Reprinted with permission from the September 21, 1998 issue of the New York Law Journal.

MURKY LANGUAGE DOOMS ARBITRATION:
STANDARD CLAUSES ARE INSUFFICIENT

by Kim Koopersmith and Robert A. Johnson

IN-HOUSE COUNSEL frequently are asked to review and approve contracts containing arbitration clauses. Sometimes these clauses provide only the most basic arbitration language, stating that the parties agree to arbitrate any disputes and that the arbitrator's findings shall be "final, binding, and conclusive." Yet that is good enough to be enforceable under the Federal Arbitration Act (FAA),/1 is it not?

Not so fast. The Eighth Circuit Court of Appeals recently found that such an arbitration clause was not sufficient to make the award enforceable under the FAA. The litigants were left only with state law remedies to enforce their arbitral result, which can create unnecessary complications for parties with diversity of citizenship. In light of this Eighth Circuit decision, corporate counsel would be well advised to use clearer arbitration language in their contracts.

The Eighth Circuit case, PVI, Inc. v. Ratiopharm GmbH,/2 involved a price dispute under a stockholders' agreement for a pharmaceutical company. PVI Inc. and William Skelley sold 51 percent of their company, Martec, to Ratiopharm. In connection with the sale, a stockholders' agreement gave PVI and Skelley a "put" option that would required Ratiopharm to buy the remaining 49 percent at a price to be agreed upon by the parties.

The agreement also provided that if the parties could not agree, there would be an averaging mechanism if their proposed prices were within 10 percent of each other. Otherwise, a neutral expert was to be selected to determine the fair market value of the stock. The expert's determination would be "final, binding, and conclusive."

When PVI exercised its option, the parties could not agree on a price and submitted their respective valuations to a selected neutral expert. The expert chose Ratiopharm's valuation. PVI then filed a lawsuit in a federal district court in Missouri against Ratiopharm for breach of contract. In response, Ratiopharm moved for confirmation of the expert's valuation as an arbitration award under §9 of the FAA, emphasizing that the stockholders' agreement had provided that the expert's determination was "final, binding, and conclusive." The district court denied the motion to confirm, and Ratiopharm appealed.

The Eighth Circuit affirmed the district court's ruling denying confirmation under the FAA, finding that the statute was "unavailable in these circumstances." The court said that §9 of the FAA allows an arbitral party to apply to the court for confirmation of an arbitration award only "[i]f the parties in their agreement have agreed that a judgment of the court shall be entered upon the award made pursuant to the arbitration." The panel determined that the parties' stockholders' agreement did not provide for a federal court judgment to be entered on the expert's award. Thus, the Eighth Circuit concluded that the "mere inclusion of the phrase 'final and binding' in an agreement to arbitrate" does not make the award enforceable under the FAA./3

Perhaps surprisingly, and despite the strong federal policy favoring arbitration,/4 the Eighth Circuit's decision is not unique. For example, the U.S. Court of Appeals for the Tenth Circuit has held that an arbitrator's resolution of a dispute under a lease could not be confirmed under §9 of the FAA because there was no language in the lease's arbitration clause providing for entry of a court judgment on the arbitration award./5

The rule in the federal courts in New York is quite different, stemming from a decision issued almost 25 years ago by the U.S. Court of Appeals for the Second Circuit./6 That case involved a dispute between National Metal Converters Inc. and I/S Stavborg, from which National Metal had agreed to charter a vessel to transport bulk scrap steel from Maine to Spain. Clause 37 of the contract of charter entered into by the parties provided that:

[a]ny and all differences and disputes of whatsoever nature arising out of this Charter, shall be put to arbitration in the City of New York pursuant to the Laws relating to arbitration there in force, before a board of three persons consisting of one arbitrator to be appointed by the Owners, one by the Charterers, and one by the two so chosen. The decision of any two of the three on any point or points shall be final.

The steel arrived in Spain, but the parties could not agree on the amount of the payment of freight due under the charter agreement. They submitted the question to arbitration in New York City. National Metal and I/S Stavborg appointed one arbitrator each, agreed to the appointment of a third by a federal district court in Manhattan (presumably because the two appointed arbitrators were unable to agree), and participated in the arbitration, including by submitting briefs, calling witnesses and presenting argument to the arbitrators. The arbitrators rendered an award in favor of I/S Stavborg, which National Metal asked the district court to modify or vacate. Instead, the district court confirmed the award, and National Metal appealed.

