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Standard Chlorine of Delaware Inc. v. Leonard

decided: October 19, 1967.


Lumbard, Chief Judge, and Smith and Kaufman, Circuit Judges.

Author: Kaufman

IRVING R. KAUFMAN, Circuit Judge:

Arbitration is often thought of as a quick and efficient method for determining controversies. Unfortunately, cases involving arbitration clauses sometimes are best remembered as monuments to delay because of the litigation and appeals antecedent to the actual arbitration. In any event, we shall deal with the incipient question -- Is Judge Ryan's order staying the action in the district court pending arbitration appealable?


Because our answer is in the negative, it will suffice to state the facts briefly. In 1965, Standard Chlorine of Delaware, Inc. ("Standard"), a Delaware corporation with its principal office in New Jersey, entered into a written agreement with Jackson D. Leonard, a New York resident, whereby Leonard was to provide the engineering skill and technical "know-how" to build a plant contemplated by Standard for the manufacturing of monochlorobenzine and dichlorobenzine. The agreement provided, in relevant part, that "any controversy between the parties * * * with respect to any of the performance of the parties under this Agreement" would be submitted to arbitration.*fn1 The plant was ultimately completed, but not to the satisfaction of Standard which charged that it was "inefficiently designed and constructed." Leonard disagreed. While the ensuing controversy appeared on its face to relate to the performance of Leonard, Standard did not seek arbitration. Instead, it sought recourse to litigation and instituted suit in the Southern District of New York. Leonard moved to have the suit stayed pending arbitration and Judge Ryan granted the motion.

Even a cursory perusal of Standard's complaint reveals that it was drawn with the objective of avoiding arbitration. Judge Ryan correctly characterized it as "a deliberate hodgepodge of contradictory charges." The complaint couples a prayer for damages for breach of contract -- a claim that is surely within the arbitration clause -- with a request for damages for fraud and a demand that the entire contract (or alternatively the arbitration clause) be rescinded or reformed because of mutual mistake or because Standard was fraudulently induced to enter into the agreement. The experienced district court judge determined, however, that the charge of "fraudulent inducement" was a grasping for straws in the wind in order to escape arbitration. After stripping the complaint of its verbiage and argumentation, he found the alleged "fraud" was nothing more than a charge that Leonard had claimed he could perform his end of the bargain when it turned out he could not.*fn2 Judge Ryan, however, chose not to rule on the presence or absence of fraud, but based his decision on the narrow ground that the claim of fraud was insufficiently pleaded. In sum, he held that use by Standard of conclusory epithets such as "fraud" would avail it nothing when the facts revealed a simple action for damages based on poor performance.*fn3


Consideration of the question of appealability must begin with the established federal policy against piecemeal litigation. "Finality as a condition of review is an historic characteristic of federal appellate procedure. It was written into the first Judiciary Act and has been departed from only when observance of it would practically defeat the right to any review at all." Cobbledick v. United States, 309 U.S. 323, 324-325, 60 S. Ct. 540, 541, 84 L. Ed. 783 (1940). The granting of a stay of an action pending arbitration must be distinguished from a final judgment dismissing an action because arbitration must still be pursued and it differs from an order compelling arbitration in an action brought solely for that purpose. See Alexander v. Pacific Maritime Assn., 332 F.2d 266 (9th Cir.), cert. denied, 379 U.S. 882, 85 S. Ct. 150, 13 L. Ed. 2d 88 (1964). It is clear beyond dispute that an order -- such as the one before us -- in a continuing suit is not a "final decision" within 28 U.S.C. § 1291. Baltimore Contractors v. Bodinger, 348 U.S. 176, 75 S. Ct. 249, 99 L. Ed. 233 (1955); Wilson Brothers v. Textile Workers Union of America, 224 F.2d 176 (2 Cir. 1955), cert. denied, 350 U.S. 834, 76 S. Ct. 70, 100 L. Ed. 745 (1956). As Judge Friendly pointed out in Lummus Company v. Commonwealth Oil Refining Company, 297 F.2d 80, 86 (2d Cir. 1961), cert. denied, 368 U.S. 986, 82 S. Ct. 601, 7 L. Ed. 2d 524 (1962), "the arbitration cannot proceed to an enforceable result without further judicial action."*fn4 Whatever inconvenience Standard might suffer because of the stay is no worse than that which results from an appellate court reversal of a final judgment because the lower court erred in issuing an interlocutory order.*fn5 In any event, the rationale for requiring finality as a condition of review has sound application here. Allowing procedural appeals in this case would be to encourage dilatory practices, put a premium on harassment and increase the cost of litigation. Compare Republic Gear Co. v. Borg-Warner Corp., 381 F.2d 551 (2d Cir., 1967).

But, Judge Ryan's order is appealable if it falls within a statutory exception to the finality requirement, 28 U.S.C. § 1292(a) (1), which provides that "interlocutory orders * * * granting, continuing, modifying, refusing or dissolving injunctions, or refusing to dissolve or modify injunctions" are appealable. Were this question one of first impression we would find little difficulty in agreeing with Judge Learned Hand that "arbitration is merely a form of trial, to be adopted in the action itself, in place of the trial at common law". Murray Oil Products Co. v. Mitsui & Co., 146 F.2d 381, 383 (2d Cir. 1944). Compare Lummus Company v. Commonwealth Oil Refining Company, 297 F.2d 80 (2d Cir. 1961), cert. denied, 368 U.S. 986, 82 S. Ct. 601, 7 L. Ed. 2d 524 (1962); but see Bernhardt v. Polygraphic Co. of America, 350 U.S. 198, 76 S. Ct. 273, 100 L. Ed. 199 (1956) (disapproving Judge Hand's statement).

