to decide, and "challenges going to the very existence of a contract that a party claims never to have agreed to," which challenges would be for the court to decide. Id.
In Belship Navigation, Inc. v. Sealift, Inc., 1995 U.S. Dist. LEXIS 10541, 95 Civ. 2748 (RPP), 1995 WL 447656, at *4-5 (S.D.N.Y. July 28, 1995), the court drew a similar distinction. Both parties there agreed that the contract they entered into, a charter fixture for a vessel, was void ab initio because it violated federal regulations. See id. at *2. Nonetheless, the court held that the arbitration provision contained in the void contract was separable and granted the motion to compel arbitration. See id. at *5. The court distinguished between claims that a party's manifestation of assent is for some reason not effective -- which are arbitrable -- and claims that a party never willingly manifested assent at all -- which are to be decided by the court. See id. at *4-5; see also Mesa Operating Ltd. Partnership v. Louisiana Intrastate Gas Corp., 797 F.2d 238, 244 (5th Cir. 1986).
The distinction drawn in these cases is eminently sound. Where a party concedes that it willingly manifested assent to a contract that includes an arbitration clause, but claims that it was induced to do so "by fraud, mistake, or duress," or that the party was an infant at the time, or that some other circumstance justifies that party in seeking to avoid the contract, see Restatement (Second) of Contracts § 7 comment b, that party's claim is simply a defense to arbitrability that is itself arbitrable. See Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S. Ct. 927, 941, 74 L. Ed. 2d 765 (1983).
Where, however, a party claims that it never actually manifested assent to a contract containing an agreement to arbitrate -- for example, because its signature was forged on the contract, or because an imposter purported to be an agent of that party with authority to bind it, or because the party was fraudulently told the contract was something other than what it actually was, or because the party did not intend to manifest assent but was physically compelled to do so -- that party cannot be forced to arbitrate until it is first established by a court that the party willingly manifested assent to the underlying contract. See Three Valleys, 925 F.2d at 1140-41; Restatement (Second) of Contracts § 163 comment a; id. § 174 comment a.
Other courts, including several others in this circuit, have expressly made this distinction as well. See Cancanon v. Smith Barney, Harris, Upham & Co., 805 F.2d 998, 1000 (11th Cir. 1986) (per curiam) (distinguishing between fraud in the inducement and fraud in the factum); N & D Fashions, Inc. v. DHJ Indus., Inc., 548 F.2d 722, 728-29 (8th Cir. 1976) (distinguishing between laches and waiver defenses, on the one hand, and defense of lack of authority of agent to bind principle, on the other); PMC, Inc. v. Atomergic Chemetals Corp., 844 F. Supp. 177, 181 (S.D.N.Y. 1994) (accepting distinction drawn in Three Valleys); Jones v. Sea Tow Services Freeport New York, Inc., 828 F. Supp. 1002, 1007-10 (E.D.N.Y. 1993) (distinguishing between fraud in the inducement and fraud in the factum), rev'd on other grounds, 30 F.3d 360 (2d Cir. 1994); Kyung In Lee v. Pacific Bullion (New York) Inc., 788 F. Supp. 155, 157-58 (E.D.N.Y. 1992) (same); Pollux Marine Agencies, Inc. v. Louis Dreyfus Corp., 455 F. Supp. 211, 218 (S.D.N.Y. 1978) (distinguishing between claims that affect "only the validity, legality or enforceability of a contract" from those that would "negate the existence of a contract").
This reasoning is reinforced by Second Circuit cases holding that it is for the arbitrator and not the court to pass on a claim that a contract containing an arbitration clause is unenforceable: for failure to abide by a time limitation included in the agreement itself, see Conticommodity Serv. Inc. v. Philipp & Lion, 613 F.2d 1222, 1226 (2d Cir. 1980); pursuant to the doctrine of laches, see Trafalgar Shipping Co. v. International Milling Co., 401 F.2d 568, 571-72 (2d Cir. 1968); or because the party seeking arbitration has engaged in activity constituting waiver (other than prior litigation), see Doctor's Associates, 66 F.3d at 454-56. See also Benoay v. Prudential-Bache Sec. Inc., 805 F.2d 1437, 1441 (11th Cir. 1986) (stating that claims of "adhesion, unconscionability, waiver of judicial remedies without knowledge, and lack of mutuality of obligation" are to be decided by arbitrator); Unionmutual Stock Life Ins. Co. of America v. Beneficial Life Ins. Co., 774 F.2d 524, 528-29 (1st Cir. 1985) (stating that claims of mutual mistake and frustration of purpose are for arbitrator to decide).
