Appeal from a judgment of the United States District Court for the Southern District of New York, Charles S. Haight, Judge, compelling arbitration under a charter party pursuant to 9 U.S.C. § 4. Affirmed. Judge Wyatt dissents.
VAN GRAAFEILAND and PIERCE, Circuit Judges, and WYATT,*fn* District Judge.
EXXON Corporation (Exxon) appeals from an order by Judge Charles S. Haight in the United States District Court for the Southern District of New York entered on April 1, 1982.*fn1 The order compelled Exxon to arbitrate a contract dispute involving $2,177,751 in alleged damages pursuant to the United States Arbitration Act, 9 U.S.C. § 4 (1976) (the Act), with Prudential Lines, Inc. (Prudential), a United States-flag steamship line. For the reasons stated below, we affirm the district court's order.
Prudential is a Delaware corporation with its principal place of business in the Southern District of New York; Exxon is a New Jersey corporation having offices in the Southern District of New York. The jurisdiction of this Court is based upon the provisions of the United States Arbitration Act, 9 U.S.C. § 4 (1976), and the maritime subject matter, 28 U.S.C.§ 1333 (1976). On November 11, 1961, Prudential "bareboat" chartered its vessel for a 15 year term commencing with the date of delivery to Exxon.*fn2 The vessel was delivered to Exxon in May, 1964 and redelivery was to be made in May, 1979.Under Clause 7 of the agreement, Exxon was to have full control over the vessel during the term of the charter.
At the end of the term, Exxon was to redeliver the vessel to Prudential pursuant to the instructions set forth in Clause 16 of the charter party. Clause 16(a) required Exxon to redeliver the vessel in as good order as it was at the time of delivery to Exxon, except for damage resulting from ordinary wear and tear. Clause 16(b) called for a joint survey of the vessel at the time of redelivery "on drydock and afloat" by representatives of the two parties and required that "[s]uch representatives by an instrument in writing shall jointly agree upon and designate the repairs of work necessary to place the vessel on the date of redelivery in the condition required by this Clause 16." Clause 16(c) required the charterer to perform all necessary repairs prior to redelivery or, at the owner's option and with the consent of the Mortgage of the vessel, to discharge such responsibility by payment for the repairs and lost time to the owner. Clause 16(d) provided that "[a]cceptance of the vessel by Owner shall be conclusive evidence of Charterer's compliance with any and all of the Charterer's obligations under this charter with respect to the vessel's class and condition at the time of redelivery."
Also relevant to this litigation were the arbitration provisions of the charter, Clauses 13(d) and 25. Clause 13(d) provided in part:
Should any dispute arise between the Owner and the Charterer in respect to the responsibility for repairs, renewals or replacements, or as to the condition of the vessel at the time of redelivery, the matter shall be decided by arbitration as provided in Clause 25.
Should any dispute arise under this agreement, the matter in dispute shall be referred to three persons, one to be appointed by Owner, one by Charterer, and the third by the two so chosen; and their decision or that of any two of them shall be final, and their award may be made a rule of court and a judgment or decree entered thereon.
In 1979, when the term of the charter was about to end, the owner Prudential appointed Carter Morrell, an independent marine surveyor, to conduct the survey on its behalf in compliance with the requirements of Clause 16(b). Morrell was a naval architect and marine engineer who had supervised the construction of the vessel, has worked as a consultant to Prudential, and had assisted in making a survey of the vessel in 1975. Morrell attended the vessel at the redelivery port, and participated in the joint survey in May, 1979.
Numerous factual claims are made by both parties as to events surrounding the redelivery of the vessel. Since the district court was deciding whether to compel arbitration and not the merits of the parties' claims, it made no findings of fact in this regard in its decision entered April 1, 1982. The court did note, however, that at the redelivery port, Prudential's representative, Morrell, executed a written "Certificate of Acceptance and Redelivery." During the period between May 25, 1979 and August, 1979, Exxon alleges that the vessel was in Prudential's sole control.
