Northrop Corp. v. Triad Intern. Marketing S.A.
| Decision Date | 27 May 1987 |
| Docket Number | No. 84-6480,84-6480 |
| Citation | 811 F.2d 1265 |
| Parties | NORTHROP CORPORATION, Petitioner-Respondent/Appellee, v. TRIAD INTERNATIONAL MARKETING S.A., and Triad Financial Establishment, Respondent-Petitioner/Appellant. |
| Court | U.S. Court of Appeals — Ninth Circuit |
John R. McDonough, Los Angeles, Cal., for respondent-petitioner/appellant.
Ronald L. Olson, Los Angeles, Cal., for petitioner-respondent/appellee.
Appeal from the United States District Court for the Central District of California.
Before BROWNING, Chief Judge, KENNEDY and HUG, Circuit Judges.
In October, 1970 Northrop and Triad entered into a "Marketing Agreement," under which Triad became Northrop's exclusive marketing representative to solicit contracts for aircraft and related maintenance, training, and support services for the Saudi Air Force, in return for commissions on sales. Northrop made substantial sales to Saudi Arabia and paid Triad a substantial part of the commissions due under the Marketing Agreement.
On September 17, 1975, the Council of Ministers of Saudi Arabia issued Decree No. 1275, prohibiting the payment of commissions in connection with armaments contracts. 1 Northrop ceased paying commissions to Triad. Triad protested, and demanded payment of the commissions remaining due under the Agreement. The dispute was submitted to arbitration. The arbitrators sustained Triad's claim in part, denied it in part, and entered an award in Triad's favor.
Triad filed an action to confirm the arbitrators' award, and Northrop filed suit to vacate it. The district court vacated the award in some respects. 593 F.Supp. 928, 942 (C.D.Cal.1984). Triad appealed. 2 We reverse.
The arbitrators noted that the essence of Northrop's defense was that Saudi Arabia's Decree No. 1275 applied to the Marketing Agreement, and made illegal any commission payment to Triad under the Agreement. "This contention," the arbitrators said, "necessitates a consideration of the meaning and effect of paragraph 13 of the Marketing Agreement." First Arbitrators' Decision at 19.
Paragraph 13 of the Marketing Agreement provided: "[T]he validity and construction of this Agreement shall be governed by the laws of the State of California." It further provided: "Any controversy or claim between the parties hereto arising out of or in connection with this Agreement ... shall be settled by arbitration," and "[t]he award of a majority of the arbitrators ... shall be final and binding upon the parties." 3
The arbitrators noted that Northrop had proposed inclusion of paragraph 13 in the Marketing Agreement to make it
unnecessary for Northrop to make an in-depth study of the law of countries such as Saudi Arabia, Iran, etc., to know what its rights and obligations would be. Instead of having varying and even inconsistent results under the same contractual provisions as a result of applying different laws, depending on where the marketing was to occur, this clause resulted in uniformity of interpretation and application of the contract. Northrop was familiar with the law of California and knew what to expect from it.
Id. at 19-20. Accordingly, the arbitrators interpreted paragraph 13 as requiring that the local law of California determine the effect of Saudi Arabia Decree No. 1275 on Northrop's obligation to pay commissions to Triad pursuant to the Marketing Agreement. 4 Northrop does not disagree with this determination.
Northrop argued the Marketing Agreement was invalid under California Civil Code Sec. 1511. This statute provides "performance of an obligation ... is excused ... [w]hen such performance ... is prevented ... by the operation of law...." Cal.Civ.Code Sec. 1511(1). Northrop reasoned Saudi Decree No. 1275 rendered the Marketing Agreement unlawful under California Civil Code Sec. 1511 because the Decree "prevented" payment of commissions to Triad and thus "excused" Northrop's performance of its obligations under the Agreement.
The arbitrators pointed out that the decisions interpreting California Civil Code Sec. 1511 principally relied upon by Northrop, including Baird v. Wendt Enterprises, Inc., 248 Cal.App.2d 52, 56 Cal.Rptr. 118 (1967), and Johnson v. Atkins, 53 Cal.App.2d 430, 127 P.2d 1027 (1942), did not look to the law of the foreign jurisdiction to determine whether performance of the contract was unlawful, but instead examined the legal action the foreign jurisdiction had taken to determine whether in fact it prevented performance of the contract. In Baird, the court concluded that a foreign jurisdiction's adoption of a building code precluding issuance of a permit to construct a building "prevented" performance of the contract within the meaning of section 1511. In Atkins, the court held a foreign jurisdiction's cancellation of entry permits for copra "prevented" performance of a contract to sell copra for delivery in the foreign jurisdiction.
