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World Brilliance Corp. v. Bethlehem Steel Co.

March 2, 1965

WORLD BRILLIANCE CORPORATION, PETITIONER-APPELLEE,
v.
BETHLEHEM STEEL COMPANY, APPELLANT.



Author: Waterman

Before SWAN, WATERMAN and MOORE, Circuit Judges.

WATERMAN, Circuit Judge:

On August 15, 1956, Bethlehem Steel Company entered into a contract, later assigned by the other party to World Brilliance Corporation, to build the vessel Princess Sophie . The contract guaranteed World against defects discovered within six months after delivery of the vessel, and it provided for arbitration of "any dispute or difference arising between the parties * * * as to any matter or thing arising out of or relating to" the contract. The vessel was delivered on May 18, 1959. World reported numerous alleged defects to Bethlehem within the next six months, but most of these were settled without resort to arbitration.As for the remaining alleged defects, first reported on July 27, 1959, the parties are in almost total disagreement about the way in which World's complaints were handled.It is clear, however, that World made a demand for arbitration on April 5, 1962, and that Bethlehem refused to participate in the selection of the neutral member of the panel.

On April 8, 1964, World petitioned the United States District Court for the Southern District of New York pursuant to Section 4 of the Federal Arbitration Act, 9 U.S.C. ยง 4, asking for an order compelling Bethlehem to proceed to arbitration according to the terms of the contract. The petition gave World's version of the dealings between the parties concerning the unresolved claims under the six months' guaranty clause of the contract. Bethlehem filed an answer which, insofar as is pertinent here, alleged that World was guilty of laches in bringing the petition and also had waived its rights under the arbitration clause. The allegations were supported by affidavits. Bethlehem demanded a jury trial in connection with these defenses.

Judge Cooper, in two memorandum decisions, ruled that the issue of laches was to be decided by the court rather than by a jury, that the facts pertaining to the issue were "hotly contested" by the parties, and that Bethlehem had not sustained its burden of proving that World unreasonably and prejudicially delayed in bringing the petition. Judge Cooper also ruled, by implication, that the issue of waiver was to be decided by the arbitrators rather than by the court. Consequently, he ordered Bethlehem to proceed to arbitration. Bethlehem appeals from this order, arguing that it was entitled to a jury trial on the issues of laches and waiver, or, alternatively, that at least it was entitled to a hearing before the judge where it would have opportunities to present oral testimony on its behalf and to cross-examine World's witnesses with reference to these issues.

Our first inquiry is directed to whether the issue of waiver was correctly left to the arbitrators, or whether it should have been decided by the district court.

The proper approach to this question has been charted with admirable precision by Judge Medina in Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402 (2 Cir. 1959), cert. dismissed, 364 U.S. 801, 81 S. Ct. 27, 5 L. Ed. 2d 37 (1960) (hereinafter cited as Robert Lawrence). In that case the district court had implicitly ruled that under the Federal Arbitration Act a defense of fraud in the inducement should be decided by the court rather than by the arbitrators.In reversing this ruling Judge Medina said:

"[It] would seem to be necessary to answer the following questions before we can decide to affirm or reverse the order appealed from: (1) is there anything in the Arbitration Act or elsewhere to prevent the parties from making a binding agreement to arbitrate * * * a dispute that there had been fraud in the inception of the contract; (2) is the exception of Section 2, 'save upon such grounds as exist at law or in equity for the revocation of any contract' applicable * * *; and (4) is the arbitration clause broad enough to cover the charge of fraud." Id. at 409.

Taking these questions in reverse order, we hold that the arbitration clause in the present case was clearly broad enough to cover the defense of waiver. As Judge Medina said of the arbitration clause in Robert Lawrence, supra, at 412, "[it] would be hard to imagine an arbitration clause having greater scope than the one before us." See In the Matter of Kinoshita & Co., 287 F.2d 951, 953 (2 Cir. 1961), in which Judge Medina ruled that an arbitration clause very similar to ours would easily encompass a dispute over fraud in the inducement. Moreover, "we fail to perceive any rational basis for thinking that the issue is of such a character that only the courts can resolve it." Robert Lawrence, supra, 271 F.2d at 412. If the parties would entrust to arbitrators the defense of fraud in the inducement, they would also entrust to arbitrators the defense of waiver, which is not a bit more "legalistic."

Furthermore, we hold that the exception in Section 2 of the Act, which makes a commercial arbitration agreement valid and enforceable "save upon such grounds as exist at law or in equity for the revocation of any contract," is not applicable to the defense of waiver."Revocation" does not, in this setting, refer to annulment by the parties themselves of an otherwise valid and enforceable contract. It applies only to cases in which the courts will step in and rescind the agreement, for reasons such as fraud, duress, or undue influence. Cf. Robert Lawrence, supra, at 410-411.

Finally, we hold that nothing in the Act prevents the parties from making a binding agreement to arbitrate the defense of waiver. Section 4 of the Act provides:

"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. * * * Where such an issue is raised, the party alleged to be in default may, except in cases of admiralty, * * demand a jury trial of such issue * * *."

Bethlehem argues that these provisions apply to the defense of waiver, because waiver "un-makes" the arbitration agreement or constitutes a "failure, neglect, or refusal" by the petitioner (World) to perform the same.

The claim that a defense of waiver raises an issue relating to "the making of the arbitration agreement" stretches the language of the statute beyond tolerable limits. Cf. Robert Lawrence, supra, at 411. Compare El Hoss Eng'r & Transp. Co. v. American Independent Oil Co., 289 F.2d 346 (2 Cir.), cert. denied, 368 U.S. 837, 82 S. Ct. 51, 7 L. Ed. 2d 38 (1961). As for the phrase "failure, ...


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