Exxon argues that execution of this certificate by Morrell in light of Clause 16(d), described above, constituted acceptance of the vessel. Thus, any claim for damage that Prudential as owner might have had against Exxon was allegedly extinguished by this "acceptance" of the vessel under Clause 16(d).
Prudential states that after May 25, 1979, it learned that anticipated repairs would cost more than $1,000,000 and on March 18, 1980, submitted a claim to Exxon for $2,177,751. Exxon refused to pay. On January 23, 1981, Prudential demanded arbitration of the dispute and subsequently designated an arbitrator, as required by the charter party. Exxon failed to reciprocate, as required by Clause 25. On May 18, 1981, Prudential filed its petition in the district court for an order to compel arbitration of its claim.
In a memorandum opinion and order dated June 17, 1981, Judge Haight initially denied Prudential's petition to compel arbitration. He found that Prudential had accepted the vessel, and held "[t]hat acceptance constitutes "conclusive evidence" of respondent's compliance with those very obligations whose alleged breach petitioner now seeks to submit to arbitration. But the issue is foreclosed, and nothing remains to be arbitrated." The court also rejected Prudential's argument that Morrell was not authorized to accept the vessel and held that Prudential had "clothed" him with apparent authority.
Prudential filed a motion for reconsideration which was granted by the district judge on September 9, 1981 to further consider the question of whether the authority vel non, actual or apparent, of petitioner's surveyor to execute the certificate of redelivery was an arbitrable dispute.Upon reconsideration, Judge Haight entered a decision on April 1, 1982, and noted that the briefs and oral arguments focused on whether the issueof Morrell's authority was collateral to the agreement between the parties or "inextricably tied up with the merits of the underlying dispute," and thus "wholly derivative of issues that fall within the scope of the arbitration clause." 535 F. Supp. at 293, quoting McAllister Bros. v. A & S Transp. Co., 621 F.2d 519, 523 (2d Cir. 1980). In reversing his earlier decision, he concluded that the issue of Morrell's authority was not collateral. He noted that in his earlier decision, he had erroneously "assumed without analysis that the issue of the surveyor's authority could be decided by the Court on the motion papers, and need not be submitted to the arbitrators." 535 F. Supp. at 293.
Exxon filed a notice of appeal on April 27, 1982 and moved for a stay pending appeal pursuant to Fed. R. Civ. P. 62(d) and Rule 42 of the Civil Rules of the Southern District of New York, when Prudential demanded that Exxon proceed with arbitration despite the pending appeal. By an order entered May 25, 1982, the district court denied the motion.On appeal of the denial of that motion, a stay was granted by this court on June 15, 1982, on condition that Exxon file a bond or other security in an amount the district court deemed proper on remand.
The issue presented herein is whether the district court erred in granting Prudential's petition to compel arbitration. In particular, we must review the district court's decision that the dispute over the responsibility for repairs, and sub-issues encompassed within the main dispute, were arbitrable.*fn3 In light of the persuasive dissenting opinion of Judge Wyatt, we shall also address the serious equitable considerations presented herein.
This action was brought pursuant to the United States Arbitration Act, 9 U.S.C. § 4 (1976), which provides in 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.*fn4
Thus, under Section 4, it must be established that: (1) an arbitration agreement exists; (2) the dispute falls within the scope of the arbitration agreement (i.e., "under a written agreement for arbitration"); and (3) the dispute does not involve the making of the agreement or the failure to comply therewith.
Here, there is no dispute concerning the first requirement of Section 4. As noted above, two clauses of the charter provided for arbitration. Nor is there any disagreement regarding the third requirement since Exxon contests neither the making of the agreement nor that it has refused to arbitrate the dispute with Prudential over a matter covered by the arbitration clauses of the charger party. See Mercury Constr. Corp. v. Moses H. Cone Memorial Hosp., 656 F.2d 933, 942 (4th Cir. 1981) (en banc), cert. granted, 455 U.S. 937, 102 S. Ct. 1426, 71 L. Ed. 2d 647 (1982). There is, however, disagreement between the parties as to whether the dispute falls within the purview of the agreement in light of the sequence of events which occurred herein. Before discussing this issue, it is helpful to state the applicable law regarding the scope of coverage of an arbitration agreement.
