UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
February 21, 1984
MERRILL LYNCH COMMODITIES INC., Plaintiff, against RICHAL SHIPPING CORPORATION and ARISTIDIS I. ALAFOUZOS, Defendants, against MERRILL LYNCH INTERNATIONAL BANK (PANAMA) and MERRILL LYNCH, PIERCE, FENNER & SMITH (HELLAS) LTD., Counterclaim Defendants.
The opinion of the court was delivered by: CANNELLA
MEMORANDUM AND ORDER
Plaintiff's and third-party defendants' motions for a stay of this action pending arbitration and for an order compelling parties to proceed to arbitration are granted. 9 U.S.C. §§ 3, 4.
Plaintiff's and third-party defendants' motions for a protective order and an order dismissing counterclaims against third-party defendants are denied without prejudice. Fed. R. Civ. P. 26(c); 12(b)(2), (6).
On July 26, 1982, defendant Richal Shipping Corporation ["Richal"], a Liberian corporation with its principal place of business in Athens, Greece, executed a Commodity Account Agreement in connection with Account No. 152-08075 ["075 Account"], with plaintiff Merill Lynch Commodities Incorporated ["MLC"], a Delaware corporation with its principal place of business in New York. The parties agreed to arbitrate their disputes pursuant to an arbitration agreement signed on behalf of Richal by Aristides I. Alafouzos ["Alafouzos"], a Greek citizen.
Alafouzos also executed a Continuing Guaranty with respect to the 075 Account on July 26, 1982 that provided in part: "This shall be a continuing Guaranty for such indebtedness which [Richal] shall incur to you, in accordance with the rules and customs of any exchange upon which [its] orders are executed and in accordance with any special agreements now or hereafter existing between you and [Richall]."
Richal used the 075 Account to engage in foreign exchange transactions. On October 6, 1982, MLC liquidated the 975 Account as a result of Richal's refusal to meet new margin demands requested by MLC. A debit balance of $1,062,820.40 remaining in the 075 Account after its liquidation was offset on November 5, 1982 by a transfer of $1,000,000 to MLC from a Richal account maintained for the benefit of MLC with Merrill Lynch International Bank Ltd. ["MLIB"]. By letter dated November 16, 1982, MLC served an arbitration demand upon Richal. By letter dated December 3, 1982, Richal elected arbitration under the rules of the American Arbitration Association but maintained that Alafouzos was not a party to the arbitration agreement and that the foreign currency transactions were not within the scope of the agreement. By letter dated December 6, 1982, MLC claimed that Richal failed to comply with selection provisions of the arbitration agreement and instead, elected arbitration pursuant to the rules of the New York Stock Exchange.
Three lawsuits have been instituted between the parties. On October 8, 1982, Richal commenced proceedings against Merrill Lynch, Pierce, Fenner & Smith (Hellas) Ltd. in the Greek courts. Following a hearing, the action was dismissed on January 11, 1983. A second lawsuit was commenced by Richal against MLIB on November 17, 1982 in British courts which is still pending.The instant action was commenced by MLC against Richal and Alafouzos on December 10, 1982 seeking recovery of the $62,820.40 debit balance remaining in the 075 Account which was not offset by the MLIB transfer. Defendants have counterclaimed for damages arising from the liquidation of the 075 Account.
On May 17, 1983, the Commodity Futures Trading Commission ["CFTC"] amended its arbitration regulations to become effective on August 15, 1983. On August 8, 1983, MLC sent Richal a notice which provided for a revised arbitration agreement that incorporated the CFTC amendments.
The section that set out the proposed arbitration terms included the following provision:
If you signed the Arbitration Agreement when you opened your account and wish to be bound by the terms of this new agreement you need not respond to this notice. If, however, you signed the Arbitration Agreement before and DO NOT wish to be bound by the terms of this new agreement, sign the form below and return it in the enclosed envelope within 30 days. By doing so, you will not only reject the new agreement, you will not be subject to or bound by the former agreement which will be null and void as of August 15, 1983. Your failure to respond within 30 days will be presumed as an indication that you accept the terms of the new agreement and agree to be bound by it (emphasis in original).
On September 1, 1983, Richal and Alafouzos elected not to be bound by the new arbitration provisions and now maintain that the original arbitration agreement is null and void ad initio. MLC asserts that the notice applied only to "new" arbitration agreements or to those accounts in which a previous arbitration agreement had not been invoked as of August 15, 1983.
9 U.S.C. § ["Section 3"]
This Court is empowered under Section 3 of the Federal Arbitration Act [the "Act"] to stay proceedings when issues are referrable to arbitration pursuant to a written agreement.
