UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
November 30, 1971
In the Matter of JOSEPH MULLER CORPORATION ZURICH, Petitioner,
COMMONWEALTH PETROCHEMICALS, INC., Respondent
Gurfein, District Judge.
The opinion of the court was delivered by: GURFEIN
GURFEIN, District Judge.
This is a petition to compel arbitration brought by Joseph Muller Corporation Zurich, Switzerland, pursuant to 9 U.S.C. § 4. Petitioner seeks an order compelling respondent to submit to arbitration in accordance with a purported written arbitration provision agreed to by both parties and enforceable under 9 U.S.C. § 2. The jurisdiction of this Court, which requires an independent basis for jurisdiction (Metro Industrial Painting Corp. v. Terminal Construction Co., 287 F.2d 382, 384 (2 Cir.), cert. denied, 368 U.S. 817, 82 S. Ct. 31, 7 L. Ed. 2d 24 (1961)), may be found in 28 U.S.C. § 1332(a) in that diversity of citizenship is present and the amount in question exceeds $10,000. Petitioner Joseph Muller Corporation is incorporated under the laws of the Canton of Zurich, Switzerland, and is, therefore, a citizen of a foreign state within the meaning of 28 U.S.C. § 1332(a)(2). Chemical Transportation Corp. v. Metropolitan Petroleum Corp., 246 F. Supp. 563 (S.D.N.Y. 1964). Respondent Commonwealth is a corporation organized under the laws of the Commonwealth of Puerto Rico with an office in San Juan. As such respondent is a "citizen of a State" within the meaning of 28 U.S.C. § 1332(a)(2). See 28 U.S.C. § 1332(d); Lummus Co. v. Commonwealth Oil Refining Co., 297 F.2d 80, 87 (2 Cir. 1961), cert. denied, Dawson v. Lummus Co., 368 U.S. 986, 82 S. Ct. 601, 7 L. Ed. 2d 524 (1962). The award which may result from arbitration of the controversy involves demurrage charges and other claims in excess of $10,000. The demurrage charges alone amount to $2,600 per day for at least 4 days. Jurisdiction, therefore, lies.
The respondent contends that the petition to compel arbitration should not be granted for two reasons: (1) that there never was an agreement to arbitrate by the parties; and (2) that, even if there was an agreement, it is invalid and unenforceable because there was fraud in the inducement of the contract. These contentions cannot be considered without a recital of the documents exchanged between the parties.
Early in 1971, the parties entered into negotiations for the sale and delivery by the petitioner of propylene to the respondent at its storage facilities in Puerto Rico. Propylene is a flammable gas which is shipped in liquid form under pressure or refrigeration. Respondent originally requested that the propylene be discharged in Puerto Rico at temperatures approximating atmospheric conditions in order to facilitate its unloading. Petitioner was unable to charter any ships with a capacity to unload at atmospheric temperature. Extensive additional negotiations were then carried on to determine at which temperature the propylene would be shipped and at which temperature it would be unloaded. Respondent asserted that the unloading temperature was crucial because the cooled gas might cause extensive damage to respondent's facilities if it were unloaded in too cold a condition. The petitioner, thereafter, suggested shipping the propylene on a vessel which would enable the propylene to be carried at a colder temperature and heated to the ambient temperature in Puerto Rico when it was unloaded under pressure. It was known that the heating and pressurizing of the propylene for discharge in Puerto Rico would require some time and, accordingly, the question arose as to who would pay the demurrage charges for the delay incident to such unloading.
Petitioner made its initial offer for the sale of propylene in a letter dated January 4, 1971, to which respondent replied on February 8, 1971, accepting petitioner's terms and adding the qualification that the propylene would be delivered to Guayanilla from the ship's tanks "at atmospheric temperature more or less." On February 22, petitioner replied that only semi-refrigerated ships were available for this traffic and asked the respondent to notify it of the "minimum temperature at which you are able to receive cargo and maximum pressure." To this the respondent replied by telex on the same day "can receive propylene at ambient temperature only (90 degrees F) maximum pressure 250 PSI." Respondent added that its offer to purchase would terminate if the petitioner failed to confirm respondent's condition by 5 p.m. that day. Petitioner, by telex received at 3:30 p.m. that day, confirmed its conclusion of a freight contract with a shipowner for 5 shipments of 2,200 metric tons of propylene and stated that the ships would transport the material semi-refrigerated and would heat up the material to discharge under pressure. The petitioner added "will pass on your temperature/pressure to shipowner tomorrow." There was, in fact, a further exchange concerning the temperature and pressure, but it presumably did not succeed in establishing any clear statement of those requirements.
