New York Law Review

Tag: arbitration clause

  • Fidelity and Deposit Co. v. Parsons & Whittemore, 48 N.Y.2d 127 (1979): Surety’s Agreement to be Bound by Arbitration in Subcontract

    48 N.Y.2d 127 (1979)

    A surety company, by incorporating a subcontract with a broad arbitration clause into its performance bond, agrees to be bound by the arbitration of disputes arising under the subcontract between the general contractor and the subcontractor, but does not necessarily agree to arbitrate separate disputes arising directly under the performance bond itself.

    Summary

    Parsons & Whittemore (P&W), a general contractor, subcontracted with Central Rigging, which furnished a performance bond from Fidelity and Deposit Company (Fidelity). The subcontract included a broad arbitration clause. When a dispute arose, P&W demanded arbitration against both Central and Fidelity. Fidelity sought a stay of arbitration, arguing it never agreed to arbitrate. The court held that Fidelity was bound by the arbitration clause in the subcontract (incorporated into the bond) regarding disputes *between* P&W and Central. However, Fidelity did not agree to arbitrate disputes arising *directly* under the performance bond itself. Therefore, the stay of arbitration was denied for the underlying subcontract dispute but upheld for any separate claims arising solely under the bond. The court emphasized the intention of the parties and the practical implications of resolving the principal’s liability (Central) and the surety’s liability (Fidelity) in separate forums.

    Facts

    1. Parsons & Whittemore (P&W) was the general contractor for a building construction project.
    2. P&W subcontracted with Central Rigging and Contracting Corporation (Central).
    3. The subcontract required Central to furnish a performance bond and contained a clause requiring arbitration of disputes arising out of the contract.
    4. Central obtained a performance bond from Fidelity and Deposit Company of Maryland (Fidelity), which incorporated the subcontract by reference.
    5. A dispute arose between P&W and Central regarding Central’s performance.
    6. P&W demanded arbitration against both Central and Fidelity.
    7. Fidelity sought a stay of arbitration, arguing it had not agreed to arbitrate.

    Procedural History

    1. Special Term granted Fidelity’s application to stay arbitration.
    2. The Appellate Division affirmed.
    3. The Court of Appeals granted leave to appeal.

    Issue(s)

    1. Whether, by incorporating a subcontract containing an arbitration clause into its performance bond, the surety company (Fidelity) agreed to arbitrate disputes arising under the subcontract between the general contractor (P&W) and the subcontractor (Central).
    2. Whether the surety company (Fidelity) agreed to arbitrate separate and distinct controversies arising under the terms of the performance bond itself between the general contractor (P&W) and the surety company (Fidelity).

    Holding

    1. Yes, because the surety company accepted the agreement of the general contractor and the subcontractor that disputes between them would be settled by arbitration; an implicit corollary of that acceptance was agreement by the surety company that for purposes of later determining its liability under its performance bond, it would accept and be bound by the resolution reached in the arbitration forum.
    2. No, because there was no agreement on the part of any party that controversies arising as to rights and obligations under the terms of the performance bond would be submitted to arbitration.

    Court’s Reasoning

    The court reasoned that by incorporating the subcontract into the performance bond, Fidelity agreed to be bound by the resolution of disputes between P&W and Central reached through arbitration. The court emphasized that the subcontract contained an express agreement to arbitrate disputes arising under it. However, this incorporation did not extend to requiring Fidelity to arbitrate separate disputes arising *directly* under the performance bond. The court distinguished between disputes relating to Central’s performance of the subcontract (which are subject to arbitration with Fidelity bound by the outcome) and disputes regarding Fidelity’s obligations under the performance bond itself (which are not subject to arbitration unless the bond explicitly provides for it). The court stated, “Although it did not agree to participate in any arbitration, it did accept the agreement of the general contractor and the subcontractor that disputes between them would be settled by arbitration. An implicit corollary of that acceptance was agreement by the surety company that for purposes of later determining its liability under its performance bond, it would accept and be bound by the resolution reached in the arbitration forum.” The court overruled Matter of Lehman v Ostrovsky to the extent it conflicted with this holding. Chief Judge Cooke dissented in part, arguing that the incorporation of the subcontract required Fidelity to be a party to the arbitration concerning Central’s alleged breach, and not just be bound by the outcome. The dissent emphasized the language of the arbitration clause, which states that “[a]ll disputes arising out of this Contract, its interpretation, performance or breach, shall be submitted to arbitration”.