See Bernhardt v. Polygraphic Co., 350 U.S. 198, 201, 100 L. Ed. 199, 76 S. Ct. 273 (1956); Ocean Industries, Inc. v. Soros Associates International, Inc., 328 F. Supp. 944, 947 (S.D.N.Y. 1971); see also Paine, Webber, Jackson & Curtis, Inc. v. Chase Manhattan Bank, N.A., 728 F.2d 577, slip op. at 1669 (2d Cir. 1984) (arbitration of disputes not incorporated in a written agreement). Pursuant to Section 3 the Court may only consider (1) whether there exists an agreement to arbitrate and (2) its scope. See Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395, 404, 18 L. Ed. 2d 1270, 87 S. Ct. 1801 (1967); Netherlands Curacao Co. v. Kenton Corp., 366 F. Supp. 744, 746 (S.D.N.Y. 1973). "The question of whether a dispute between the parties is covered by the arbitration agreement is for the courts to decide." Prudential Lines, Inc. v. Exxon Corp., 704 F.2d 59, 63 (2d Cir. 1983).
It is not contested that an enforceable arbitration agreement existed at the time of the disputed transactions; rather, Richal argues that the issues raised by these transactions are outside the scope of the agreement. Richal maintains that it was misled as to the scope of the underlying Commodity Account Agreement covered by the arbitration agreement and contends that the 075 Account was not to be used for foreign currency transactions.
In deciding whether to stay this action, the Court must determine whether the arbitration clause is broad enough to include the claims made by MLC. See United States Steelworkers of America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, 4 L. Ed. 2d 1409, 80 S. Ct. 1347 (1960); Coudert v. Paine Webber Jackson & Curtis, 705 F.2d 78, 81 (2d Cir. 1983).
The arbitration agreement covers "transactions" relating to Richal's "account". All transactions between MLC and Richal were based upon the contractual relationship entered into on July 26, 1982. It is evident that issues involving the foreign exchange transactions, regardless of whether they were made pursuant to the 075 Account or Account No. 152-08076 derive from this relationship.
For this reason, the Court finds that the claims at issue are within the ambit of the arbitration agreement and hereby stays this proceeding. See Downing v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 725 F.2d 192, slip op. at 967 (2d Cir. 1984). 9 U.S.C. § 4 ["Section 4"]
Under Section 4 of the Act, the Court is instructed to order arbitration to proceed upon being satisfied that (1) the making of the agreement for arbitration or (2) the failure to comply therewith is not in issue.
See Prima Paint Corp. v. Flood & Conklin Manufacturing Co., supra, 388 U.S. at 403; Prudential Lines, Inc. v. Exxon Corp., supra, 704 F.2d at 62 & n.14.Defendants argue that their failure to arbitrate is in issue because the Commodity Account Agreement was allegedly limited to trading subject to the Commodities Exchange Act ["CEA"], 7 U.S.C. §§ 1-24 and that the currency transactions at issue are not regulated by the CEA.
This argument is without merit. Richal signed a Corporate Authorization to Trade Commodities ["Corporate Authorization"] empowering MLC to buy or sell commodities that did not refer to CEA regulations. The Corporate Authorization is clearly part of the July 27, 1982 agreements covered by the arbitration agreement. Foreign currency transactions are commodities transactions, see CFTC v. American Board of Trade, Inc., 473 F. Supp. 1177, 1182 (S.D.N.Y. 1979) and, therefore, are subject to the arbitration agreement.
Moreover, pursuant to Section 4 the Court is limited to determining only "whether a party refused to arbitrate, not whether it rightfully refused. . . . A contrary conclusion, permitting the court to evaluate the "rightfulness' of a party's refusal to arbitrate, would be at odds with the limited scope of judicial inquiry authorized by section 4." Conticommodity Services v. Philipp & Lion, 613 F.2d 1222, 1227 (2d Cir. 1980) (citations omitted); see Trafalgar Shipping Co. v. International Milling Co., 401 F.2d 568, 572 (2d Cir. 1968).
In the instant dispute, there is (1) no claim of fraud in the inducement or (2) any other factual issue concerning the existence of an arbitration agreement. See Prima Paint Corp. v. Flood & Conklin Manufacturing Co., supra, 388 U.S. at 406. Having determined the existence of the arbitration agreement and a failure to comply therewith, the Court orders the parties to proceed to arbitration.