Thereafter, on March 8 petitioner by telex nominated the vessel FROSTFONN to transport the first shipment of propylene and informed the respondent that "shipowner estimates transfer commencing at 60 degrees F and lowering promptly to 32 degrees F against 220-250 PSIG will require 24 hours maximum." Ultimately the FROSTFONN arrived in Puerto Rico on April 15 and began the next day to discharge propylene in alleged violation of the respondent's discharge requirements. It is unnecessary to advert to the arguments and counterarguments with respect to an alleged misunderstanding between the parties of the temperature and pressure requirements.
On March 2, 1971, before the FROSTFONN had sailed, the petitioner sent to the respondent a copy of its form entitled "INSTRUCTIONS HOW TO OPEN LETTER OF CREDIT IN FAVOUR OF JOSEPH MUELLER CORPORATION ZUERICH" and requested the respondent to open a letter of credit in favor of the petitioner in the amount of $140,700 in accordance with the enclosed instructions. These "Instructions," in addition to containing terms dealing with the specifications of the propylene, documentation and payment, also contained "Special Instructions." These "Special Instructions" included: (1) an arbitration clause and (2) a statement that, in the absence of a signed contract of sale and purchase between the parties, the letter of credit constitutes the entire contract. The arbitration clause therein contained is set forth in the margin.
On March 5 the petitioner submitted to the respondent a proposed contract for the sale and delivery of propylene which contained the same arbitration clause in haec verba. The respondent refused to execute the agreement on the ground that it failed to include the understanding concerning respondent's discharge requirements for the propylene. No question was raised or discussed about the arbitration clause.
In the meantime, by telex of March 12, 1971 the respondent appears to have accepted the "Instructions" as follows:
"The content of the Instructions on How to Open a Letter of Credit in Favor of Joseph Mueller Corporation-Zurich are acceptable to us. However, by no means as previously explained does it represent the complete agreement between us."
Thus, there was no rejection of the arbitration clause as such. This apparently was the view of the petitioner who, replying on March 19 to the above, wrote:
"From this telex we see that you accept our form entitled 'Instructions how to open letter of credit' * * * sent to you attached to our letter of March 2, 1971. Please note that when and if we receive your Letter of Credit it shall be the complete agreement between the parties for the first shipment and the only binding document between our two companies, except arbitration to which you agreed in your above telex, unless you sign the written Contract No. 13.786 submitted to you and until such signed Contract is in our hands."
The respondent did open a letter of credit at the First National City Bank in favor of the respondent for $155,000, which did not, however, include the provision for arbitration or the "complete agreement" clause. Petitioner's New York counsel on March 17 wrote to respondent stating:
"It is my understanding that the letter of credit will be revised so as to conform to the terms set forth in 'Instructions How to Open a Letter of Credit in Favour of Joseph Mueller Corporation Zuerich' previously delivered to you, with the exception that you do not accept the first paragraph in the section captioned 'Special Instructions,' and while you accept the balance of the 'Special Instructions' sections, you will not set this forth in the letter of credit."
Included in the "balance of the 'Special Instructions'" was the arbitration clause previously mentioned.
Respondent replied, on March 22, that the sale agreement was in the hands of its legal department for review and redrafting. The letter stated:
"We again stipulate that our current agreement, in the absence of better documentation, is based on the exchange of correspondence and cables which indicates the required performance of both parties. As we have previously indicated, the instructions for how to handle a letter of credit are acceptable to us, however, by no means constitute the entire agreement between us."
It did not rebut the statement that the "balance of the 'Special Instructions'" was accepted.
The petitioner now seeks to compel arbitration under Section Four of the Federal Arbitration Act. The requirement of "commerce" contained in that Act, 9 U.S.C. §§ 1-2, is met since the transaction involved a shipment of propylene from Europe to Puerto Rico. See Caribbean S.S. Co. v. La Societe Navale Caennaise, 140 F. Supp. 16, 21-22 (E.D.Va.), aff'd Reynolds Jamaica Mines v. La Societe Navale Caennaise, 239 F.2d 689 (4 Cir. 1956).