The arbitrators concluded there "was no comparable governmental action in this case." The building in Baird could not be built without a building permit; the copra in Atkins could not be delivered without an entry permit; but in this case despite the issuance of Decree No. 1275, Northrop could still pay Triad the commissions the Marketing Agreement called for, and Triad could still give advice, translate documents, make local arrangements, and perform the other services the Agreement required. Moreover, as Triad points out, before Decree No. 1275 issued, Triad had successfully solicited the sales contracts Northrop sought and thus had already completed performance of its principal obligation under the Marketing Agreement.
Northrop argued that to honor its obligation to Triad, Northrop would be required to violate Decree No. 1275. The arbitrators adopted Judge Hamley's statement for this court in a similar case and responded: Alghanim v. Boeing Co., 477 F.2d 143, 150 (9th Cir.1973).
The district court reviewed the arbitrators' decision de novo, rather than under a deferential standard, on the ground that the question presented was whether the Agreement was "contrary to law and public policy," 593 F.Supp. at 936. We consider later whether the arbitrators' interpretation and application of the Agreement is unenforceable because it is contrary to public policy. As the district court correctly stated, this was a question for the court alone to decide. W.R. Grace & Co. v. Local 759, Int'l Union of United Rubber Workers, 461 U.S. 757, 766, 103 S.Ct. 2177, 2183, 76 L.Ed.2d 298 (1983); American Postal Workers v. United States Postal Serv., 682 F.2d 1280, 1286 (9th Cir.1982).
The question the arbitrators decided, however, was one of contract interpretation. That issue was the proper interpretation of the requirement of paragraph 13 of the Marketing Agreement that claims arising in connection with the Agreement be settled by arbitration and that California law be applied in resolving them. More specifically, the question was whether paragraph 13 required the arbitrators to apply California Civil Code Sec. 1511 to determine the effect of Saudi Arabia Decree No. 1275 on the obligations of the parties under the Agreement, and, if so, what that determination should be. This issue arose from the very terms of the Marketing Agreement. Its resolution was an inescapable part of the arbitrators' task of interpreting and applying the Agreement and resolving the dispute between these parties. Courts are bound to enforce an award based upon the arbitrators' resolution of such an issue "even in the face of 'erroneous findings of fact or misinterpretations of law.' " French v. Merrill Lynch, Pierce, Fenner & Smith, 784 F.2d 902, 906 (9th Cir.1986) (quoting American Postal Workers, 682 F.2d at 1285) (footnote omitted).
This case is not unlike George Day Construction Co. v. United Brotherhood of Carpenters, 722 F.2d 1471 (9th Cir.1984). A clause in the contract in George Day Construction provided that the terms of the contract were intended to be consistent with federal and state law. The arbitrators interpreted this contract provision as authorizing the arbitrators to look to external law to resolve the parties' dispute. In reviewing the award, the court held that both the arbitrators' interpretation of this provision and their resolution of the legal questions the dispute raised as to the parties' contractual obligations were entitled to deferential review. Id. at 1479-80. See also International Bhd. of Teamsters v. Washington Employers, Inc., 557 F.2d 1345, 1349-50 (9th Cir.1977).
Similarly, in this case it was within the arbitrators' authority to interpret paragraph 13 as requiring that all disputes under the Agreement be determined by the arbitrators in accordance with California law. This interpretation required the arbitrators to decide questions of California law relevant to the parties' dispute as to their obligations under the Agreement. "In such circumstances, the arbitrator may and indeed must do so to fulfill his function under the agreement, and a court should not review the merits of his performance in any more depth than it reviews the merits of his interpretation of other contractual provisions." Kaden, Judges and Arbitrators: Observations on the Scope of Judicial Review, 80 Colum.L.Rev. 267, 286 (1980). 5
The arbitrators' conclusions on legal issues are entitled to deference here. The legal issues were fully briefed and argued to the arbitrators; the arbitrators carefully considered and decided them in a lengthy written opinion. To now subject these decisions to de novo review would destroy the finality for which the parties...
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