C. Itoh & Co. (America), Inc. v. Jordan Intern. Co.

• Decision Date: 04 April 1977
• Docket Number: No. 76-1707,76-1707
• Citation: 552 F.2d 1228
• Parties: 21 UCC Rep.Serv. 353 C. ITOH & CO. (AMERICA) INC., A New York Corporation, Plaintiff-Appellee, v. The JORDAN INTERNATIONAL COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1228

552 F.2d 1228

21 UCC Rep.Serv. 353

C. ITOH & CO. (AMERICA) INC., A New York Corporation Plaintiff-Appellee, v. The JORDAN INTERNATIONAL COMPANY, Defendant-Appellant.

No. 76-1707.

United States Court of Appeals Seventh Circuit.

Argued Feb. 17, 1977.

Decided April 4, 1977.

Stanley J. Adelman, Chicago, Ill., for defendant-appellant.

Paul M. Levy, Richard A. Schulman, Chicago, Ill., for plaintiff-appellee.

Before FAIRCHILD, Chief Judge, and SPRECHER and WOOD, Circuit Judges.

SPRECHER, Circuit Judge.

The sole issue on this appeal is whether the district court properly denied a stay of the proceedings pending arbitration under Section 3 of the Federal Arbitration Act, 9 U.S.C. § 3.

I

C. Itoh & Co. (America) Inc. ("Itoh") submitted a purchase order dated August 15, 1974 for a certain quantity of steel coils to the Jordan International Company ("Jordan"). In response, Jordan sent its acknowledgment form dated August 19, 1974. On the face of Jordan's form, the following statement appears:

Seller's acceptance is, however, expressly conditional on Buyer's assent to the additional or different terms and conditions set forth below and printed on the reverse side. If these terms and conditions are not acceptable, Buyer should notify seller at once.

One of the terms on the reverse side of Jordan's form was a broad provision for arbitration. ¹ Itoh neither expressly assented nor objected to the additional arbitration term in Jordan's form until the instant litigation.

Itoh also entered into a contract to sell the steel coils that it purchased from Jordan to Riverview Steel Corporation, Inc. ("Riverview"). The contract between Itoh and Riverview contained an arbitration term which provided in pertinent part:

Any and all controversies arising out of or relating to this contract, or any modification, breach or cancellation thereof, except as to quality, shall be settled by arbitration. . . .

After the steel had been delivered by Jordan and paid for by Itoh, Riverview advised Itoh that the steel coils were defective and did not conform to the standards set forth in the agreement between Itoh and Riverview; for these reasons, Riverview refused to pay Itoh for the steel. Consequently, Itoh brought the instant suit against Riverview and Jordan. Itoh alleged that Riverview had wrongfully refused to pay for the steel; as affirmative defenses, Riverview claimed that the steel was defective and that tender was improper since delivery was late. Itoh alleged that Jordan had sold Itoh defective steel and had made a late delivery of that steel.

Jordan then filed a motion in the district court requesting a stay of the proceedings pending arbitration under Section 3 of the Federal Arbitration Act, 9 U.S.C. § 3. The district court concluded that, as between Itoh and Riverview, the issue of whether the steel coils were defective was not referable to arbitration because of the "quality" exclusion in the arbitration provision of the contract between Itoh and Riverview. Since arbitration would not necessarily resolve all the issues raised by the parties, the district court, apparently assuming arguendo that there existed an agreement in writing between Jordan and Itoh to arbitrate their dispute, denied the stay pending arbitration. In the district court's opinion, sound judicial administration required that the entire litigation be resolved in a single forum; since some of the issues those relating to quality between Itoh and Riverview were not referable to arbitration, this goal could only be accomplished in the judicial forum.

It is from this denial of a stay pending arbitration that Jordan appeals. ²

II

Our inquiry begins with the question of whether, assuming arguendo that there existed an agreement in writing between Jordan and Itoh to arbitrate their dispute, the district court had the discretion under Section 3 of the Federal Arbitration Act, 9 U.S.C. § 3, to deny Jordan's request for a stay pending arbitration of that dispute on the ground that sound judicial administration requires resolution of the entire lawsuit in a single forum and at least some of the disputed issues between Itoh and Riverview were not referable to arbitration.