Defendants argue that the arbitration agreement is invalid because it does not comply with the August 15, 1983 amendments to CFTC arbitration regulations. Although the arbitration agreement, the dispute, the request to arbitrate and the instant motion predate the amended regulations, defendants rely on Curran v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 622 F.2d 216 (6th Cir. 1980), aff'd, 456 U.S. 353, 72 L. Ed. 2d 182, 102 S. Ct. 1825 (1982) and Ames v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 567 F.2d 1174 (2d Cir. 1977), to support the argument that the CFTC amendments are retroactive.
The CFTC regulations at issue were promulgated pursuant to 7 U.S.C. § 7a(11), which limits the foreign currency transactions it governs to those involving sales "for future delivery conducted on a board of trade." 7 U.S.C. § 2.
There is no dispute that the transactions at issue are forward rather than future transactions, see SEC v. G. Weeks Securities, 483 F. Supp. 1239, 1244 (W.D. Tenn. 1980), modified on other grounds, 678 F.2d 649 (6th Cir. 1982), and were not conducted on a board of trade.
Clearly, if the transactions do not need to comply with CEA requirements, then the controlling arbitration agreement is not affected by CFTC regulations. See Shearson Hayden Stone, Inc. v. Scrivener, 671 F.2d 680, 684-85 (2d Cir. 1982). Because the transactions were not within the scope of the CEA, the arbitration agreement remains valid and enforceable.
Assuming arguendo that CEA jurisdiction existed, the Court would not give retroactive effect to the CFTC amendments. The instant dispute varies significantly from situations where CFTC amendments have been retroactively applied. See Curran v. Merrill Lynch, Pierce, Fenner & Smith, supra, 622 F.2d at 228.
The purpose of the August 15, 1983 CFTC regulations are designed to "encourage the use of arbitration as a means of dispute resolution by participants in the commodity futures and options markets." 48 Fed. Reg. 22,136 (May 18, 1983). Thus, because the new regulations are designed to supplement existing rights rather than remedy existing hardships, the Court declines to give them retroactive effect. See Greene v. United States, 376 U.S. 149, 160, 11 L. Ed. 2d 576, 84 S. Ct. 615 (1964); see also Arkoosh v. Dean Witter & Co., 571 F.2d 437, 438-39 (6th Cir. 1978) (no retroactive effect to November 29, 1976 CFTC amendments because untimely assertion of rights resulted in manifest injustice); Ames v. Merrill Lynch, Pierce, Fenner & Smith, Inc., supra, 567 F.2d at 1181 (Meskill, J., dissenting) (CFTC amicus curiae brief states November 29, 1976 CFTC amendments were not intended to extend to pre-existing arbitration agreements).
August 8, 1983 Notice
Relying on MLC's August 8, 1983 notice that existing arbitration agreements "will be null and void as of August 15, 1983," defendants assert that plaintiff waived its right to seek arbitration on the disputed transactions. Defendants contend that the MLC announcement and their response terminate rights pursuant to the arbitration agreement, including rights vested prior to the announcement.For the reasons set forth below, the Court rejects this contention.
Citing Casey v. Kastel, 237 N.Y. 305, 312, 142 N.E. 671, 673 (1924) and Zogby v. State, 53 Misc.2d 740, 743, 279 N.Y.S.2d 665, 668 (N.Y. Ct. Cl. 1967), defendants maintain that the generally accepted definition of "null and void" is void ab initio. The interpretation of "null and void" in these cases was narrowly construed and both courts ruled that the term "null and void" is susceptible to a "more limited meaning" than void ab initio. See Matter of New York & Long Island Bridge Co. v. Smith, 148 N.Y. 540, 547, 42 N.E. 1088, 1090 (1895); see also Ewell v. Daggs, 108 U.S. 143, 148-49, 27 L. Ed. 682, 2 S. Ct. 408 (1883) ("null and void" can give rise to antecedent rights and obligations).
Plaintiff's contention that the "null and void" provision applies solely to disputes arising after August 15, 1983 is supported by the facts and circumstances of this action. The language of the notice must be construed in light of reasonable business practices designed to preserve "sanity of end and aim." Outlet Embroidery Co. v. Derwent Mills, 254 N.Y. 179, 183, 172 N.E. 462, 463 (1930). Because MLC intended to retain its option to arbitrate against Richal,
the Court interprets the notice as preserving MLC's antecedent rights. See Oil Trading Associates, Inc. v. Texas City Refining, Inc., 201 F. Supp. 846, 849 (S.D.N.Y. 1962); Brown v. McGraw-Hill Book Co., 25 A.D.2d 317, 320, 269 N.Y.S.2d 35, 38 (1st Dep't 1966), aff'd, 20 N.Y.2d 826, 285 N.Y.S.2d 72, 231 N.E.2d 768 (1967). Moreover, in view of the "overriding federal policy honoring arbitration [dictating that waiver] is not to be lightly inferred," Carcich v. Rederi Aì Nordie, 389 F.2d 692, 696 (2d Cir. 1968); see Southland Corp. v. Keating, 465 U.S. 1, 52 U.S.L.W. 4131, 4134, 79 L. Ed. 2d 1, 104 S. Ct. 852 (U.S. Jan. 23, 1984), the Court finds that the original July 26, 1982 arbitration agreement remains in effect. See Scherk v. Alberto-Culver Co., 417 U.S. 506, 510-11, 41 L. Ed. 2d 270, 94 S. Ct. 2449, reh'g denied, 419 U.S. 885, 42 L. Ed. 2d 129, 95 S. Ct. 157 (1974); China Union Lines, Ltd. v. American Marine Underwriters, Inc., 458 F. Supp. 132, 135 (S.D.N.Y. 1978).