In its decision, the Second Circuit found that the language of Clause 37, coupled with National Metal's participation in the arbitration, was sufficient to allow the district court to enter judgment on the award. The appellate court recognized that Clause 37 did not contain any explicit agreement by the parties to entry of judgment on an arbitration award, as seemingly required by FAA §9. It said, however, that there were two important provisions in Clause 37.

From the provision indicating that arbitration was to be conducted "in the City of New York pursuant to the Laws relating to arbitration there in force," it could be implied that both National Metal and I/S Stavborg had consented to arbitrate in New York City and to be served with process in New York to enforce any arbitration award that might be forthcoming.

Moreover, the court noted, Clause 37 also stated that "[t]he decision of any two of the three [arbitrators] shall be final." In the panel's view, this provision "clearly express[ed] the intent of the parties that the arbitrators' decision as expressed in the award was to be 'final.' " The court said that, at the least, "final" expressed the intent of the parties that the issues resolved in the arbitration could not be tried again in any court.

The court added that any doubt about the intent of the parties from the language of Clause 37 was "removed by the conduct of the parties to this case," such as when they asked the district court to appoint a third arbitrator and participated in the arbitration. The panel also found it significant that National Metal had moved under §9 of the FAA to vacate or modify the award, concluding that "it seems abundantly clear to us that both parties in fact consented to the entry of judgment on any arbitral award entered."

District Court Cases

Since the I/S Stavborg decision, a number of federal district courts in the Second Circuit have ruled that they can enforce an arbitration award under the FAA even if the parties' arbitration clause did not explicitly so provide.

One case/7 arose following an arbitration between a Chilean shipping corporation and the company that had acted as its agent in the United States under an arbitration clause that provided that "[a]ll disputes between the parties which arise in connection with the interpretation or enforcement of the terms of this Agreement shall be submitted to arbitration in the City of New York, State of New York, before the Society of Marine Arbitrators. The decision of said Society shall be final and binding in accordance with applicable law."

After the arbitrator awarded the shipping company $40,000 and ordered the agent to post a $123,000 bond to fund any future awards it might be required to pay, the shipping company asked the Southern District to confirm the award and bond order. Focusing on the language in the arbitration clause that provided that any arbitration award entered "shall be final and binding," the court concluded that it had "no hesitation" in finding that it had the power to confirm the award./8

Just how far the federal courts in the Second Circuit will go to find that they have the jurisdiction under §9 of the FAA to enforce an arbitration award can be seen from a recent decision by the U.S. District Court for the Northern District of New York./9 That case involved a standard form agreement between a contractor, Worthy Brothers Pipeline Corp., and a subcontractor, St. Lawrence Explosives Corp.

The parties struck out certain form language before signing the contract, leaving only a provision in Section 6.1 that "[a]ny controversy or claim between the Contractor and the Subcontractor arising out of or related to this Subcontract, or the breach thereof, shall be settled by arbitration," and a clause saying that the arbitration "shall be conducted in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association [AAA] currently in effect unless the parties mutually agree otherwise." Notably, the parties also crossed out language in Section 6.4 which provided that "[t]he award rendered by the arbitrator or arbitrators shall be final, and judgment may be entered upon it in accordance with applicable law in any court having jurisdiction thereof."

St. Lawrence obtained an award in its favor from an arbitrator, then asked the district court to confirm and enter judgment on the award. St. Lawrence argued that because the contract referred to the AAA rules, it revealed an intent by the parties to have their arbitration governed in all regards by the AAA Rules, including Rule 47(c), which provides that "[p]arties to these rules shall be deemed to have consented that judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof."

Worthy countered that by striking out Section 6.4, the parties clearly intended that the arbitration be non-binding, the AAA rules notwithstanding.

The court pointed out that under the FAA, a number of courts have held that an arbitration award was binding where the rules under which the arbitration was conducted called for binding arbitration./10 Indeed, in one case decided by the Second Circuit,/11 an arbitration clause provided that disputes under the parties' contract should be settled by arbitration pursuant to AAA rules. The court held that such rules could be incorporated into an arbitration clause, thereby establishing the requisite "consent" of the parties to entry of judgment, if the rules so provided./12

Consequently, the St. Lawrence court held, where an arbitration clause refers to AAA rules, a presumption arises that such arbitration was intended to be binding. Yet, the court added, if the parties "expressly agree otherwise," resort to AAA arbitration should not be deemed binding or subject to entry of judgment.