Section 3 of the federal statute provides:

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration (emphasis added).

The use of the word "shall" rather than "may" in Section 3 indicates that a district court, when presented with an application for a stay of proceedings pending arbitration, must grant the requested stay where two conditions are satisfied: (1) the issue is one which is referable to arbitration under an agreement in writing for such arbitration, and (2) the party applying for the stay is not in default in proceeding with such arbitration. As the Supreme Court held in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404, 87 S.Ct. 1801, 1806, 18 L.Ed.2d 1270 (1967):

(I)n passing upon a § 3 application for a stay while the parties arbitrate, a federal court may consider only issues relating to the making and performance of the agreement to arbitrate. In so concluding, we not only honor the plain meaning of the statute but also the unmistakably clear congressional purpose that the arbitration procedure, when selected by the parties to a contract, be speedy and not subject to delay and obstruction in the courts.

Considerations of judicial economy bear no relation to "the making and performance of an agreement to arbitrate," and to permit a district court to deny a stay pending arbitration based on such discretionary considerations would, in our opinion, frustrate the strong federal policy in favor of arbitration which is expressed in the Federal Arbitration Act as interpreted by the Supreme Court. This conclusion is supported by the First Circuit's decision in Hilti, supra. In that case, the district court had denied a stay pending arbitration because, inter alia, one of the defendants was not a party to the arbitration agreement. In summarily rejecting this basis for the district court's decision, Judge Coffin stated:

Appellee did not wisely, we think attempt to support this basis for decision in brief or argument. If arbitration defenses could be foreclosed simply by adding as a defendant a person not a party to an arbitration agreement, the utility of such agreements would be seriously compromised. Id. at 369 n.2.

See also Acevedo Maldonado v. PPG Industries, Inc., 514 F.2d 614 (1st Cir. 1975); Lawson Fabrics, Inc. v. Akzona, Inc., 355 F.Supp. 1146 (S.D.N.Y.1973).

Accordingly, we hold that if Jordan was otherwise entitled to a stay pending arbitration of its dispute with Itoh under Section 3 of the Federal Arbitration Act, it was error to deny its application on the ground that the controversy between Itoh and Riverview had to be resolved in the judicial, not the arbitral, forum.

III

Having concluded that the district court had no discretion under Section 3 of the Federal Arbitration Act, 9 U.S.C. § 3, to deny Jordan's timely application for a stay of the action pending arbitration if there existed an agreement in writing for such arbitration between Jordan and Itoh, the remaining issue is whether there existed such an agreement.

The pertinent facts may be briefly restated. Itoh sent its purchase order for steel coils to Jordan which contained no provision for arbitration. Subsequently, Jordan sent Itoh its acknowledgment form which included, inter alia, a broad arbitration term on the reverse side of the form. ³ On the front of Jordan's form, the following statement also appears:

Seller's acceptance is . . . expressly conditioned on Buyer's assent to the additional or different terms and conditions set forth below and printed on the reverse side. If these terms and conditions are not acceptable, Buyer should notify Seller at once.

After the exchange of documents, Jordan delivered and Itoh paid for the steel coils. Itoh never expressly assented or objected to the additional arbitration term in Jordan's form.

In support of its contention that there exists an agreement in writing to arbitrate, Jordan places some reliance on certain New York decisions interpreting Section 2-201 of the Uniform Commercial Code, the UCC Statute of Frauds provision. That section provides in pertinent part:

(1) Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought . . . .

(2) Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents is given within ten days after it is received.

Several New York lower court decisions have apparently held that under Section 2-201, where there has been an oral offer or agreement followed by a written confirmation containing an additional arbitration term and where the merchant recipient of the confirmation has reason to expect that a provision for arbitration would be included in any written confirmation of an oral offer or agreement, the arbitration provision becomes a part of the parties' agreement...