The opinion of the court was delivered by: William M. Skretny United States District Judge
Plaintiff Town of Amherst ("the Town") commenced this action on April 5, 2007, by filing a Verified Petition in New York State Supreme Court, Erie County, seeking to permanently stay an arbitration brought by Defendant Custom Lighting Services, LLC ("CLS").*fn1 CLS then removed the case to this Court, pursuant to 28 U.S.C. § 1332. (Docket No. 1.) CLS has filed its opposition to the Town's Petition*fn2 and the matter is now fully briefed. Having reviewed the parties' submissions, this Court finds oral argument unnecessary.
This action concerns the arbitrability of a dispute arising out of the second of two agreements executed by the Amherst Town Supervisor and CLS. (Docket No. 1, Petition, Ex. E.) The background, as set forth in the parties' pleadings, affidavits and exhibits, is as follows.
On December 8, 2003, the Town executed a contract with CLS (the First Agreement) which was directed toward improving the quality of the Town's street lighting services, then provided by Niagara Mohawk Power Corporation (NiMo). (Petition ¶ 7, Ex. B.) Under the First Agreement, CLS was to develop a business plan detailing its ability to provide street lighting services at a minimum 5 percent annual cost reduction over NiMo's rate, exclusive of energy and delivery charges. (Id. ¶ 8, Ex. B at 4, 15.) If CLS's business plan demonstrated annual savings of at least 5 percent, the First Agreement required that the Town "shall engage [CLS] to perform the services defined in Statement of Work B" by way of a separate agreement, to be executed within 45 days of the Town's review and approval of the CLS business plan. (Id. Ex. B at 4.) Under the scope of work in Statement of Work B, CLS was to, among other tasks: (1) prepare an asset inventory, if required; (2) negotiate the purchase of street light infrastructure from NiMo or, if more cost effective, reconstruct the system; (3) work with the Town to develop a process to report trouble calls; and (4) provide ongoing street light repair and maintenance. (Id. Ex. B at 16.)
On February 27, 2004, CLS submitted its business plan to the Town. (Id. ¶ 13, Ex. C.) The plan's financial assessment indicated that the Town would realize annual savings of 13 to 47 percent by pursuing ownership of street lights, rather than renting those assets from NiMo. (Id. Ex. C at 2.) CLS recommended that the Town "proceed with negotiations for acquiring the street light assets with a backup position of system reconstruction." (Id.) Approximately seven months after receiving CLS's business plan, on September 20, 2004, the Amherst Town Board (the Board) considered and approved the following resolution:
WHEREAS, the Town of Amherst has had long standing concerns about the quality of streetlighting services provided to the Town of Amherst by Niagara Mohawk; and WHEREAS, the Town of Amherst has entered into negotiations with Custom Lighting Services (CLS), a private contractor that specializes in the installation, operation and maintenance of municipal lighting systems, regarding potential improvements to the effectiveness and efficiency of the installation, operation, and maintenance of the streetlighting system in the Town of Amherst; and WHEREAS, CLS has provided information suggesting that it can install, operate and maintain a streetlighting system in the Town of Amherst at significant savings to the Town of Amherst after accounting for the cost of installation and the continuing requirement that electricity be purchased from Niagara Mohawk;
NOW, THEREFORE, BE IT RESOLVED, that the Supervisor is authorized to sign a contract with CLS, upon resolution of its final terms to the satisfaction of the Town Attorney, CLS, and any department heads, if necessary, authorizing CLS to commence negotiation with Niagara Mohawk toward the purchase of existing streetlighting stock in the Town of Amherst currently owned by Niagara Mohawk and for such other ancillary services as may be necessary to accomplish the goal of lowering the cost of steetlighting services and leading to the ownership of streetlighting assets by the Town of Amherst.
BE IT FURTHER RESOLVED, that any contract to buy out Niagara Mohawk facilities shall be subject to Town Board approval. (Id. Ex. D) (emphasis supplied).
