Gaines Service Leasing Corp. v. Carmel Plastic Corp., 23 N.Y.2d 643 (1968)
A broad arbitration clause is enforceable even when one party alleges that the other party’s performance involved a violation of law, as long as the underlying agreement itself is lawful and contemplates lawful performance.
Summary
Carmel Plastic Corp. refused to pay Gaines Service Leasing Corp. for services rendered under a contract containing a broad arbitration clause. Carmel argued that Gaines’s performance was illegal. The court held that the arbitration clause remained enforceable. The court reasoned that the agreement itself was lawful and contemplated lawful performance, distinguishing it from cases where the agreement’s inherent nature was illegal. The court emphasized that allowing allegations of illegal performance to nullify arbitration agreements would undermine the purpose of arbitration, and that arbitration awards would only bind the parties involved, thus not hampering public interest in enforcing public law.
Facts
Carmel Plastic Corp. and Gaines Service Leasing Corp. entered into an agreement that contained a broad arbitration clause covering “any controversy or claim arising out of or relating to this Agreement or the breach thereof.” A dispute arose regarding whether Gaines had properly performed its obligations under the agreement. Carmel refused to pay, contending that Gaines’ failure to perform properly also entailed a violation of law.
Procedural History
The lower court initially addressed the dispute. The Appellate Division rendered a decision. The case was appealed to the New York Court of Appeals. The Court of Appeals affirmed the Appellate Division’s order, enforcing the arbitration agreement.
Issue(s)
Whether a broad arbitration clause in a contract is rendered unenforceable when one party alleges that the other party’s performance under the contract involved illegal conduct.
Holding
No, because the agreement itself was lawful and contemplated lawful performance; an allegation of illegality in performance does not nullify a broad arbitration agreement.
Court’s Reasoning
The Court of Appeals reasoned that a broad arbitration clause, encompassing any controversy arising from the agreement or its breach, should be enforced even when a party alleges illegal performance. The court emphasized that the agreement itself was lawful and contemplated lawful performance. The court distinguished this case from situations where the agreement’s very nature was illegal from the outset, such as in Durst v. Abrash. The court argued that allowing a party to nullify an arbitration agreement merely by claiming illegality in performance would undermine the purpose of arbitration agreements. The court stated that “it would be the rare arbitration agreement that could not be nullified merely by the contention of illegality in performance.” The Court also noted that an arbitrator’s award would only bind the parties to the arbitration, therefore the public interest in the enforcement of public law would not be hampered. The court also distinguished Matter of Aimcee Wholesale Corp. (Tomar Prods.), noting that it supported the right to arbitration, but barred a counterclaim based on illegal conduct by the buyer, which was a different scenario from the instant case. The court concluded that because the agreement was lawful and intended for lawful performance, the arbitration clause was enforceable, despite the allegations of illegal conduct in performance.