Seen in this light, CPL's claim that the policy is rendered unenforceable by NEIL by virtue of section 8 must be submitted to the arbitrator. CPL does not dispute the fact that it willingly manifested its assent to the policy, but contends only that its manifestation of assent, by virtue of section 8, cannot legally bind it to any policy provision it now seeks to avoid. Thus, like a claim that the policy was fraudulently induced, its claim that the policy may not be enforced by NEIL is a defense to arbitrability that must itself be arbitrated.
CPL also urges that its challenge to the policy goes only to the arbitration clause, not to the policy as a whole. If so, that challenge would be for the Court to decide, pursuant to Prima Paint. However, that claim is belied by CPL's own actions. For example, by filing an action in Texas state court, it has made clear its position that the forum selection clause choosing the Southern District of New York as the proper venue for any non-arbitrable dispute is not enforceable by NEIL.
Further, by claiming that section 8 precludes enforcement of the arbitration clause by NEIL and by including claims pursuant to Texas law in its state action, CPL has taken the position that the choice-of-law clause in the policy is also unenforceable. In short, CPL's claim is not that the arbitration clause is unenforceable by NEIL, but that the entire policy, including the arbitration clause, is unenforceable by NEIL.
Prima Paint does contain an ambiguity as to whether or not challenges of this type are arbitrable. Read one way, the case stands for the proposition that the court may decide a challenge to an arbitration provision only when the challenge goes solely to the arbitration clause and not to the remainder of the contract at all. See Bhatia v. Johnston, 818 F.2d 418, 421 (5th Cir. 1987); Benoay, 805 F.2d at 1441; Schacht v. Beacon Ins. Co., 742 F.2d 386, 389-90 (7th Cir. 1984). Read another way, the court must decide a challenge to an arbitration provision whenever the challenge goes to the validity of the arbitration provision, regardless of whether the challenge also goes to the rest of the contract. See C.B.S. Employees Fed. Credit Union v. Donaldson, Lufkin and Jenrette Sec. Corp., 912 F.2d 1563, 1568 (6th Cir. 1990); Rush v. Oppenheimer & Co., 681 F. Supp. 1045, 1048-53 (S.D.N.Y. 1988); Jeppsen v. Piper, Jaffray & Hopwood, Inc., Civ. No. 88- C-297, 1988 WL 121893, at *3 (D. Utah Aug. 16, 1988).
However, even courts that take the latter approach require that at least some of the allegations that the contract is invalid be specifically directed to the arbitration provision, such as that it was used as a tool to further a fraudulent scheme, in order to permit the court to decide the issue. These cases hold that where it is alleged that the arbitration agreement is invalid for the same general reason that the contract as a whole is invalid, the challenge must be decided by the arbitrator. See Arnold v. Arnold Corp., 920 F.2d 1269, 1278-79 (6th Cir. 1990); Hires Parts Serv., Inc. v. NCR Corp., 859 F. Supp. 349, 355 (N.D. Ind. 1994); Rosen v. Waldman, 1993 U.S. Dist. LEXIS 14076, 93 Civ. 0225 (PKL), 1993 WL 403974, at *3 (S.D.N.Y. Oct. 7, 1993); cf. Moseley v. Electronic & Missile Facilities, Inc., 374 U.S. 167, 171, 83 S. Ct. 1815, 1817-18, 10 L. Ed. 2d 818 (1963).
Here, the claim of unenforceability does not specifically relate to the arbitration provision. Rather, the arbitration clause is claimed by CPL to be unenforceable by NEIL only because the entire policy is unenforceable by NEIL. Under these circumstances, pursuant to Prima Paint, the challenge goes not to the arbitration provision in particular but to the contract generally, and the dispute is for the arbitrator, not this Court.