  • Rio Grande Transport, Inc. v. Intern. Surplus Lines Ins. Co., 44 N.Y.2d 840 (1978): Enforceability of Limited Arbitration Clauses

    Rio Grande Transport, Inc. v. Intern. Surplus Lines Ins. Co., 44 N.Y.2d 840 (1978)

    An agreement to arbitrate must be express, direct, and unequivocal as to the issues or disputes to be submitted to arbitration; ambiguous arbitration clauses are to be read conservatively.

    Summary

    Rio Grande Transport sought to avoid an arbitration clause in a marine insurance policy, arguing it was too narrow to cover the dispute. The New York Court of Appeals affirmed the lower court’s decision, holding that the arbitration clause, which referred only to disputes “regarding the execution of the present policy,” was limited and did not encompass the broader claims Rio Grande sought to arbitrate. The court emphasized that arbitration agreements must be explicit and unambiguous and, in the absence of proof of contrary applicable foreign law, the law of the forum should be applied.

    Facts

    Rio Grande Transport, Inc. was involved in a dispute with International Surplus Lines Insurance Company concerning a marine insurance policy. The policy contained an arbitration clause stating that disputes “regarding the execution of the present policy” would be subject to arbitration. The policy also contained a clause stating “Disputes are settled at the place where the contract is subscribed by the Underwriters.”
    Rio Grande sought to litigate the dispute, arguing that the arbitration clause was too narrow to encompass the issues in question.

    Procedural History

    The Special Term held that the arbitration clause was limited and did not require arbitration of the dispute. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal and certified the question of whether the order of the Appellate Division was properly made.

    Issue(s)

    1. Whether the arbitration clause in the marine insurance policy, limited to disputes “regarding the execution of the present policy,” is broad enough to encompass all disputes arising under the policy.
    2. Whether, in the absence of proof of applicable foreign law, the law of the forum (New York) should be applied to interpret the arbitration clause.

    Holding

    1. No, because the agreement to arbitrate must be express, direct, and unequivocal as to the issues or disputes to be submitted to arbitration; the instant clause was not broad, and ambiguous clauses are read conservatively.
    2. Yes, because in the absence of proof of contrary applicable foreign law, the law of the forum should be applied.

    Court’s Reasoning

    The Court of Appeals emphasized that a contractual choice of forum, whether for arbitration or precluding litigation, must be express. The court distinguished the limited arbitration clause in this case from “broad” arbitration clauses that American courts generally accept as unlimited. The court noted that while the term “execution” could have a broad or narrow meaning, ambiguous arbitration clauses must be read conservatively.

    The court stated: “The agreement to arbitrate must be express, direct, and unequivocal as to the issues or disputes to be submitted to arbitration. But, once there is agreement or submission to arbitration, the scope of the arbitrators is unlimited and, with very limited exceptions, unreviewable.”

    Appellants argued that Belgian law should apply to the interpretation of the agreement, but the court noted that appellants provided no proof or argument about how Belgian law would interpret the word “execution” or the clause as a whole. The court also found the policy provision “Disputes are settled at the place where the contract is subscribed by the Underwriters” ambiguous and requiring interpretation under Belgian law, but appellants failed to provide such interpretation.

    Therefore, the court held that in the absence of proof of contrary applicable foreign law, the law of the forum (New York) should be applied. Because the arbitration clause was narrowly written and ambiguous, it did not require arbitration of the dispute.

  • Kornblum Metals Co. v. Intsel Corp., 38 N.Y.2d 376 (1975): Enforceability of Arbitration Clauses in Oral Contracts

    Kornblum Metals Co. v. Intsel Corp., 38 N.Y.2d 376 (1975)

    An arbitration clause included in a written purchase order can be enforced when the evidence supports a finding that the oral contract between the parties included an agreement to arbitrate.

    Summary

    Kornblum Metals Co. (seller) sought to stay arbitration demanded by Intsel Corp. (purchaser) regarding a zinc sales agreement. The dispute arose after the seller failed to deliver the zinc. The purchaser claimed the oral agreement included an arbitration clause detailed in a purchase order. The New York Court of Appeals held that there was sufficient evidence for the jury to find that the oral contract included the arbitration provision, emphasizing the parties’ prior dealings, industry custom, and the seller’s acknowledgment of the purchase order with the arbitration clause when requesting a payment modification. The court affirmed the denial of the stay of arbitration.

    Facts

    The seller and purchaser had a 15-year business relationship. On September 21, 1973, they orally agreed to the sale of 250 tons of zinc at 32 cents per pound. The purchaser sent a purchase order containing an arbitration clause to the seller. On September 24, the parties reaffirmed the agreement, and the seller requested a modification to the payment terms but made no objection to the arbitration provision. The seller later failed to deliver the zinc as agreed, leading the purchaser to initiate arbitration proceedings.