The remaining question is whether Alafouzos, as guarantor of Richal, must participate in the arbitration.
It is clear that nonsignatories to a contract containing an arbitration clause may be deemed parties thereto, through ordinary contract principles, for purposes of the Act. See Interbras Cayman Co. v. Orient Victory Shipping Co., 663 F.2d 4, 7 (2d Cir. 1981); McAllister Brothers, Inc. v. A & S Transportation Co., 621 F.2d 519, 523-24 (2d Cir. 1980). In construing the scope of a guarantee, the Second Circuit has stated:
The determination of whether a guarantor is bound by an arbitration clause contained in the original contract necessarily turns on the language chosen by the parties in the guaranty. We are aided in our construction of the language here by prior decisions which make clear that where an arbitration clause is applicable by its own terms to all disputes and is not limited to those arising between the [contract signatories], the agreement to arbitrate binds "not only the original parties, but also all those who subsequently consent to be bound by [the terms of the contract]."
Compania Espanola de Petroleos, S.A. v. Nereus Shipping, S.A. 527 F.2d 966, 973 (2d Cir. 1975), cert. denied, 426 U.S. 936, 49 L. Ed. 2d 387, 96 S. Ct. 2650 (1976) (quoting Lowry & Co. v. S.S. Le Moyne D'Iberville, 253 F. Supp. 396, 398 (S.D.N.Y. 1966), aff'd, 372 F.2d 123 (2d Cir. 1967)).
In the instant dispute, the arbitration agreement covers "any controversy arising out of or relating to [Alafouzos"] account" and the Continuing Guaranty states unequivocally that Alafouzos guarantees any indebtedness that Richal may incur "in accordance with any special agreements' between MLC and Richal.
The arbitration agreement is sufficiently broad to bind Alafouzos and the Court concludes that the references in the Continuing Guaranty explicitly adopt the conditions of the Commodity Account Agreement, including the arbitration agreement, all signed by Alafouzos. See Compania de Espanola de Petroleos, S.A. v. Nereus Shipping, S.A. supra, 527 F.2d at 973-74; Antco Shipping Co. v. Sidermar, S.p.A., 417 F. Supp. 207, 217-18 (S.D.N.Y. 1976), aff'd, 553 F.2d 93 (2d Cir. 1977); Midland Tar Distillers, Inc. v. M/T LOTOS, 362 F. Supp. 1311, 1313 (S.D.N.Y. 1973); Lowry & Co. v. S.S. Le Moyne D'Iberville, supra, 253 F. Supp. at 398-99.
Because the third-party complaint is clearly within the ambit of the arbitration agreement and should be resolved in the arbitration proceeding, the Court denies the counterclaim dismissal motion without prejudice. See Schulman Investment Co. v. Olin Corp., 458 F. Supp. 186, 188 (S.D.N.Y. 1978). The motion for a protective order is denied without prejudice. 9 U.S.C. § 7; see Commercial Solvents Corp. v. Louisiana Liquid Fertilizer Co., 20 F.R.D. 359, 361 (S.D.N.Y. 1957).
Plaintiff's and third-party defendants' motion for a stay of this action pending arbitration and for an order compelling Richal and Alafouzos to proceed to arbitration are granted. 9 U.S.C. §§ 3, 4.
Plaintiff's and third-party defendants' motion to dismiss counterclaims is denied without prejudice. Fed. R. Civ. P. 12(b)(2), (6).
MLC is directed to send a letter to Richal within five (5) days of the date of this Memorandum and Order describing the available options for arbitration pursuant to the July 26, 1982 arbitration agreement. This letter may incorporate the increased options available under the August 15, 1983 CFTC amendments.
The Clerk of the Court is directed to prepare and enter Judgment dismissing the action without prejudice.