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October 8, 1999


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 1(b).

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 pertinent part:

  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 Paine-Webber, 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 ...

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