For a petitioner to succeed in compelling arbitration under the Federal Arbitration Act, 9 U.S.C. § 4, he must also show a "written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction" (9 U.S.C. § 2). Metro Industrial Painting Corp. v. Terminal Construction Co., supra, 287 F.2d at 384. This is true because the order sought under Section 4 is dependent upon a "refusal * * * to arbitrate under a written agreement for arbitration." The issue, therefore, is whether in the exchange of correspondence recited above there emerged a "written agreement for arbitration" of a kind sufficient to satisfy the requirements of the statute.
At the threshold it should be noted that federal law, composed of generally accepted principles of contract law, controls the validity of an "agreement for arbitration," under the Federal Arbitration Act. Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402, 404-409 (2 Cir. 1959), cert. granted, 362 U.S. 909, 80 S. Ct. 682, 4 L. Ed. 2d 618, cert. dismissed, 364 U.S. 801, 81 S. Ct. 27, 5 L. Ed. 2d 37 (1960); see Fisser v. International Bank, 282 F.2d 231, 233 (2 Cir. 1960). A motion to compel arbitration under Section Four is simply a request for an order compelling specific performance of part of a contract. Kulukundis Shipping Co. v. Amtorg Trading Corp., 126 F.2d 978, 986-987 (2 Cir. 1942). Since a court should not exercise such powers except "on the basis of a fully informed judgment as to all the circumstances" (ibid.), the Act has provided that the court must be "satisfied that the making of the agreement for arbitration * * * is not in issue" (§ 4); otherwise there must be a trial on that issue. That test, however, cannot mean that a trial is necessary in every case where the court finds preliminarily that such an issue has been tendered. If, upon the papers submitted and after a hearing thereon, there emerges only a question of law on which the court is "fully informed," relief may be granted without a trial. After all, such an issue would never go to a jury in any case. And we must bear in mind that the fundamental purpose of the Federal Arbitration Act is to relieve the parties from expensive litigation and "to help ease the current congestion of court calendars." Robert Lawrence Co. v. Devonshire Fabrics, Inc., supra, 271 F.2d at 410.
In the case at bar, a contract for the sale of goods arose from the offer of the respondent to buy the propylene and the act of the petitioner in shipping it. 1 Corbin on Contracts § 77 (1963); U.C.C. 2-206(1)(b).
See also U.C.C. 2-207(3);
Bauer International Corp. v. Eastern Township Produce, Ltd., 4 U.C.C.R.S. 735 (Sup. Ct. N.Y. Co. 1967), aff'd, 29 A.D. 2d 738, 288 N.Y.S. 2d 434 (1st Dept. 1968).
Both parties accordingly became bound to a contract, but it was never an integrated written document containing all the terms of the transaction.
A written integrated contract had been tendered by the petitioner but not accepted by the respondent. On the other hand, there was clearly an intent on the part of both parties to accept the provision for arbitration contained in the "Special Instructions." The unacceptability of that provision was never raised in the negotiations. When the counter-offer of March 22 by the respondent stated: "We again stipulate that our current agreement, in the absence of better documentation, is based on the exchange of correspondence and cables which indicates the required performance of both parties," the respondent was adopting as its counter-offer the portions of the correspondence already received, including the arbitration clause in the "Special Instructions."
By shipping the propylene, the petitioner accepted this counter-offer, resulting in a valid contract.
The only question that remains is whether the statute in requiring "a written provision in * * * a contract evidencing a transaction involving commerce" is limited to a contract completely integrated in a single written agreement. If that is what is meant, arbitration may not be compelled, for the contract here is not a single integrated written agreement.
There seems to be a dearth of federal authority on the question of whether a written offer accepted by performance or a contract formed by correspondence is "a contract evidencing a transaction" within the meaning of the Federal Arbitration Act.
In Universal Oil Products Co. v. S.C.M. Corp., 313 F. Supp. 905 (D. Conn. 1970), Judge Timbers compelled arbitration under a contract formed by the seller's delivery pursuant to a counter-offer consisting of the buyer's purchase order form which contained an arbitration provision. Judge Timbers cited no authority for this conclusion.
