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In re Application of Conticommodity Services

decided: January 15, 1980.


Appeal from order of the United States District Court for the Southern District of New York, Kevin T. Duffy, J., granting appellee's motion for stay of arbitration and denying appellant's cross-motion to compel arbitration. Reversed.

Before Smith, Feinberg and Timbers, Circuit Judges.

Author: Feinberg

The issue in this case is whether a court or an arbitrator should decide the timeliness of a demand for arbitration. Philipp & Lion (Philipp), the party seeking arbitration, appeals from an order of the United States District Court for the Southern District of New York, Kevin T. Duffy, J., that granted the petition of appellee Conticommodity Services Inc. (Conti) to stay Philipp's demand for arbitration and denied Philipp's cross-motion to compel arbitration under section 4 of the Federal Arbitration Act, 9 U.S.C. § 4. The judge held that it was proper for the district court to decide the issue and that Philipp's demand for arbitration was time-barred. For reasons stated below, we reverse the judgment of the district court and grant Philipp's cross-motion to compel arbitration.


Philipp is an English partnership that trades in metals, and Conti is a domestic commodities broker. In 1974, Philipp opened an account with Conti for the trading of metals futures contracts. A written Customer's Agreement between Philipp and Conti provided for the arbitration of "(a)ny controversy . . . arising out of or relating to" the trading contract between the parties, with the additional provision that arbitration was to commence within one year of the accrual of any such cause of action.*fn1 Philipp and Conti are also both members of the Commodities Exchange Inc. (COMEX) and as such are governed by the rules promulgated by COMEX. One such rule provides for the arbitration of any "claim, dispute, difference or controversy (between COMEX members) wholly or partially arising, directly or indirectly, out of, in connection with, or as a result of, any transaction in a commodities futures contract."*fn2 Although the original version of the COMEX rule did not establish a time limitation for the commencement of arbitration, a 1977 amendment imposed a one-year time limitation.*fn3

Several months after the parties entered into their agreement, a dispute arose over Conti's handling of Philipp's account, and, as a result, Conti ceased acting as Philipp's broker in late 1974. The parties attempted to settle their disagreement, but in September 1978 Philipp, claiming it was owed $750,000, served Conti with a demand for arbitration before COMEX. Conti applied in the Supreme Court, New York County, for an order staying arbitration on the ground that Philipp's demand was untimely under their agreement. Philipp removed the action to the federal district court, and then cross-moved under section 4 of the Federal Arbitration Act, 9 U.S.C. § 4, for an order compelling arbitration.

In the district court, Conti argued that Philipp's demand for arbitration was untimely under the one-year limitation incorporated into the parties' agreement. Philipp responded that the timeliness of its demand for arbitration was an issue that should be determined by an arbitrator rather than by the court. Phillip also argued that even if the issue was properly before the court, the demand for arbitration was nonetheless timely under the agreement and the COMEX rule. As already indicated, Judge Duffy rejected Philipp's arguments and held that the issue of timeliness was properly before the court and that Philipp's demand for arbitration was untimely. The judge recognized that the key question before him was whether a court, rather than an arbitrator, could properly decide that "the period of limitation contained in an arbitration clause had run." The judge was also "of the opinion," in the words of 28 U.S.C. § 1292(b), that his order involved "a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal" from his order might "materially advance the ultimate termination of the litigation." Accordingly, the judge certified an interlocutory appeal pursuant to that section, and a panel of this court permitted the appeal to be taken.


When one party to a dispute seeks to stay the other party's demand for arbitration by raising various defenses to arbitration before a district court, there is a considerable temptation for the court to pass on the validity of such defenses rather than to refer their resolution to an arbitrator. Determining the merits of such defenses may often appear to be a simple task that should not be delayed or deferred, and judges are, by training and temperament, prepared to decide the issues that come before them. Furthermore, there is inevitably some judicial hostility toward the view that a court is deprived of jurisdiction over procedural questions simply because the parties have agreed to arbitrate disputes.

These reactions, while understandable, are at odds with the policy considerations embodied in the Federal Arbitration Act, which favor the enforcement of arbitration agreements. Arbitration is intended to provide the parties to a dispute with a speedy and relatively inexpensive trial before specialists. Scherk v. Alberto-Culver Co., 417 U.S. 506, 510-11, 94 S. Ct. 2449, 41 L. Ed. 2d 270 (1974); Hanes Corp. v. Millard, 174 U.S.App.D.C. 253, 265-66, 531 F.2d 585, 597-98 (D.C.Cir.1976). Use of the arbitral device, it should also be noted, simultaneously eases the workload of the courts. Presumably in order to prevent the easy frustration of these goals, the Federal Arbitration Act carefully limits the role of courts in considering motions to compel arbitration. Section 4 of the Act provides in pertinent part that

A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court . . . for an order directing that such arbitration proceed in the manner provided for in such agreement. . . . 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.

The statutory language is straightforward; unless the "making" of the agreement to arbitrate or "the failure, neglect, or refusal" of one party to arbitrate is in dispute, the court must compel arbitration.

In the present case, the existence of an arbitration agreement and Conti's refusal to arbitrate its controversy with Philipp are both undisputed. Accordingly, it would appear that the district court was required under section 4 to send the dispute to arbitration, regardless of the validity of any procedural defenses, such as untimeliness, that Conti might assert against Philipp's demand for arbitration. The district court nonetheless denied Philipp's cross-motion under section 4 to compel arbitration. The court did not address the express terms of that section, but reasoned that it need not compel arbitration if it found that the agreement was no longer "viable" due to the untimeliness of Philipp's demand for arbitration. In support of its authority to determine the validity of Conti's time-bar defense to arbitration, the district court cited our prior decision in Reconstruction Finance Corp. v. Harrisons & Crosfield, 204 F.2d 366 (2d Cir.), cert. denied, 346 U.S. 854, 74 S. Ct. 69, 98 L. Ed. 368 (1953), and distinguished our later holding in Trafalgar Shipping Co. v. International Milling Co., 401 F.2d 568 (2d Cir. 1968). In his subsequent certification to this court, however, Judge Duffy noted that there was substantial uncertainty concerning the interpretation of these decisions. We agree that some ambiguity exists, but find that Reconstruction Finance and Trafalgar Shipping, when read in light of the language of section 4 and the policy considerations underlying the Federal Arbitration Act, support the view that the validity of time-bar defenses to the enforcement of arbitration agreements should generally be determined by the arbitrator rather than by the court.

In Reconstruction Finance, the plaintiff sought to enjoin defendant's demand for arbitration of a claim of damages resulting from the failure of plaintiff's predecessor to obtain insurance on certain rubber shipments that were destroyed in 1942. Since defendant had not requested arbitration until 1951, the plaintiff argued that the demand was untimely under the relevant six-year statute of limitations governing contract obligations. District Judge Weinfeld denied plaintiff's petition to stay arbitration, noting that under the language of section 4 the court was precluded from passing on the validity of plaintiff's time-bar defense. Application of Reconstruction Finance Corp., 106 F. Supp. 358, 361-62 (S.D.N.Y.1952). In affirming, this court assumed arguendo that defendant would be barred by the six-year statute of limitations from recovering damages for plaintiff's breach of its contractual obligation to obtain insurance. Nevertheless, we concluded that the "effect of the limitations statute on the asserted obligations to obtain insurance will be determined by the arbitrators." 204 F.2d at 369. The district court's role was limited to determining whether the statute of ...

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