As we noted in McAllister, 621 F.2d at 522, "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." (quoting United Steelworkers of Am. v. Warrior and Gulf Navigation Co., 363 U.S. 574, 582, 4 L. Ed. 2d 1409, 80 S. Ct. 1347 (1960)). The question of whether a dispute between the parties is covered by the arbitration agreement is for the courts to decide. Galt v. Libbey-Owens-Ford Glass Co., 376 F.2d 711, 714 (7th Cir. 1967); see Atkinson v. Sinclair Refining Co., 370 U.S. 238, 241, 8 L. Ed. 2d 462, 82 S. Ct. 1318 (1962) (under Section 301 of the Labor Management Relations Act, the courts must decide whether a party has breached his promise to arbitrate).
Since adoption of the United States Arbitration Act, American jurisprudence has favored the arbitrability of disputes whenever parties contractually provide for arbitration. See Scherk v. Alberto-Culver Co., 417 U.S. 506, 510-11, 41 L. Ed. 2d 270, 94 S. Ct. 2449 (1974). The legislative history of the United States Arbitration Act indicates that the Act was designed to avoid "the costliness and delays of litigation," and to place arbitration agreements "upon the same footing as other contracts. . . ." H.R. Rep. No. 96, 68th Cong., 1st Sess., 1, 2 (1924); see also S. Rep. No. 536, 68th Cong., 1st Sess. (1924). Moreover, the arbitrators appointed by the parties are presumably specialists, familiar not only with the relevant statutory and common law but also with custom and usage of the trade. Federal Commerce & Navigation Co. v. Kanematsu-Gosho, Ltd., 457 F.2d 387, 389-90 (2d Cir. 1972); Use of arbitration procedures also eases the workload of the courts. Conticommodity Serv. Inc. v. Philipp & Lion, 613 F.2d 1222, 1224 (2d Cir. 1980). For these reasons, courts have consistently held that doubts about arbitrability should be resolved in favor of arbitration. E.g., Galt, 376 F.2d at 714; World Brilliance Corp. v. Bethlehem Steel Co., 342 F.2d 362, 365 (2d Cir. 1965).
With this presumption in mind, a court must examine the second requirement of Section 4, namely, the scope of the agreement to arbitrate. Two inquiries must be made by the district court at the outset: (1) is the arbitration agreement broad or narrow?; (2) if narrow, does the dispute involve a "collateral" agreement?
With respect to the broad or narrow query, we stated in McAllister:
If the arbitration clause is broad and arguably covers disputes concerning contract termination, arbitration should be compelled and the arbitrator should decide any claim that the arbitration agreement, because of substantive or temporal limitations, does not cover the underlying dispute. . . .However, . . . when "dealing with a narrower arbitration clause, . . . it will be proper to consider whether the conduct in issue is on its face within the purview of the clause." Hence, if the arbitration agreement cannot reasonably be construed to cover disputes over whether the contract was in force during the relevant period, arbitration need not be compelled.
621 F.2d at 522 (citations omitted). Simply stated, a court should compel arbitration, and permit the arbitrator to decide whether the dispute falls within the clause, if the clause is "broad." In contrast, if the clause is "narrow," arbitration should not be compelled unless the court determines that the dispute falls within the clause. Specific words or phrases alone may not be determinative although words of limitation would indicate a narrower clause. The tone of the clause as a whole must be considered.
Here, as we have noted above, the charter party included two provisions for arbitration. The court below observed that clause 13(d) appeared to be "broad" while clause 25 appeared to be "narrow." 535 F. Supp. at 295. We disagree. We believe that both clauses contain sufficient words of limitation so that they must be construed to be "narrow."*fn5 Nonetheless, the district court properly addressed the question of whether the dispute fell within either or both of these clauses before issuing an order to compel arbitration. Id. The court correctly concluded that Prudential's claim arises "under" the agreement and is arbitrable.
