The opinion of the court was delivered by: LASKER
This is a motion to compel arbitration of a contract dispute between the Farkar Company ("Farkar") and two R.A. Hanson organizations, R.A. Hanson Co., Inc. ("Hanson, Inc.") and its international sales subsidiary, R.A. Hanson, DISC., Ltd. ("Hanson, DISC").
The relevant facts are not in dispute. In July, 1974, Farkar, an Iranian corporation (para. 3, Petition to Compel Arbitration) was awarded a canal construction contract by the Khuzestan Water and Power Authority of Iran. Prior to the award, Farkar's chief officers, Pakrad Kazazian ("Kazazian") and Nicolas Markarian ("Markarian") had been shopping for equipment that would be needed for the excavation work required under the contract. In the course of their activities they met Robert Waggoner and Goorgen Assatourian, (Markarian Deposition, 43-45, 78, 81-83; Kazazian Deposition, 37-38) sales representatives for "RAHCO" machinery, which included excavation equipment of the kind needed for canal work. ("RAHCO" is a tradename used both by Hanson, Inc. and Hanson, DISC. Hanson Deposition at 68. It is also used to identify the excavating equipment in which Farkar was interested. See, Exhibits A, N-1) Following a meeting between Farkar's officers and RAHCO's salespeople, Farkar entered into negotiations for the purchase of a RAHCO DE-30 excavator. On September 21st, Farkar signed an agreement to purchase a RAHCO DE-30 excavator. The agreement was thereafter executed by Hanson, DISC, but not by Hanson, Inc., in Spokane on November 11, 1974. Subsequently, the excavator was manufactured and delivered -- all this occurred in Spokane.
Ultimately, after the machine had made its way to Iran, Farkar was dissatisfied with its performance. Allegedly: it took much longer to assemble than had been represented, it could not perform the specialized tasks for which it had been purchased, and it broke down repeatedly. As a result, Farkar exercised its contractual right to commence an arbitration proceeding by filing, on October 6, 1976, a demand for arbitration, in which Farkar alleged breaches of various warranties (see, para. 13, Purchase Agreement; Demand for Arbitration at 4-5). The prayer for relief sought both actual and consequential damages. The respondent Hanson organizations did not submit to the demand for arbitration. Instead, on October 19, 1976, they obtained a stay of proceedings from the Superior Court, Spokane County, Washington. One day later, Farkar filed, with this court, a petition to compel arbitration. Thereafter, the respondents moved to dismiss the petition on the grounds that the claim for consequential damages was not arbitrable and that venue in this district was improper.
The motion also requested an order declaring that Hanson, Inc., which did not sign the contract under which the arbitration proceedings were commenced, was not subject to the jurisdiction of the arbitrators. At a hearing on the motion to dismiss, the court ordered discovery on the question of Hanson, Inc.'s relation to Hanson, DISC, so as to determine whether Hanson, Inc. was bound by the arbitration clause although it was not a signatory to the purchase or arbitration agreement. Discovery is now complete. For the reasons stated below, the motion is denied.
Respondents contend that Farkar's demand for consequential damages is not arbitrable because the purchase agreement, which contained the arbitration clause, provided that "[in] no event shall RAHCO be liable for special or consequential damages."
Although the quoted clause may seriously undermine the merits of Farkar's claim, it does not remove the claim from the subject matter jurisdiction of the arbitrators.
In pertinent part, the arbitration clause reads:
"[all] disputes arising in connection with this Agreement shall be finally decided under the Rules of the American Arbitration Association in New York, New York, United States of America, by one or more arbitrators appointed in accordance with those Rules. The proceedings shall be conducted in the English language."
The dispute as to the performance of the RAHCO DE-30 excavator plainly arises "in connection with [the purchase] Agreement," and is therefore properly arbitrable under the arbitration clause. Since "an arbitrator is entitled to pass on every question of law or fact necessary to the disposition . .." of the case submitted to him, Federal Commerce & Navigation Company v. Kanematsu-Gosho, Limited, 457 F.2d 387, 389 (2d Cir. 1972), and since the matter and amount of damages must be resolved as part of the disposition of the dispute, it is within the arbitrator's power to entertain a claim for consequential damages. The power is not reduced by the limitation clause, both because that provision is subject to attack as unconscionable, U.C.C. § 2-302,
and because the "duty to arbitrate is not diminished by the fact that the claim of one of the parties may be lacking in merit." Bigge Crane and Rigging Co. v. Docutel Corporation, 371 F. Supp. 240, 244 (E.D.N.Y. 1973). Arguably, a specific prohibition against claiming consequential damages does more than merely detract from the merit of such a claim. However, it does not go so far as utterly to remove the issue from the arbitrator's jurisdiction.
The request that the court direct the arbitrators to make specific findings concerning the limitation of damage clause is denied. Of course, there is a strong public interest in having contract disputes correctly decided, and to that end, detailed rulings would be useful. But, as was observed in Sobel v. Hertz, Warner & Co., (reversing a district judge's order remanding the case to the arbitrators for the purpose of having them specify their findings) 469 F.2d 1211, 1215 (2d Cir. 1972):
"[There] is also a public interest, manifested in the United States Arbitration Act, 9 U.S.C. § 1 et seq., in the proper functioning of the arbitral process. It would be destructive of that process if [the court] approved the . . . requirement . . . that the arbitrators give reasons for their decision. Arbitration may not always be the speedy and economical remedy its admirers claim it is -- this case is proof enough of that. But forcing arbitrators to explain their award even when grounds for it can be gleaned from the record will unjustifiably diminish whatever efficiency the process now achieves." (footnote omitted)
Hanson, Inc. is a manufacturer of specialized construction equipment. Hanson, DISC is a subsidiary, which was formed in 1971 to take advantage of favorable tax treatment available for exports of machinery manufactured by Hanson, Inc. As appears more fully, below, Hanson, DISC exists solely for that purpose (see, Articles of Incorporation; Election for Treatment as a Domestic International Sales Corporation (DISC); Domestic International Sales Corporation Agreement of December 27, 1972 -- all contained in Exhibit B).
Understandably emphasizing that it was Hanson, DISC -- not Hanson, Inc. -- which signed the purchase agreement, respondent Hanson, Inc. claims that it is not bound by the contract or its arbitration clause. Accordingly, it contends that it is not a proper ...