate commerce; that under the controlling Robert
The key statutory provisions are § § 2, 3, and 4 of the United States Arbitration Act of 1925. Section 2 provides that a written provision for arbitration “in any maritime transaction or a contract evidencing a transaction involving commerce . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”
With respect to cases brought in federal court involving maritime contracts or those evidencing transactions in “commerce,” we think that Congress has provided an explicit answer. That answer is to be found in § 4 of the Act, which provides a remedy to a party seeking to compel compliance with an arbitration agreement. Under §4, with respect to a matter within the jurisdiction of the federal courts save for the existence of an arbitration clause, the federal court is instructed to order arbitration to proceed once it is satisfied that “the making of the agreement for arbitration or the failure to comply [with the arbitration agreement] is not in issue.”
There remains the question whether such a rule is constitutionally permissible. The point is made that, whatever the nature of the contract involved here, this case is in federal court solely by reason of diversity of citizenship, and that since the decision in Erie R. Co. v. Tompkins, 304 U. S. 64 (1938), federal courts are bound in diversity cases to follow state rules of decision in matters which are “substantive” rather than “proce
Affirmed.
Mr. Justice Harlan: In joining the Court’s opinion I desire to note that I would also affirm the judgment below on the basis of Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F. 2d 402 (C. A. 2d Cir. 1959), cert, granted, 362 U. S. 909, dismissed under Rule 60, 364 U. S. 801 (1960).
9 U. S. C. §§ 1-14.
Although the letter to F & C’s attorneys had alleged breaches of both consulting and purchasing agreements, and the fraudulent inducement of both, the complaint did not refer to the earlier purchase agreement, alleging only that Prima Paint had been “fraudulently
Whether a party seeking rescission of a contract on the ground of fraudulent inducement may in New York obtain judicial resolution of his claim is not entirely clear. Compare Exercycle Corp. v. Maratta, 9 N. Y. 2d 329, 334, 174 N. E. 2d 463, 465 (1961), and Amerotron Corp. v. Maxwell Shapiro Woolen Co., 3 App. Div. 2d 899, 162 N. Y. S. 2d 214 (1957), aff’d, 4 N. Y. 2d 722, 148 N. E. 2d 319 (1958), with Fabrex Corp. v. Winard Sales Co., 23 Misc. 2d 26, 200 N. Y. S. 2d 278 (1960). In light of our disposition of this case, we need not decide the status of the issue under New York law.
The meaning of “maritime transaction” and “commerce” is set forth in § 1 of the Act.
See, infra, at 403-404.
This conclusion is amply supported by an affidavit submitted to the District Court by Prima Paint’s own president, which read in part:
“The agreement entered into between the parties on October 7, 1964, contemplated and intended an orderly transfer of the assets of the defendant to the plaintiff, and further contemplated and intended that the defendant would consult, advise, assist and help the plaintiff so as to insure a smooth transition of manufacturing operations to Maryland from New Jersey, together with the .sales and servicing of customer accounts and the retention of the said customers.”
The affidavit’s references to a “transfer of the assets” cannot fairly be read to mean only “expertise and know-how . . . and a covenant not to compete,” as argued by counsel for petitioner.
It is suggested in dissent that, despite the absence of any language in the statute so indicating, we should construe it to apply only to “contracts between merchants for the interstate shipment of goods.” Not only have we neither the desire nor the warrant so to amend the statute, but we find persuasive and authoritative evidence of a contrary legislative intent. See, e. g., the House Report on this legislation which proclaims that “[t]he control over interstate commerce [one of the bases for the legislation] reaches not only the
In addition to Robert Lawrence Co., supra, see In re Kinoshita & Co., 287 F. 2d 951 (C. A. 2d Cir. 1961). With respect to claims other than fraud in the inducement, the court has followed a similar process of analysis. See, e. g., Metro Industrial Painting Corp. v. Terminal Constr. Co., 287 F. 2d 382 (C. A. 2d Cir. 1961) (dispute over performance); El Hoss Engineer. & Transport Co. v. American Ind. Oil Co., 289 F. 2d 346 (C. A. 2d Cir. 1961) (where, however, the court found an intent not to submit the issue in question to arbitration).
The Court of Appeals has been careful to honor evidence that the parties intended to withhold such issues from the arbitrators
These cases and others are discussed in a recent Note, Commercial Arbitration in Federal Courts, 20 Vand. L. Rev. 607, 622-625 (1967).
Section 4 reads in part: “The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement. ... If the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof.”
This position is consistent both with the decision in Moseley v. Electronic Facilities, 374 U. S. 167, 171, 172 (1963), and with the statutory scheme. As the “saving clause” in § 2 indicates, the purpose of Congress in 1925 was to make arbitration agreements as enforceable as other contracts, but not more so. To immunize an arbitration agreement from judicial challenge on the ground of fraud in the inducement would be to elevate it over other forms of contract. — a situation inconsistent with the “saving clause.”
It is true that the Arbitration Act was passed 13 years before this Court’s decision in Erie R. Co. v. Tompkins, supra, brought to an end the regime of Swift v. Tyson, 16 Pet. 1 (1842), and that at the time of enactment Congress had reason to believe that it still had power to create federal rules to govern questions of “general law” arising in simple diversity cases — at least, absent any state statute to the contrary. If Congress relied at all on this “oft-challenged” power, see Erie R. Co., 304 U. S., at 69, it was only supplementary to the admiralty and commerce powers, which formed the principal bases of the legislation. Indeed, Congressman Graham, the bill’s sponsor in the House, told his colleagues that it “only affects contracts relating to interstate subjects and contracts in admiralty.” 65 Cong. Rec. 1931 (1924). The Senate Report on this legislation similarly indicated that the bill “[relates] to maritime transactions and to contracts in interstate and foreign commerce.” S. Rep. No. 536, 68th Cong., 1st Sess., 3 (1924).
Non-congressional sponsors of the legislation agreed. As Mr. Charles L. Bernheimer, chairman of the Arbitration Committee of the New York Chamber of Commerce, told the Senate subcommittee, the proposed legislation “follows the lines of the New York arbitration law, applying it to the fields wherein there is Federal jurisdiction.