To make this determination, a district court must turn to the second inquiry, which is whether the dispute involves a "collateral" agreement. A "collateral" agreement is a separate, side agreement, connected with the principal contract which contains the arbitration clause. The burden is on the party resisting arbitration to demonstrate that the disputed issue is collateral.
If a dispute arises under a collateral agreement, arbitration of that dispute cannot be compelled merely based upon the existence of an arbitration clause in the main agreement. Rochdale Village, Inc. v. Public Serv. Employees Union, Local No. 80, 605 F.2d 1290, 1296-97 (2d Cir. 1979). For example, in Rochdale, we noted that if a dispute over contract termination was based on the theory that the contract had expired by its own terms, then the dispute was arbitrable because it required an interpretation of the contract's own terms. If, however, the contract had been terminated by a separate, collateral agreement, the dispute over termination would not be arbitrable because it could not reasonably be classified as an issue arising "under" the original contract.
It is important to note the difference between a dispute arising under a collateral agreement and one which arises under the main agreement but required determination of a sub-issue. The latter, in the words of McAllister, is one which is "inextricably tied up with the merits of the underlying dispute," 621 F.2d at 523, and is arbitrable. Here, the main issue before us is whether the district court erred in granting a petition to compel arbitration between Prudential and Exxon concerning responsibility for repairs to the vessel. Resolution of this dispute necessarily implicates resolution of several sub-issues, including: (1) whether Prudential's claim for damages was extinguished by the operation of Clause 16; (2) whether Prudential's marine surveyor was authorized to "accept" the vessel; (3) what acts would constitute an "acceptance" of the vessel by Prudential sufficient to meet the Clause 16(d) requirement.
We conclude that none of these sub-issues involves a collateral agreement. Rather, as the district court concluded, each of these issues "is inextricably tied up with the merits of the underlying dispute," and "wholly derivative of issues that fall within the scope of the arbitration clause," McAllister, 621 F.2d at 523, and therefore is within the scope of the arbitration clauses of the charter party. The district court was correct in so holding.
The dissenting opinion expresses concern over Prudential's conduct, delay and consequent prejudice to Exxon in bringing this action, which appears to have significantly benefitted Prudential while at the same time placing Exxon in a position of serious disadvantage. Judge Wyatt asserts that the charter, inter alia, required either that the parties, through their surveyors, agree on all repairs for which the charterer was responsible or demand arbitration as to responsibility for repairs before redelivery. Judge Wyatt asserts that such a requirement:
recognizes the importance of establishing at the time of redelivery the then condition of the vessel rather than to delay this determination to some later date when the condition of the vessel will have been changed by operations of the owner, or of new charterers, or by the mere passage of time.
(slip op. at ). Here, the vessel was redelivered on May 25, 1979, but a claim for the cost of repairs was not made until 10 months later, on March 18, 1980, and a demand for arbitration was not made until 1 year and 8 months after redelivery, on January 23, 1981. Moreover, Prudential accepted possession and control of the vessel in May, 1979; delivered it to another charterer in August, 1979; and had alterations made to the vessel in preparation for the new charter while it was in Prudential's sole control. The dissent concludes that Prudential should not be allowed, at this late date, to obtain an order from the district court compelling arbitration.