    Procedural History

    The seller initiated a proceeding in Supreme Court to stay arbitration and vacate the demand for arbitration. The Supreme Court ordered a trial on all issues. A jury found for the purchaser, denying the stay of arbitration. The Appellate Division affirmed the Supreme Court’s judgment. The seller then appealed to the New York Court of Appeals.

    Issue(s)

    Whether there was sufficient evidence to support the jury’s finding that the oral contract between the seller and purchaser included an agreement to submit disputes to arbitration.

    Holding

    Yes, because there was sufficient evidence for the jury to conclude that the arbitration provision in the purchase order was a term of the oral contract made by the parties.

    Court’s Reasoning

    The court held that the jury was entitled to find that the oral contract, confirmed on September 24, included the arbitration clause set forth in the purchase order. The court emphasized the parties’ prior course of dealing, where similar purchase orders containing arbitration provisions had been used. The seller’s confirmation of the agreement while having the purchase order, including the arbitration clause, in front of him, and only requesting a modification as to payment terms, suggested an acceptance of all other terms, including arbitration. The court stated, “This is not an instance in which it was sought, subsequent to the completion of the contract, to add an arbitration provision as an additional term to a pre-existing contract. The jury was certainly entitled on this record to conclude that the arbitration provision was one of the terms of the contract when initially made by the parties.” The court further noted that the seller’s requested jury instruction, that mere receipt of a purchase order with an arbitration clause is insufficient to establish an agreement to arbitrate, was an inaccurate analysis of the legal issues presented in this case, as it failed to account for the specific evidence and circumstances. Therefore, the court affirmed the order denying the stay of arbitration.

  • Hollander v. Allied Van Lines, Inc., 17 N.Y.2d 384 (1966): Enforceability of Arbitration Clauses and Antitrust Concerns

    Hollander v. Allied Van Lines, Inc., 17 N.Y.2d 384 (1966)

    An arbitration clause covering “any dispute” is broadly enforceable, but arbitration is improper where the core issue involves antitrust concerns, unless specific, severable issues exist that can be resolved independently.

    Summary

    Hollander, an agent for Allied Van Lines, sought arbitration when Allied approved a new branch in his territory. Hollander argued this violated his agency contract. Allied resisted arbitration, claiming the agreement only covered termination disputes and that the matter raised antitrust issues due to its potential impact on competition. The court held that while the arbitration clause was broad, encompassing “any dispute,” the primary issue—restricting competition through territorial exclusivity—implicated antitrust law, rendering it non-arbitrable. However, a specific claim regarding Allied’s internal procedures for approving new branches (Rule 26) could be arbitrated separately, as it concerned contract interpretation without directly addressing competitive restraints.

    Facts

    Hollander was an exclusive agent for Allied Van Lines in a Chicago suburban area. Allied approved a new branch agency in the same territory for American Imperial Movers, Inc. Hollander contended this breached his agency contract. The agency contract contained a broad arbitration clause covering “any dispute” between the parties.

    Procedural History

    Special Term initially denied Allied’s motion to stay arbitration, interpreting the arbitration clause as broad and all-encompassing. The Appellate Division reversed, finding the arbitration clause limited to termination disputes and holding that the dispute raised substantial antitrust questions warranting a stay. The case was appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether the arbitration clause in the agency contract was limited to disputes involving termination of the contract.
    2. Whether the dispute, concerning territorial exclusivity, raised antitrust issues that precluded arbitration.

    Holding

    1. No, because the arbitration clause was clear and unambiguous, covering “any dispute” between the parties, not solely termination-related issues.
    2. Yes, in part, because the primary issue of territorial exclusivity implicated antitrust concerns, but a separate claim regarding Allied’s internal procedures for approving new branches (Rule 26) could be arbitrated separately.

    Court’s Reasoning

    The court emphasized the broad language of the arbitration clause, stating it applied to “[a]ny dispute between the parties.” The court rejected Allied’s argument that the clause was limited to termination disputes, finding no such restriction on the face of the agreement. The court noted that the parties could have easily limited arbitration to specific breaches warranting termination if that had been their intent.

    Regarding antitrust concerns, the court recognized that revoking American’s branch agency would restore the status quo and relieve Hollander of competition, potentially violating antitrust laws. The court cited Matter of Aimcee Wholesale Corp. (Tomar Prods.), stating that antitrust issues are generally not arbitrable. The court found that most of Hollander’s claims were intertwined with the issue of territorial exclusivity and, therefore, implicated antitrust law.

