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In re Arbitration Between Farkar

decided: August 16, 1978.


Before Moore, Oakes and Gurfein, Circuit Judges.

Author: Per Curiam


In the original opinion of the panel, we held that the specific agreement of the parties barring consequential damages was not arbitrable because to hold otherwise would affect the stability of consensual business arrangements, implying that such a provision does not go to the merits of the controversy. This portion of the opinion reversed Judge Lasker's holding that the issue of consequential damages was to be determined by the arbitrators. Farkar Co. v. R. A. Hanson Disc, Ltd., 441 F. Supp. 841, 844 (S.D.N.Y.1977). We took cognizance of the point raised that a finding of unconscionability under U.C.C. §§ 2-302, 2-719, could defeat the limitation of damages, but held that there had been no showing sufficient to raise an issue of unconscionability.

Although it is true that, where there is not even a colorable claim to be submitted to arbitration, as in the case where the claim does not relate to the contract providing for arbitration or to its breach, the parties need not arbitrate the claim, Rosenthal v. Emanuel, Deetjen & Co., 516 F.2d 325, 327 (2d Cir. 1975), we have long held that even though there is a high probability that a party seeking arbitration will lose because of a given contractual provision, he must nevertheless first submit his claim to the arbitrators if it is colorable. I/S Stavborg v. National Metal Converters, Inc., 500 F.2d 424 (2d Cir. 1974), at least where the arbitration clause itself is broad enough to cover the claim asserted. See, e. g., International Union of Electrical, Radio & Machine Workers v. General Electric Co., 407 F.2d 253, 259-61 (2d Cir. 1968), Cert. denied, 395 U.S. 904, 89 S. Ct. 1742, 23 L. Ed. 2d 217 (1969).

The respective briefs did not disclose any case dealing directly with a claim for consequential damages in arbitration contrary to a specific clause like the one involved here, but a similar question has arisen in the New York state court. In In re Granite Worsted Mills, Inc., 25 N.Y.2d 451, 306 N.Y.S.2d 934, 255 N.E.2d 168 (1969), a 4-3 majority of the Court of Appeals separated the issue of consequential damages from the merits, even though the arbitration clause itself made no such special provision.

On further consideration, we hold that the defense of unconscionability is not so clearly frivolous as to bar its consideration as a question of fact.

The request had been made to the district court that it direct the arbitrators to make specific findings concerning the limitation of damages, but the district court denied the request on grounds of a general policy not to require arbitrators to make specific findings. 441 F. Supp. at 844.

Judge Lasker was quite right that arbitration awards generally need not state reasons or reasoning, at least where the "grounds for (the award) can be gleaned from the record . . .," Sobel v. Hertz, Warner & Co., 469 F.2d 1211, 1215-16 (2d Cir. 1972).

In this specific instance, however, we shall follow the New York Court of Appeals majority in Granite Worsted Mills, supra, and hold that the district court should direct the arbitrators to be bound by the limitation of damages provision unless in a separate determination expressed in the award they find the provision to be unconscionable within the meaning of U.C.C. §§ 2-302, 2-719. All other matters are reserved for the arbitration.

The decision below is affirmed as modified.

MOORE, Circuit Judge (dissenting):

Petitioner-appellee Farkar Company petitions for rehearing of this Court's decision which concluded that "the consequential damages provision (of the contract in issue) is not unconscionable and therefore must limit the arbitrators' inquiry". Petitioner claims that, in reaching this result, the court decided on the merits that a no-consequential-damages clause was not unconscionable under § 2-302 of the Uniform Commercial Code. This was not, nor is it now, our intention but we found "no facts to support placing into the "unconscionable' category the provision barring consequential damages".

In my opinion, the majority remakes and changes the business contract as agreed to and signed by the parties to conform to their conception of what the contract should have provided.

The contract involved the manufacture and sale of a complicated piece of earth-dredging machinery. As part of the sale the contract provided "8. LIMITATION OF LIABILITY" that "In no event shall RAHCO (the seller) be liable for any special or consequential damages". ...

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