Bridas Sociedad Anonima Petrolera Industrial Y Commercial v. International Standard Elec. Corp.

• Decision Date: 11 June 1985
• Citation: 128 Misc.2d 669,490 N.Y.S.2d 711
• Parties: BRIDAS SOCIEDAD ANONIMA PETROLERA INDUSTRIAL Y COMERCIAL, Plaintiff, v. INTERNATIONAL STANDARD ELECTRIC CORPORATION, Defendant.
• Court: New York Supreme Court

Page 711

490 N.Y.S.2d 711

128 Misc.2d 669

BRIDAS SOCIEDAD ANONIMA PETROLERA INDUSTRIAL Y COMERCIAL, Plaintiff, v. INTERNATIONAL STANDARD ELECTRIC CORPORATION, Defendant.

Supreme Court, Special Term New York County, Part I.

June 11, 1985.

Coudert Brothers, New York City (Jerry Siegel, New York City, of counsel), for plaintiff.

Patterson, Belknap, Webb & Tyler, New York City (Eugene Girden, New York City, of counsel), for defendant.

IRVING LANG, Judge:

Plaintiff's motion for an order pursuant to CPLR 3217(b) discontinuing this action without prejudice raises the issue whether adding a claim for damages to an application to enjoin a stock sale constitutes a waiver of the right to arbitrate.

I. Facts

Plaintiff Bridas Sociedad Anonima Industrial Y Comercial (hereinafter, Bridas), is an Argentine corporation. Defendant International Standard Electric Corporation (hereinafter, ISEC), is incorporated in Delaware and is a wholly-owned subsidiary of ITT Corporation. On May 7, 1979, Bridas and ISEC entered into an agreement whereby Bridas purchased from ISEC 25% of the stock of an Argentine telephone company, Compania Standard Electric Argentina S.A.I.C. (hereinafter, CSEA). Bridas and ISEC also entered into a shareholders agreement, in which they secured their reciprocal rights and obligations as sole shareholders of CSEA. ¹ The shareholders agreement contains a broad arbitration clause, providing that:

all disputes connected to this agreement ... shall be settled or finally decided by one or more arbitrators appointed by the International Chamber of Commerce in accordance with the rules of Conciliation and Arbitration.

(shareholders agreement Para. 11).

The shareholders agreement and stock transfer were negotiated in New York City and Argentina.

Between 1979 and 1985, representatives of both ISEC and its parent company, ITT Corporation, made numerous trips to Argentina in connection with the business activities and operations of CSEA. Despite this, CSEA incurred substantial losses.

On March 4, 1985, ISEC informed Bridas of its intention to sell all of its shares in CSEA to a group of entities including Siemans A.G., a West German corporation. Bridas strenuously objected to the sale, on the ground that the transaction would violate the shareholders agreement.

Bridas learned that ISEC intended to consummate the sale of its CSEA holdings on March 15, 1985 or shortly thereafter. In an attempt to enjoin the sale, Bridas applied to Special Term, Part II by way of order to show cause (dated March 15, 1985), for a temporary restraining order and preliminary injunction. The court denied the request for a TRO but scheduled a hearing for March 20, 1985 on the preliminary injunction application.

On March 18, 1985, Bridas served ISEC with the order to show cause. Annexed to the affidavit were Bridas' summons and complaint. In addition to injunctive relief, damages were sought arising from ISEC's purported breach of the shareholders agreement and breach of fiduciary duties. Upon receiving these papers, attorneys for ISEC informed counsel for Bridas that the sale of stock which Bridas sought to enjoin had already taken place on March 14, 1985. Consequently, ISEC requested that Bridas discontinue the action and withdraw its application for a preliminary injunction.

On March 19, 1985, ISEC served its answer and notice to take depositions and produce documents. Bridas agreed to adjourn the hearing date on its motion for a preliminary injunction from March 20th to March 22nd, 1985, in order to examine certain papers with respect to ISEC's representation that its stock in CSEA had already been sold.

On March 21, 1985, new attorneys for ISEC contacted Bridas' counsel to inform Bridas of the substitution of counsel. At that time, Bridas informed ISEC that, in view of the evidence indicating that the sale of ISEC's shares had been effected, Bridas would withdraw its now-mooted motion for injunctive relief.

During the next several days, the parties attempted to stipulate to the conditions under which Bridas would discontinue the action. Bridas desires to discontinue the action without prejudice to any of its claims against ISEC. In contrast, ISEC would only consent to Bridas' discontinuing the action without prejudice with the following proviso: if Bridas wanted to renew any claim for damages under the shareholders agreement, it could only do so in this forum, with ISEC retaining its priority of discovery. Under this condition, Bridas would be precluded from invoking the arbitration clause in the agreement.

Inasmuch as the parties were unable to stipulate, Bridas brought the present motion for an order discontinuing the action without prejudice. ISEC has filed a cross motion for an order determining that Bridas has waived its arbitration rights under the shareholders agreement by virtue of having commenced litigation in this forum.