We note the similarity of the concerns expressed by Judge Wyatt to policy considerations underlying the doctrines of laches and waiver. For example, the doctrine of laches instructs that an inequity might result in a case where a claim is permitted to go forward where relevant evidence has been lost due to a petitioner's delay in bringing suit. LaGares v. Good Commander Shipping Co., 487 F. Supp. 1243 (S.D.N.Y. 1980). A court of equity confronted with a laches issue must consider whether the plaintiff has inexcusably slept on his rights so as to make a decree against the defendant unfair. Russell v. Todd, 309 U.S. 280, 287, 84 L. Ed. 754, 60 S. Ct. 527 (1940). One factor traditionally considered by courts of equity in determining whether a plaintiff's claim is barred by laches is the prejudice to the defendant resulting from the delay. Public Adm'r of New York v. Angela Compania Naviera, S.A., 592 F.2d 58, 63-64 (2d Cir. 1979), cert. dismissed, 443 U.S. 928, 100 S. Ct. 15, 61 L. Ed. 2d 897 (1979). Judge Wyatt is understandably concerned with the issue of likely prejudice to Exxon resulting from Prudential's extended delay before making known its claim and seeking arbitration. Therefore, we believe it is fruitful to consider how courts have dealt with laches in conjunction with motions to compel arbitration.
The seminal case in this area is Trafalgar Shipping Co. v. International Milling Co., 401 F.2d 568 (2d Cir. 1968). Trafalgar, like the instant case, involved responsibility for repairs to a vessel which had been chartered by petitioner Trafalgar, the owner, to respondent International. Approximately four years after the charter had ended, Trafalgar demanded that the dispute be submitted to arbitration, and thereafter brought suit to compel arbitration in the district court pursuant to 9 U.S.C. § 4.International asserted that Trafalgar's right to arbitrate was barred by laches. This court held that "all questions of delay which relate to issues which the parties have agreed to submit to arbitration [are to] be resolved by the arbitrators, not the court." Id. at 571. The court's reason for so holding was that:
in the often esoteric field of commercial dealings, and in admiralty, it would seem that the severity of prejudice suffered through delay, and the reasonableness of excuses offered by the dilatory party, the elements of laches, might be resolved better where resort is had to the expertise of the arbitrators.
Id. at 572. The court noted that parties to a charter agreement could avoid this result by expressly providing in their agreement that all issues of laches be submitted to the court. Trafalgar also noted one instance when questions of delay could be properly decided by a court, which is when such questions:
relate to and affect issues which [the court] is called upon to decide in connection with the motion under 9 U.S.C. § 4.
The only issues which the court is authorized to consider on a motion to compel arbitration are ones which pertain to "the making of the arbitration agreement or the failure, neglect, or refusal to perform the same." . . . If one of these issues is disputed before the court, and if one party claims that its ability to present proof in relation thereto has been prejudiced through the delay of the other, the court may consider whether it is fair to permit the dilatory party even to invoke its processes under the Act.
Id. at 571. (citations omitted) (emphasis added). Thus, under Trafalgar, only if the alleged laches pertains to the making of the arbitration agreement or the failure, neglect, or refusal to comply therewith -- the two issues which the court is required to decide under the Federal Arbitration Act -- is the court free to dispose of the laches issue. In all other cases, laches must be decided by the arbitrator.
Trafalgar has been consistently followed in this circuit when questions arise as to whether arbitration should be compelled after long delay. Most recently this court followed Trafalgar in Conticommodity Serv., Inc. v. Philipp & Lion, 613 F.2d 1222 (2d Cir. 1980). Conticommodity involved an arbitration clause contained in a customer's agreement between petitioner and respondent for trading in metal futures. The arbitration clause contained a one year time limit within which the arbitration machinery could be invoked. Four years after a disagreement arose, Philipp demanded arbitration and Conticommodity argued that the demand was untimely. The district court held that the issue of timeliness was properly before the court, and that the demand for arbitration was untimely. This court reversed. Judge Feinberg, writing for the court, noted the temptation to a district court to decide the merits of a laches defense:
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.
Id. at 1224. The court concluded that the Federal Arbitration Act carefully limits the role of courts in considering motions to compel arbitration. Id.