Finally, CPL cites the Supreme Court decision in Southland Corp. v. Keating, 465 U.S. 1, 16, 104 S. Ct. 852, 861, 79 L. Ed. 2d 1 (1984), to demonstrate that it is for courts, not arbitrators, to decide whether a state statute purporting to bar a party from enforcing an arbitration clause succeeds in doing so. Although the Supreme Court did not expressly address the issue, CPL argues, the fact that the Court determined that the California statute at issue in that case conflicted with the Federal Arbitration Act and was therefore preempted demonstrates that the Court implicitly held it was proper for courts, not arbitrators, to decide such issues.
However, the Court in Southland made clear that it viewed the California statute as directed only to arbitration provisions. See id. at 16 n.11, 104 S. Ct. at 861 n.11; see also Perry v. Thomas, 482 U.S. 483, 493 n.9, 107 S. Ct. 2520, 2527 n.9, 96 L. Ed. 2d 426 (1987). Indeed, it was this aspect of the California statute that rendered it inconsistent with the FAA. See Doctor's Associates, Inc. v. Casarotto, 134 L. Ed. 2d 902, 116 S. Ct. 1652, 1996 U.S. LEXIS 3244, 1996 WL 262287, at *5 (U.S. 1996); Allied-Bruce Terminix Co. v. Dobson, 115 S. Ct. 834, 843, 130 L. Ed. 2d 753 (1995); Perry, 482 U.S. at 493 n.9, 107 S. Ct. at 2527 n.9. This placed it within that aspect of Prima Paint that requires courts to decide challenges to arbitration provisions that do not implicate the contract as a whole.
Pursuant to Prima Paint, CPL's challenge to NEIL's ability to enforce the policy does not go to the "making" of the arbitration clause. Thus, neither the making of an agreement to arbitrate this dispute nor CPL's refusal to arbitrate is in issue. Accordingly, pursuant to 9 U.S.C. § 4, the petition to compel arbitration must be granted.
C. Stay of the Texas Action
The question remains whether the Court may stay the pending Texas state court action pending final disposition of the arbitration. Pursuant to the Anti-Injunction Act, 28 U.S.C. § 2283, a Court may not issue such a stay "except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments." The courts in this district have consistently held that a stay, when issued subsequent to or in conjunction with an order compelling arbitration concerning the same subject matter as the state court proceeding, falls within one or both of the latter two exceptions. See, e.g., Ferrari North America, Inc. v. Crown Auto Dealerships, 1995 U.S. Dist. LEXIS 15356, 94 Civ. 8541 (KMW), 1995 WL 614558, at * (S.D.N.Y. Oct. 19, 1995); Pervel Indus., Inc. v. TM Wallcovering, Inc., 675 F. Supp. 867, 870 (S.D.N.Y. 1987), aff'd, 871 F.2d 7 (2d Cir. 1989); Hunt v. Mobil Oil Corp., 557 F. Supp. 368, 372 (S.D.N.Y.), aff'd, 742 F.2d 1438 (2d Cir. 1983); Burger Chef Sys., Inc. v. Baldwin Inc., 365 F. Supp. 1229, 1233 (S.D.N.Y. 1973); Network Cinema Corp. v. Glassburn, 357 F. Supp. 169, 172 (S.D.N.Y. 1973); Necchi Sewing Machine Sales Corp. v. Carl, 260 F. Supp. 665, 669 (S.D.N.Y. 1966). Moreover, the Second Circuit has approved of this reasoning. See Standard Microsystems Corp. v. Texas Instruments Inc., 916 F.2d 58, 60 (2d Cir. 1990).
Because this Court has made a "conclusive ruling" that this dispute is arbitrable and because the effect of this ruling "may be undermined by threatened relitigation" in the Texas state court, id., the motion for a stay of CPL's action against NEIL in the Texas state court pending final disposition of the arbitration is granted.
For the foregoing reasons, NEIL's petition to compel arbitration and to enjoin CPL from proceeding against it in the Texas action is granted.
DATED: New York, New York
May 24, 1996
SIDNEY H. STEIN, U.S.D.J.