But we are not writing on a clean slate. In a series of severely criticized decisions*fn6 culminating in Baltimore Contractors v. Bodinger, supra,*fn7 the Supreme Court indicated that under certain circumstances an order staying a suit pending arbitration must be considered an interlocutory injunction under § 1292. The Court analogized such orders to those of a court of equity before the merger of law and equity. It reasoned that a stay of a law type action must be considered equivalent to an injunction staying litigation pending in another court; but, it added, a stay of an equity type proceeding is to be considered akin to an order within the action itself. The Court apparently recognized that troublesome distinctions would create a formidable task for lower courts: "The reliance on the analogy of equity power to enjoin proceedings in other courts has elements of fiction in this day of one form of action. The incongruity of taking jurisdiction from a stay in a law type and denying jurisdiction in an equity type proceeding springs from the persistence of outmoded procedural differentiations." 348 U.S. at 184, 75 S. Ct. at 254. But the Court felt bound by the old technical distinctions, leaving to Congress the task of correcting the anomaly. With the Supreme Court grounding its holding against appealability in Baltimore Contractors on an admitted fiction, it is not surprising that the decisions of the lower federal courts, sometimes within the same circuit, are not easily reconcilable.*fn8 This court has on occasion indicated that we would be guided by the principle that orders compelling arbitration made in an independent proceeding under section 4 of the United States Arbitration Act*fn9 would be appealable while those issued in the course of a continuing suit would not be. Farr & Co. v. Cia. Intercontinental De Navegacion, 243 F.2d 342 (2d Cir. 1957).*fn10 While we do not harbor the illusion that we can harmonize all the decisions in this obfuscated area, it seems clear to us that this court has been guided by the technical distinctions between equity and law claims sanctioned by the Supreme Court in Baltimore Contractors.*fn11 And, we agree with the Fifth Circuit that the rule that has emerged from the many decisions is that "An order staying or refusing to stay proceedings in the District Court is appealable under § 1292(a) (1) only if (A) the action in which the order was made is an action which, before the fusion of law and equity, was by its nature an action at law; and (B) the stay was sought to permit the prior determination of some equitable defense or counterclaim." Jackson Brewing Co. v. Clarke, 303 F.2d 844, 845 (5th Cir.), cert. denied, 371 U.S. 891, 83 S. Ct. 190, 9 L. Ed. 2d 124 (1962) (emphasis in original).


It remains for us only to apply that principle to the present case. Leonard tells us that because he pleaded no equitable defense or counterclaim, we need not decide whether Standard's complaint sounded in law or in equity; that in either case the order is not appealable. But this argument ignores the full import of the Supreme Court's holding, for the Court has held that "the special defense setting up the arbitration agreement is [itself] an equitable defense". Shanferoke Coal & Supply Corp. v. Westchester Service Corp., 293 U.S. 449, 55 S. Ct. 313, 79 L. Ed. 583 (1935) (Brandeis, J.). Thus, almost 30 years after the supposed complete merger of law and equity, we find it frustratingly necessary to determine whether Standard's complaint is properly characterized as an action at law or a proceeding in equity.

Fortunately, the problem of classification is not overly difficult for we begin with the fact that Standard's complaint, in its own words, characterized the requested relief of reformation or rescission as equitable. But we need not stop with Standard's own description of its complaint, for it is clear that requests for reformation and rescission have traditionally been considered equitable in nature. Cf. Smith v. Bear, 237 F.2d 79 (2d Cir. 1956); Greenhood v. Orr & Sembower, Inc., 158 F. Supp. 906 (D.Mass.1958). See 5 Moore's Federal Practice paras. 38.22 and 38.23 (2d ed. 1966). We have not overlooked the fact that Standard sought the legal remedy of damages for fraud or that the grounds advanced for reformation were alleged mutual mistake and Leonard's claimed fraud. But Standard also sought damages for breach of contract which, because of the arbitration clause, could only be granted after the contract was reformed. And as Professor Moore posits: "Where an action is brought to reform a contract and to recover on it as reformed, all the issues, including damages, are for the court since equity having taken jurisdiction would decide the entire controversy." 5 Moore's Federal Practice para. 38.22, p. 183 (2d ed. 1966). Under these circumstances, the request for reformation or rescission cannot be considered merely incidental. In the application of the rationale of Baltimore Contractors to this case, we must conclude that Standard's complaint was sufficiently equitable in nature so that Judge Ryan's order is not appealable. We cannot accept the fictional premise that in the case before us we are dealing with an order akin to that where one court is staying proceedings in another court.*fn12

While we recognize that we are compounding technical distinctions given us by a higher court in applying them to this case, we believe it preferable to adopting the alternatives of either glossing over differences deemed important by the Supreme Court, or accepting extensive delays in cases such as this.*fn13 Justice Jackson stated it well in another context, "To pull one misshapen stone out of the grotesque structure is more likely simply to upset its present balance between adverse interests ...

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