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El Hoss Engineering & Transport Co. v. American Independent Oil Co.

April 10, 1961


Author: Waterman

Before CLARK, WATERMAN and FRIENDLY, Circuit Judges.

WATERMAN, Circuit Judge.

El Hoss Engineering & Transport Co., Ltd. (El Hoss) 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, for an order directing American Independent Oil Company (Aminoil) to submit certain disputes to arbitration as allegedly provided for in an agreement made by the two parties. Judge Bryan issued an order compelling Aminoil to submit to arbitration (183 F.Supp. 394) (1960) and Aminoil appeals.

El Hoss is a Lebanese corporation with its principal place of business in Beirut, Lebanon. Aminoil is a Delaware corporation with its principal place of business in New York City. The alleged agreement which we must construe involves commerce and the amount in controversy far exceeds $10,000. Therefore, the court below had jurisdiction to entertain the petition. Bernhardt v. Polygraphic Co. of America, 1956, 350 U.S. 198, 76 S. Ct. 273, 100 L. Ed. 199.

Robert Lawrence Co. v. Devonshire Fabrics, Inc., 2 Cir., 1959, 271 F.2d 402, certiorari granted 362 U.S. 909, 80 S. Ct. 682, 4 L. Ed. 2d 618, dismissed pursuant to Rule 60, 1960, 364 U.S. 801, 81 S. Ct. 27, 5 L. Ed. 2d 37, holds that the validity and interpretation of an arbitration agreement must be determined by the federal substantive law of arbitration as expressed in the Arbitration Act.*fn1 Accord, Petition of Kinoshita & Co. (American Oceanic Corp.), 2 Cir., 1961, 287 F.2d 951; Amicizia Societa Navegazione v. Chilean Nitrate & Iodine Sales Corp., 2 Cir., 274 F.2d 805, certiorari denied 1960, 363 U.S. 843, 80 S. Ct. 1612, 4 L. Ed. 2d 1727. Contra, Lummus Co. v. Commonwealth Oil Refining Co., 1 Cir., 280 F.2d 915, certiorari denied 1960, 364 U.S. 911, 81 S. Ct. 274, 5 L. Ed. 2d 225. The question for decision here is: Did the parties make a binding contract to arbitrate disagreements as to whether certain conditions to which the contract was made "subject" were complied with?

In 1959 Aminoil distributed a 54 page instrument upon which prospective bidders could tender bids for the purchase of Aminoil's automotive and construction equipment, and for the job of providing the transportation service Aminoil would require. It proposed to sell transportation equipment valued at nearly one million dollars and further proposed to lease this equipment from the successful bidder at a substantial rental. Aminoil, by affixing its signature below that of the successful bidder in a space provided for this purpose on page 54 of the instrument, could accept that bid. However, below this signature line there was a clause conditioning Aminoil's acceptance upon the bidder's compliance with the conditions of the agreement by providing guarantees covering purchase price, performance bonds and insurance protection:

"subject to compliance with the conditions of this agreement as to guarantees or endorsements by third parties in favor of the company covering the unpaid installments on purchase price, performance bonds and insurance coverage, etc., not later than fourteen (14) days from the date of the acceptance by the company."*fn*

This conditional acceptance expressly applied to "this agreement consisting of sections one through thirteen inclusive and attachments one through seven inclusive totaling fifty-four pages" - i.e., it applied to the entire instrument. Included as part of the instrument was clause eleven of section one, the clause that provided for arbitration:

"11. In the event of any disagreement between the parties hereto as to the effectuation of this agreement, or performance thereof, or any part of the agreement, each party undertakes to use its best efforts to resolve said disagreement without submission to arbitration. However, should such solution be impossible, the parties hereto will select a mutually acceptable arbitrator whose decision as to the matters presented to him shall be final. If the parties cannot agree on such an arbitrator, each shall nominate an arbitrator of its choice and these shall in turn select a third, and the decision of a majority of this panel of three shall be final as to all matters submitted. This paragraph shall not affect the rights of the company to terminate this agreement under the provisions of paragraphs three (3) and four (4) of section one (1)."