II. Waiver

The waiver question requires analysis of three underlying issues:

(1) Should the question of waiver be decided according to New York State law or the United States Arbitration Act (9 U.S.C. Sec. 1 et seq.)?

(2) Is it within the province of the courts or the arbitrator to decide whether the right to arbitration has been waived?

(3) Pursuant to the applicable body of law, what constitutes a waiver?

III. Federal Law vs. New York Law

A) Contentions

The threshold choice of law problem requires determining whether the shareholders agreement evidences a transaction involving "commerce", within the purview of the Federal Arbitration Act.

Bridas argues that the shareholders agreement reflects foreign commerce, thereby rendering the United States Arbitration Act and federal law applicable to the question of waiver. It claims that the agreement is inextricably tied to the actual sale of stock between American and Argentine corporations, that it spells out the rights and obligations of CSEA's sole owners, and that it was designed to facilitate the smooth operation of CSEA.

In contrast, ISEC contends that the shareholders agreement simply speaks of notice, and not commerce, and that therefore the issue of waiver is governed by state arbitration law. It argues that the shareholders agreement is separate and distinct from the sales document, that it does not in any way govern the operations of CSEA, and that it does not provide for the shipment of goods across foreign borders. ISEC further claims that New York is the proper forum for this action, since the relevant transaction occurred here, the witnesses to the claimed breaches are located here, and an answer and discovery demand have been served in this action.

B) Analysis

The United States Arbitration Act (9 U.S.C. § 1 et seq.) makes enforceable all arbitration agreements concerning transactions involving commerce. The statute reverses centuries of judicial hostility to arbitration agreements, and reflects a repudiation of the common law view which considered irrevocable arbitration agreements as "... ousting the court of jurisdiction". Scherk v. Alberto Culver, 417 U.S. 506, 510 (ft. nt. 4), 94 S.Ct. 2449, 2452 (ft. nt. 4), 41 L.Ed.2d 270 (1973), Southland Corp. v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984). The Act was intended to allow parties to avoid the costliness of litigation and to place arbitration agreements on the same footing as other contracts. Scherk v. Alberto Culver, supra 417 U.S. at 511, 94 S.Ct. at 2453.

It provides in relevant part:

A written provision in any ... transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arisi out of such contract or transactions ... shall be valid, irrevokable and enforceable, save upon such grounds as exist at law or in equity for the revokation of any contract.

9 U.S.C. § 2 (emphasis added). Commerce is defined in § 1 simply as "... commerce among the several states or with foreign nations ...".

When an arbitration agreement is governed by the Federal Arbitration Act, certain rules apply. Specifically, federal law, as opposed to state arbitration law, governs all questions of interpretation, construction, validity, revokability and enforceability. Coenen v. R.W. Pressprich and Co., 453 F.2d 1209 (2nd Cir.) (1972), cert. den., 406 U.S. 949, 92 S.Ct. 2045, 32 L.Ed.2d 337 (1972); Matter of Aaacon Auto Transport, 77 Misc.2d 1069, 356 N.Y.S.2d 171 (1974); Shearson Hayden Stone v. Liang, 493 F.Supp. 104 (N.D., Ill) (1980), aff'd, 653 F.2d 310 (7th Cir.1981), Aerojet General Corp. v. Nonferrous Metal Refining Ltd., 37 A.D.2d 531, 322 N.Y.S.2d 33 (1st Dept.) (1971). Federal law also controls the allocation of functions between the court and the arbitrator. Matter of Cone Mills and Nielsen, 90 A.D.2d 31, 455 N.Y.S.2d 625 (1st Dept.1982). The applicability of the Federal Arbitration Act is not affected or diluted by the fact that the agreement specifies otherwise. "Even though the ... agreement provides that it be governed by New York law, New York courts, in dealing with arbitration disputes where the contract involves ... commerce, apply federal, not state, arbitration law." Masthead Mac Drilling Corp. v. Fleck, 549 F.Supp. 854, 856 (S.D.N.Y.) (1982) (citing Rothberg v. Loeb, Rhoades & Co., 445 F.Supp. 1336 (S.D.N.Y.) (1978). ²

If, on the other hand, a contract is not predicated on interstate or foreign commerce, then state arbitration law controls. Shearson Hayden Stone v. Liang, supra, Aerojet General Corp. v. Nonferrous Metal Refining Ltd., supra.

The House Report accompanying the Federal Arbitration Act suggests that the legislature intended the term "commerce" to be broadly construed. The House Report states that "[t]he control over interstate commerce reaches not only the actual physical interstate shipment of goods but also contracts relating to interstate commerce". H.R.Rep. No. 96, 68th Cong. 1st Sess. 1 (1924) (emphasis added ), Prima Paint Corp. v. Flood and Conklin Mfg. Co., 388 U.S. 395, 401 ...