On October 28, 2004, CLS's General Manager executed a Professional Services Contract between the Town and CLS. (Id. Ex. F.) Each page of the Contract includes the term "Final" in a footer. (Id.) On November 15, 2004, the Town Board considered and approved the following resolution regarding a contract with CLS:
WHEREAS, the Town of Amherst has had long standing concerns about the quality of streetlighting services provided to the Town of Amherst by Niagara Mohawk; and WHEREAS, the Town of Amherst has entered into negotiations with Custom Lighting Services (CLS), a private contractor that specializes in the installation, operation and maintenance of municipal lighting systems, regarding potential improvements to the effectiveness and efficiency of the installation, operation, and maintenance of the streetlighting system in the Town of Amherst; and WHEREAS, CLS has provided information suggesting that it can install, operate, and maintain a streetlighting system in the Town of Amherst at significant savings to the Town of Amherst after accounting for the cost of installation and the continuing requirement that electricity be purchased from Niagara Mohawk;
NOW, THEREFORE BE IT RESOLVED, that the Supervisor is authorized to sign a contract with CLS authorizing CLS to commence negotiation with Niagara Mohawk toward the purchase of existing streetlighting stock in the Town of Amherst currently owned by Niagara Mohawk and upon the failure to successfully conclude such negotiations to oversee the design and construction of streetlighting assets in the Town of Amherst. (Id. Ex. E.) Following passage of the resolution, on November 18, 2004, the Town Supervisor executed the Professional Services Contract previously signed by CLS (the Second Agreement). (Id. Ex. F.) The Second Agreement contains a dispute resolution process, the final step being "arbitration in accordance with the Construction Industry Rules of the American Arbitration Association." (Id. at 21.)
After the Second Agreement was executed, CLS conducted a survey of the Town's street lighting system (location, attributes and physical deficiencies of each street light) to assist in determining a fair purchase price. (Vogel Aff., ¶ 13.) It then engaged in negotiations with NiMo on the Town's behalf and, in May 2005, the Town and NiMo reached an agreement in principal. (Id. ¶¶ 14-15.) On June 21, 2005, the Town Supervisor and NiMo executed a Memorandum of Understanding to outline terms and conditions for the proposed sale by NiMo of certain street light assets to the Town for the sum of Ten Million Three Hundred Thousand Dollars. (Id. Ex. 5.)
The Town then requested that CLS update its cost savings estimate. (Id. ¶ 16.) After doing so, CLS agreed to execute a performance bond to guarantee that the Town would save a minimum of Seven Hundred Eighty Thousand Dollars annually, for the first seven years.*fn3 (Id. ¶ 17.) At the Town's request, CLS proceeded to prepare transactional documents, which NiMo approved on August 10, 2005. (Id. ¶ 21; Petition, Exs. F and G.) Thereafter, however, the Town Board rejected both a resolution authorizing the issuance of bonds to fund the purchase from NiMo and a resolution for the preparation of an RFP for alternative financing. (Petition, Exs. G and H.) In short, the Board did not approve the buy out of NiMo assets.
By letter dated July 11, 2006, CLS's General Manager demanded payment of its unpaid invoices for services rendered under the Second Agreement, and requested a meeting with the Town pursuant to the Agreement's dispute resolution provisions. (Id. Ex. J.) On July 26, 2006, CLS's attorney wrote to the Town's legal counsel, noting the Town's failure to make payment or attempt resolution and requesting a meeting of senior management. (Id. ¶ 55, Ex. A.) Counsel went on to advise the Town's attorney that CLS considered the Town's July 25, 2006 notification that it would not continue its Professional Services Contract with CLS to constitute termination of the Second Agreement, requiring payment of liquidated damages of One Million Fifty-nine Thousand Five Hundred Nineteen Dollars. (Id.) Counsel requested payment of this additional amount and, if payment was not forthcoming, dispute resolution in accordance with the Second Agreement's provisions. (Id.) The Town did not respond to either letter and CLS made a demand for arbitration dated August 28, 2006. (Petition ¶¶ 55, 57 and Ex. A.)
The Town objected to the propriety of CLS's arbitration demand and later petitioned for a stay of arbitration in state court. According to the Town, this dispute is not subject to arbitration because: (1) the Second Agreement is invalid and unenforceable in its entirety; (2) CLS failed to comply with a condition precedent to arbitration; (3) CLS's claim is time-barred; and (4) only the courts, not an arbitrator, can award CLS the punitive damages it seeks. The Town contends that each of these questions is governed by state law.
CLS argues that the Federal Arbitration Act (the Act), not state law, governs a determination of the arbitrability of this dispute. Without conceding the issue, the Town, in its reply memorandum, "assume[s] arguendo that the [Act] applies to the arbitrability issues and New York law applies to contract formation and substantive law issues." (Town Reply at 5-6.)
A. Applicability of the Federal Arbitration Act
Congress enacted the Federal Arbitration Act to overcome judicial resistance to arbitration. The Act's coverage provision, 9 U.S.C. § 2, compels judicial enforcement of arbitration agreements "in any . . . contract evidencing a transaction involving commerce."
In Allied-Bruce Terminix Cos. v. Dobson, the Supreme Court interpreted the "involving commerce" phrase as implementing Congress' intent "to exercise [its] commerce power to the full." 513 U.S. 265, 277, 115 S.Ct. 834, 130 L.Ed. 2d 753 (1995). "The 'liberal federal policy favoring arbitration agreements,' manifested by this provision and the Act as a whole, is at bottom a policy guaranteeing the enforcement of private contractual arrangements." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 625, 105 S.Ct. 3346, ...