The court noted that the only apparent evidence that the parties did otherwise agree was their act of crossing out Section 6.4, thereby implying that an arbitration would be nonbinding. St. Lawrence successfully argued, though, that the court should ignore Section 6.4 as extrinsic evidence because the parties in fact had crossed it out. Without considering the deletion of that provision, St. Lawrence contended, the reference to the AAA rules in Section 6.1 stood alone and required the conclusion that the arbitration was binding. The court agreed, and said that it could consider the deletion of Section 6.4 only if the contract (and Section 6.1 in particular) was somehow ambiguous.

A 1997 district court decision from New Jersey went even farther, finding that the parties agreed to enforcement under the FAA merely through an implicit agreement and the waiver of any objections by the respondent./13 The case involved a dispute between Acme Sanitation Corp. and Teamsters Local 945 as well as the pension and welfare fund trustees for the local.

A collective bargaining agreement between Acme and the local established a grievance and arbitration procedure and provided that the procedure "shall be the sole and exclusive means for the determination of all disputes, complaints, controversies, claims or grievances whatsoever." There was no such agreement between Acme and the trustees, however. Nevertheless, the local and the trustees initiated an arbitration and obtained an award.

With respect to the local, the court found that the collective bargaining agreement "implicitly authorized confirmation of an arbitration award between Acme and Local 945 in Federal Court."/14 With respect to the trustees, the court found that Acme had failed on numerous opportunities to object to the procedure, and thereby had implicitly agreed to enforcement under the FAA./15

Conclusion

Although courts in some other circuits agree with the general rule in effect in the Second Circuit,/16 a party to a contract containing an arbitration clause cannot necessarily be certain where an arbitration under the contract ultimately will take place. Therefore, businesses that want to use arbitration to resolve disputes that may arise, and that want to be able to enforce those arbitrations under the FAA, should eliminate any ambiguity in their arbitration clauses and clearly include provisions that judgment shall be entered on the arbitration award in a specific federal court.

BIOs: Kim Koopersmith and Robert A. Johnson, partners in the New York office of Akin, Gump, Strauss, Hauer & Feld, L.L.P., often represent parties in arbitration and other forms of alternative dispute resolution.

COPYRIGHT 1998, Akin, Gump, Strauss, Hauer & Feld, L.L.P. All rights reserved.

NOTES:

1. 9 U.S.C. § 1 et seq.

2. 135 F.3d 1252 (8th Cir. 1998).

3. The court stated that Ratiopharm might be able to bring an action to enforce the expert's decision under relevant state law; such an action would be subject to applicable substantive rules and defenses.

4. See, e.g., Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213 (1985); Moses H. Cone Memorial Hosp. v. Mercury Constr. Co., 460 U.S. 1 (1983).

5. Oklahoma City Assoc. v. Wal-Mart Stores, Inc., 923 F.2d 791 (10th Cir. 1991).

6. In re I/S Stavborg v. National Metal Converters, Inc., 500 F.2d 424 (2d Cir. 1974).

7. Compania Chilena de Navegacion Interoceancia, S.A. v. Norton, Lilly & Co., Inc., 652 F. Supp. 1512, 1513 (S.D.N.Y. 1987).

8. See, also, Pennsylvania Eng'g. Corp. v. Islip Resource Recovery Agency, 710 F. Supp. 456 (E.D.N.Y. 1989); International Longshoremen's Ass'n v. Hellenic Lines, Ltd., 549 F. Supp. 435 (S.D.N.Y. 1982).

9. St. Lawrence Explosives Corp. v. Worthy Bros. Pipeline Corp., 916 F. Supp. 187 (N.D.N.Y. 1996).

10. See, e.g., McKee v. Home Buyers Warranty Corp. II, 45 F.3d 981 (5th Cir. 1995); Rainwater v. National Home Ins. Co., 944 F.2d 190, 192 (4th Cir. 1991).

11. Varley v. Tarrytown Assoc., Inc., 477 F.2d 208 (2d Cir. 1973).

12. The applicable rules in Varley made no reference to entry of judgment, unlike current AAA Rule 47(c).

13. Teamsters-Employer Local No. 945 Pension Fund v. Acme Sanitation Corp., 963 F. Supp. 340 (D.N.J. 1997).

14. Id. at 346.

15. Nevertheless, the court did not confirm the award because Acme failed to appear at the arbitration hearing due to "inadvertent misunderstanding." Acme requested a reopening of the arbitration and volunteered to pay the extra expenses incurred by the arbitrator. The court granted Acme's request on equitable grounds.

16. See, e.g., Milwaukee Typo. Union No. 23 v. Newspapers, Inc., 639 F.2d 386 (7th Cir.), cert. denied, 454 U.S. 838, 102 S. Ct. 144 (1981); Booth v. Hume Pub. Inc., 902 F.2d 925 (11th Cir. 1990).