This view on the laches issue in conjunction with the Federal Arbitration Act has also been widely adopted by courts in this and other circuits. E.g., Halcon Int'l, Inc. v. Monsanto Australia Ltd., 446 F.2d 156 (7th Cir.), cert. denied, 404 U.S. 949, 92 S. Ct. 286, 30 L. Ed. 2d 266 (1971) (arbitration compelled pursuant to construction after five years had elapsed between injury and motion to compel arbitration); Singer Co. v. Tappan Co., 403 F. Supp. 322 (D.N.J. 1975), aff'd, 544 F.2d 513 (3rd Cir. 1976) (arbitration compelled pursuant to goods contract after three years had elapsed between injury and filing of motion to compel arbitration); In Re Arbitration Between Maritime Co. "Spetsai," S.A. and International Commodities Export Corp., 348 F. Supp. 258 (S.D.N.Y. 1972) (arbitration compelled pursuant to charter party after more than four year delay between injury and filing of motion to compel).
Here, the parties did not specifically provide in their agreement that all issues of laches should be submitted to the court. Moreover, as we have noted above, no issue was presented regarding the making of the agreement or the failure, neglect, or refusal to comply therewith. Thus, the potential laches issue*fn6 and implicitly the concern of prejudice to Exxon raised by the dissent herein constitute issues properly presented to the arbitrators.
A similar analysis would also apply to a waiver defense here. For instance, in World Brilliance Corp. v. Bethlehem Steel Co., 342 F.2d 362 (2d Cir. 1965), this court held that waiver, as well as laches, is an arbitrable issue. There, Judge Waterman, writing for this court, concluded that nothing in Section 4 of the Federal Arbitration Act "expressly bars enforcement of an agreement to arbitrate [where waiver is asserted as a defense] in a suit brought under Section 4. Nor should such a bar be inferred on any but the strongest grounds." Id. at 365.*fn7 We agree with Judge Waterman's assessment.*fn8 Accordingly, we affirm the district court's order compelling arbitration.
WYATT, District Judge, dissenting:
The majority decision affirms an order directing the charterer (Exxon) to arbitrate a "dispute" based on a claim first raised by the owner (Prudential) long after redelivery of the vessel had been completed and the charter had thereby been terminated.The claim, however now phrased, is (in the terms of the charter) that the condition of the vessel, when offered by Exxon for redelivery, was worse than it had been when delivered to Exxon, and that the damages were in excess of "ordinary wear and tear". It is contended by Prudential that arbitrators should determine whether repairs would have been necessary prior to redelivery in May 1979 to put the vessel in the same condition it was in at the time of its delivery to Exxon and, if so, Prudential alleges that Exxon is now responsible for the cost of such repairs.
The charter, for a sensible reason, provides that such a claim must be made, arbitrated, and decided before redelivery is effected. The reason is to achieve a basic objective of the redelivery provisions that, before redelivery, all repairs for which the charterer is responsible, if any, be determined by agreement of surveyors from both parties or by arbitration of any dispute. This objective recognizes the importance of establishing at the time of redelivery the then condition of the vessel rather than to delay this determination to some later date when the condition of the vessel will have been changed by operations of the owner, or of new charterers, or by the mere passage of time. It is the condition of the vessel at the time of redelivery which is relevant in determining whether the charterers is responsible for making repairs.
To reinforce the requirement that the condition of the vessel must be agreed upon or arbitrated before there is redelivery, it is also provided in the contract that an adequate opportunity be given to the owner to inspect the vessel when tendered for redelivery and that acceptance by the owner of the vessel thereafter is "conclusive evidence" that the charterer has complied with all of its obligations "with respect to the vessel's class and condition at the time of redelivery". Thus, by the terms of the charter, no claim can be made by Prudential after redelivery -- either in arbitration, in litigation, or otherwise -- based on the condition of the vessel when redelivered.
Despite its knowledge that its claim could not survive acceptance of the vessel in redelivery, it was important to Prudential at that time to secure a prompt retransfer of possession and control from Exxon, because Prudential was then negotiating to turn over the vessel to another charterer. Consequently, Prudential did not wish to raise any dispute at the time of redelivery. The arbitration of such a dispute to a final decision would necessarily have meant a delay in Prudential obtaining possession and control of the vessel. Therefore, Prudential deliberately, with full knowledge of the consequences, and for its own advantage, accepted the vessel from Exxon in redelivery without raising ...