It has been said by an eminent authority that the insertion of "evidencing a transaction" into the language of the bill, which had previously read "in any maritime transaction or contract or transaction involving commerce," was merely "to improve the language of the act and not to effect a substantive change." Metro Industrial Painting Corp. v. Terminal Construction Co., supra, 287 F.2d at 387 n. 2 (Lumbard, J., concurring). If we do not assign a literal emphasis to "evidencing a transaction," we may conclude that if there is a written provision for arbitration coupled with a contract between the parties, albeit a unilateral contract or one arising from correspondence, that is enough to satisfy the Federal Arbitration Act.
In Fisser v. International Bank, supra, the Court held that "[ordinary] contract principles determine who is bound by such written provisions and of course parties can become contractually bound absent their signatures." The Court gave a number of illustrations of how a party may become bound by a written arbitration provision without signing it, "limited only by generally operative principles of contract law" 282 F.2d at 233 and n. 6. I take the broad meaning of this to be that no single integrated agreement is required to the exclusion of other binding events under the generally operative principles of contract law. This result is in accord with the policy of the Act. It was intended to create a type of remedy. The single inquiry is whether the respondent agreed with the petitioner to pursue that remedy and whether it is memorialized in written words. Even though the respondent may not have signed its name to a particular paper containing the arbitration provision, if there was agreement to its terms, the respondent is nevertheless bound.
State law, while not controlling on this point, is nevertheless instructive. New York's C.P.L.R. § 7501 requires a "written agreement" to arbitrate.
This, like the Federal Arbitration Act, has long been held not to require a signing. Helen Whiting, Inc. v. Trojan Textile Corp., 307 N.Y. 360, 121 N.E. 2d 367 (1954). And in New York it has been held explicitly that the agreement to arbitrate need not be set out in one document (Hutchinson Roofing & Sheet Metal Co. v. IBM Corp., 237 N.Y.S. 2d 582 (Sup. Ct., Westchester Co. 1963)) and that the offer to arbitrate can be accepted orally or by conduct (In re American News Co., 130 N.Y.S. 2d 554 (Sup. Ct., N.Y. Co. 1954)).
In essence, the decision of whether a single integrated contract should be required involves a balancing of the desirability of certainty and uniformity, on the one hand, against the policies of enforcing the parties' intent and of fostering submission to arbitration in accordance with the purposes of the Act. The latter side of the balance appears the more weighty. Requiring a single integrated contract, moreover:
"would have the effect either of eliminating as a practical matter arbitration provisions from numerous contracts which are entered into daily or of upsetting routine and ordinary business practices whereby contracts are made by accepting purchase orders, by brokers' notes, by performance, or even by silent assent. These conditions apply generally to the field of contracts and, although some problems arise, they are not of sufficient weight to urge a different disposition of contracts to arbitrate."
Accordingly, I hold that the arbitration provision, as set out in the "Special Instructions," was agreed upon and is binding upon the parties.
Once it is held that the written arbitration provision is binding, then the question of venue must be resolved against the respondent. The arbitration clause specifically provides for arbitration in New York and that is enough to confer venue on the Court. Farr & Co. v. Cia. Intercontinental De Navegacion De Cuba, 243 F.2d 342, 346 (2 Cir. 1957); Lawn v. Franklin, 328 F. Supp. 791, 793-794 (S.D.N.Y. 1971).
Finally, the respondent claims that there was fraud in the inducement of the contract in that the petitioner fraudulently concealed the fact that the ships chartered for the delivery of the propylene did not have sufficient unloading capacity. There is no separate claim that the arbitration provision was induced by fraud. Under these circumstances the Supreme Court has said:
"If the claim is fraud in the inducement of the arbitration clause itself -- an issue which goes to the 'making' of the agreement to arbitrate -- the federal court may proceed to adjudicate it. But the statutory language does not permit the federal court to consider claims of fraud in the inducement of the contract generally." Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-404, 87 S. Ct. 1801, 1806, 18 L. Ed. 2d 1270 (1967).
The issue of fraud in the inducement must, therefore, be left to the arbitrators.
The motion to compel arbitration is granted.
Settle order on notice.