The lower court, relying on Robert Lawrence Co. v. Devonshire Fabrics, Inc., supra, declared that this clause was separable from the rest of the instrument and was a binding contract to arbitrate differences which had arisen as to whether El Hoss, the successful bidder, had performed the acts required of El Hoss before Aminoil was bound.

We are of the opinion that this conclusion that the arbitration clause was separate from the rest of the contract was erroneous. Robert Lawrence was a giant step in the development of a federal substantive law of arbitration and in the implementation of the federal policy that encourages the private resolution of commercial disputes. Kulukundis Shipping Co., S/A v. Amtorg Trading Corp., 2 Cir., 1942, 126 F.2d 978, 985. The aim of Robert Lawrence was to destroy frustration of the Arbitration Act by a litigant's cry of fraud in the inducement, a claim that would require a preliminary court adjudication in every case where the cry was raised. See 271 F.2d at page 410. Therefore, we concluded that it was consistent for parties to agree to arbitrate among the issues arising under their contract the issue of whether fraud existed in the inducement. Under the circumstances present in the Robert Lawrence situation, a contract for the sale of goods, the parties were found to have so agreed. There was no allegation of fraud in the inducement of the arbitration clause of the agreement but that cry was raised only as to the subject matter of the contract, the sale of the goods, and therefore we found that the arbitration agreement was separable from the rest of the agreement.

This is not the situation before us in the present case. Aminoil made it clear that the enjoyment by a bidder for the contract of the contractual fruits and duties was conditioned on the bidder's prior performance of the prior acts required of that successful bidder. See United Engineering & Contracting Co. v. Broadnax, 2 Cir., 136 F. 351, certiorari denied 1905, 197 U.S. 624, 25 S. Ct. 800, 49 L. Ed. 911; F. W. Berk & Co. v. Derecktor, 1950, 301 N.Y. 110, 92 N.E.2d 914. Every clause including the arbitration clause was expressly so conditioned. This poses quite a different problem from the problem posed by a cry of fraud in the inducement. Here there is no likelihood of sham litigation to avoid submitting issues to arbitration. A complete reading of the contract discloses that Aminoil sought to protect itself from being bound by the agreement until the bidder met the conditions incumbent upon it initially to meet. There is no reason in fact or in law for a frustration of this clearly demonstrated intent. Aminoil was proposing to sell a million dollars worth of transportation equipment and was further proposing to lease from its purchaser the equipment it had sold to the purchaser and was agreeing to pay a substantial rental therefor. Considering the size of the transaction it is patently understandable that Aminoil would choose to condition its obligations under the contract, including its obligation to arbitrate, upon the prior performance by the bidder of basic financial guarantees.

We concern ourselves here, as the courts concerned themselves in Robert Lawrence and Kinoshita, with ascertaining the intent of the parties from an examination of the entire instrument they bound themselves by and from the meaning of the language they used in their agreement - the traditional approach of common law judges when questions involving the validity or interpretation of contracts are presented for judicial resolution. The agreements in the three cases differ from each other. In Robert Lawrence there was no language obstacle to considering the arbitration clause a separable clause and to reading it so that it would encompass a dispute as to whether entry into that contract was induced by fraud. In Kinoshita & Co. the words of the arbitration clause were readable so as not to encompass an agreement to arbitrate an issue of fraud in the inducement. In the present case the document before us is an integrated document where every clause, including the clause providing for arbitration, that binds both parties is carefully conditioned on the prior performance of the specified conditions by one of these parties. We find this fact to be a clear and unambiguous obstacle to a separability of the arbitration clause from the remainder of the agreement, and we read the entire contract as demonstrating a clear intent on the part of both parties not to arbitrate any dispute with reference to whether there was a full performance of these threshold conditions.

Although the U.S. Arbitration Act looks favorably upon arbitration it does not dictate that we should disregard parties' contractual agreements that contain specific language outlining the ...

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