    However, the court carved out an exception for Hollander’s claim that Allied violated the contract by failing to provide notice and a hearing under Rule 26 when approving the new branch. The court stated this issue presented a matter of contract construction that could be resolved without reference to antitrust complications. “Of course, it may be assumed that the arbitrators will not render an award which would require the doing of an act prohibited by law or offensive to public policy. If there is such an award, the court has the power to vacate it.” (Matter of National Equip. Rental [American Pecco Corp.], 35 A D 2d 132, 135, affd. 28 Y 2d 639, mot. for rearg. den. 28 Y 2d 859).

    The court concluded that Hollander was only entitled to arbitration on the limited issue of whether Allied breached the contract by promulgating Rule 26 without providing for notice and hearing and by granting American’s application pursuant to a defective rule.

  • Gaines Service Leasing Corp. v. Carmel Plastic Corp., 23 N.Y.2d 643 (1968): Enforceability of Arbitration Clauses Despite Allegations of Illegal Performance

    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.

  • Matter of Dormitory Authority (Sam Minskoff & Sons, Inc.), 33 N.Y.2d 58 (1973): Enforceability of Arbitration Clauses Against State Entities

    Matter of Dormitory Authority (Sam Minskoff & Sons, Inc.), 33 N.Y.2d 58 (1973)

    A state entity, even when performing a governmental function, is generally bound by arbitration clauses in its contracts, as the power to contract implies the power to agree to dispute resolution through arbitration.

    Summary

    The Dormitory Authority of the State of New York (the Authority) appealed a decision to compel arbitration with Sam Minskoff & Sons, Inc. (Minskoff), regarding a construction contract. The Authority argued that as a state entity performing a governmental function (education), it was protected by sovereign immunity from the arbitration clause in the contract. The Court of Appeals held that the Authority was a separate entity from the state and, even if it were not, the state’s power to contract included the power to agree to arbitration. Therefore, the arbitration clause was enforceable.

    Facts

    The Authority awarded a contract to Minskoff for electrical work on a new dormitory at Stony Brook. The contract, drafted by the Authority, contained an arbitration clause for disputes. Minskoff alleged delays caused by the Authority led to a 183-day delay in completion. After attempts at negotiation failed, Minskoff demanded arbitration, but the Authority sought a stay, arguing sovereign immunity.

    Procedural History

    The Supreme Court denied the Authority’s petition for a stay of arbitration. The Appellate Division unanimously affirmed this denial. The Court of Appeals granted permission to appeal.

    Issue(s)

    Whether the Dormitory Authority, in carrying out a governmental function, is shielded by sovereign immunity from an arbitration clause that it included in a contract.

    Holding

    No, because the Dormitory Authority is a separate entity from the State, and even if it were not, the power of the State to enter into contracts includes the power to agree to settle disputes through arbitration.

    Court’s Reasoning

    The court reasoned that the Authority is not identical to the State. It cited previous cases establishing the Authority as a separate body politic, not an arm of the State (Braun v. State of New York, 203 Misc. 563, 564; Windalume Corp. v. Rogers & Haggerty, 36 Misc 2d 1066, 1067; Thompson Constr. Corp. v. Dormitory Auth., 48 Misc 2d 296, 298). The Court reviewed the Authority’s enabling legislation (Public Authorities Law, §§ 1675-1690) and highlighted its powers, including the power to sue and be sued, make its own by-laws, appoint its own personnel, acquire property, enter contracts, fix and collect rentals, and borrow money. The court noted that the State is not liable for the Authority’s bonds or other obligations, which are payable only out of Authority funds. The Court stated: “Considering and weighing all the above powers, functions, and obligations, it is clear that this Authority, enjoying a separate existence, transacting its own business, hiring and compensating its own personnel, is not identical with the State”.

    The Court also held that even if the Authority were identical to the State, the State is not insulated from arbitration clauses in contracts. Citing Campbell v. City of New York, 244 N.Y. 317, 331, the court emphasized that “the power to contract implies the power to assent to the settlement of disputes by means of arbitration”. The court quoted Judge Earl from Danolds v. State of New York, 89 N.Y. 36, 44: “There is not one law for the sovereign and another for the subject, but when the sovereign engages in business and the conduct of business enterprises, and contracts with individuals, whenever the contract in any form comes before the courts, the rights and obligation of the contracting parties must be adjusted upon the same principles as if both contracting parties were private persons. Both stand upon equality before the law, and the sovereign is merged in the dealer, contractor and suitor”. The court found that this principle is particularly relevant today, with the State increasingly involved in what were once private sectors of the economy.