The opinion of the court was delivered by: Rakoff, District Judge.
This Opinion And Order confirms the Court's bench ruling of September
13, 1999, which denied respondent's motion seeking to dismiss or stay
this action pending arbitration.
The pertinent allegations, essentially undisputed, are as follows. On
July 28, 1998, the Board of Directors of petitioner Cendant Corporation
held a special meeting in New York to consider terminating the employment
of respondent Walter A. Forbes, who had served as Chairman of the Board
since the corporation's inception but was now involved in inquiries
concerning certain alleged accounting irregularities. While an agreement
had already been drafted terminating Mr. Forbes "without cause" (the
"Termination Agreement"), concern was expressed during the Board
meeting as to whether Forbes had previously received reimbursement for
expenses above and beyond the "reasonable travel, entertainment, business
and other expenses" for which he was entitled to reimbursement under the
terms of his employment contract with Cendant. Verified Petition, Ex. D,
Restated Employment Agreement ("Emploment Agreement"), Section V.
In order to resolve this issue and obtain the Board's approval of the
Termination Agreement, Forbes signed and delivered to the Board a letter
(the "Audit Letter"), drafted by his own counsel, that stated: "I will
remit to the Company any overcharge the Audit Committee [of the Board of
Directors] determines exists with respect to my expense items as
discussed at the Special Board Meeting on July 28, 1998." Verified
Petition Ex. A., Letter of Walter Forbes dated July 28, 1998 ("Audit
Letter"). Contemporaneously, the parties executed the Termination
Agreement, pursuant to which Forbes received $35 million in cash, as well
as options to purchase 1,266,500 shares of Cendant common stock at $17.00
per share. See Verified Petition Ex. B, Termination Agreement, Section
Thereafter, the Audit Committee, with input from Forbes and his
counsel, conducted an investigation into Forbes' expenses and determined
that an overcharge of $2,145,446 had occurred. By letter dated March 19,
1999, Cendant demanded that Forbes remit this amount. Forbes refused
and, on April 16, 1999, initiated an arbitration seeking, inter alia, a
declaration that he was not required to make the payment demanded by
Cendant. In initiating the arbitration, Forbes purported to act pursuant
to the arbitration provision of the Employment Agreement, which states in
Any controversy, dispute or claim arising out of or
relating to this Agreement or the breach hereof which
cannot be settled by mutual agreement . . . shall be
finally settled by binding arbitration in accordance
with the Federal Arbitration Act. . . .
Employment Agreement Section XIX.
On June 7, 1999, Cendant filed its answer in arbitration, asserting,
inter alia, that Forbes had waived arbitration by executing the Audit
Letter. Simultaneously, Cendant filed a petition in New York State
Supreme Court, seeking to confirm the Audit Committee's determination
pursuant to Section 7601 of New York's Civil Practice Law and Rules
("Section 7601"), which empowers courts to confirm, modify or vacate
valuations or appraisals by which parties have contractually agreed to
abide. See N.Y. CPLR § 7601; see also Penn Central Corp. v.
Consolidated Rail Corp., 56 N.Y.2d 120, 128-30, 451 N.Y.S.2d 62,
436 N.E.2d 512 (1982); Questrom v. Federated Dept. Stores. Inc.,
41 F. Supp.2d 294, 307 (S.D.N.Y. 1999).
On July 7, 1999, Forbes timely removed Cendant's petition to this Court
on grounds of diversity of citizenship. Thereafter, Forbes filed the
instant motion to stay or dismiss the action pending arbitration,
arguing, inter alia, that under the arbitration provision of the
Employment Agreement the parties had agreed to arbitrate the instant
dispute or at least to arbitrate whether the dispute was eligible for
arbitration. On September 13, 1999, following oral argument, the Court
denied the motion from the bench. This Opinion And Order confirms that
ruling and briefly elaborates the reasons therefor.
First, as to the threshold question of who should decide whether the
instant controversy is arbitrable, the answer is the Court. While the
parties' intent ultimately controls, it is settled law that unless there
is "clear and unmistakable" evidence that the parties intended
otherwise, the question of whether a particular dispute is arbitrable is
one that must be judicially resolved. First Options of Chicago, Inc. v.
Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995); accord
Inc. v. Bybyk, 81 F.3d 1193, 1198-99 (2d Cir. 1996).
Here, Forbes concedes that the parties did not enter into an express
agreement to arbitrate arbitrability but argues that they nonetheless
manifested an intention to arbitrate arbitrability by agreeing to
arbitrate "[a]ny controversy, dispute, or claim arising out of' the
Employment Agreement. See Employment Agreement, Section XIX, supra. This
argument, however, overlooks the qualifying language limiting the scope
of the foregoing to any controversy, claim or dispute "which cannot be
settled by mutual agreement." Id. The contract gives no indication
— let alone a "clear and unmistakable" one — that the parties
intended for the arbitrator to determine the arbitrability of whether or
not a particular controversy falls within or outside this carve-out, or
whether, for that matter, it arises under a separate agreement. Yet these
are the immediate issues here, and are therefore for the Court to
decide. Cf. Rochdale Village, Inc. v. Public Service Emp. Union,
605 F.2d 1290, 1295 (2d Cir. 1979) (where arbitration provision was
limited to disputes arising under a particular agreement, the issue of
whether a dispute was arbitrable or whether the arbitration clause was
terminated by a collateral agreement was for the court); Prudential Lines
v. Exxon Corp., 704 F.2d 59, 64 & n. 5 (2d Cir. 1983) (same).
Second, the controversy here is not subject to mandatory arbitration
under the Employment Agreement for two independently sufficient reasons.
To begin with, it does not arise under the Employment Agreement. Rather,
it arises under the Audit Letter. That letter is an
independently-negotiated, separately-executed contract that nowhere
refers to the Employment Agreement and that deals with a subject not
directly covered by the Employment Agreement: the remittance of
improperly reimbursed expenses. Consequently, it is not subject to the
arbitration clause of the Employment Agreement.
It is true that the Audit Letter may be viewed as in some sense
collateral to the Employment Agreement or, more immediately, the
Termination Agreement. But a dispute arises under a collateral
agreement, arbitration of that dispute cannot be compelled merely based
upon the existence of an arbitration clause in the main agreement."
Prudential, 704 F.2d at 63.*fn1
Independently, moreover, even if the arbitration provision in the
Employment Agreement had some application to this controversy, the result
would be the same. The provision, as noted, requires arbitration of only
those disputes "which cannot be settled by mutual agreement," Employment
Agreement Section XIX. Here, it is plain from the face of the Audit
Letter that the parties' dispute relating to overcharged expenses was
settled by mutual ...