Halcon International, Inc. v. Monsanto Australia Ltd.

• Court: U.S. Court of Appeals — Seventh Circuit
• Writing for the Court: SWYGERT, , KILEY and SPRECHER, Circuit
• Citation: Halcon International, Inc. v. Monsanto Australia Ltd., 446 F.2d 156 (7th Cir. 1971)
• Decision Date: 11 August 1971
• Docket Number: No. 18669.,18669.
• Parties: HALCON INTERNATIONAL, INC., Respondent-Appellant, v. MONSANTO AUSTRALIA LIMITED, Petitioner-Appellee.

446 F.2d 156 (1971)

HALCON INTERNATIONAL, INC., Respondent-Appellant, v. MONSANTO AUSTRALIA LIMITED, Petitioner-Appellee.

No. 18669.

United States Court of Appeals, Seventh Circuit.

July 9, 1971.

Rehearing Denied August 11, 1971.

Lloyd W. Bowers, Chicago, Ill., Edward N. Costikyan, New York City, Gardner, Carton, Douglas, Chilgren & Waud, Chicago, Ill., Paul, Weiss, Goldberg, Rifkind, Wharton & Garrison, New York City, for respondent-appellant; Sidney S. Rosdeitcher, Selvyn Seidel, New York City, of counsel.

Harlan L. Hackbert, Chicago, Ill., Jerome N. Groark, Chicago, Ill., for petitioner-appellee.

Before SWYGERT, Chief Judge, KILEY and SPRECHER, Circuit Judges.

SPRECHER, Circuit Judge.

This appeal raises the question of whether the federal court or the arbitrator shall determine the merits of the defense of laches under the Federal Arbitration Act. 9 U.S.C. §§ 1-14.

On May 7, 1962, Monsanto Australia Limited, then named Monsanto Chemicals (Australia) Limited ("Monsanto"), a corporation organized under the laws of the Commonwealth of Australia with its principal office in Melbourne, and Halcon International, Inc., then named Scientific Design Company, Inc. ("Halcon"), a corporation organized under the laws of Delaware with its principal office in New York City, entered into an agreement for the design and engineering of a plant to be constructed in Australia for the manufacture of phenol under a process developed by Halcon.

Halcon guaranteed that when completed the plant would be "capable of producing phenol conforming to specifications set forth in Annex B-I at an average rate of at least 2,275 pounds per hour when based on an operating year of 7,920 hours, and with a yield of at least 95.5 pounds of specification phenol for each 100 pounds of benzene contained in the feedstock consumed."

The plant began operating on November 15, 1964. Halcon has conceded that the plant's "performance fell short of the standards set by the agreement."

In September, 1965, Monsanto took control of the operations of the plant, but Halcon's personnel remained at the plant until May, 1967.

On June 1, 1966, representatives of Monsanto and Halcon met. This meeting resulted in alternative written suggestions by Halcon to Monsanto dated July 21, 1966, which would have required additional expenditures by Monsanto of $600,000 followed by either another $850,000 or $1.9 million. No representation was made by Halcon that after Monsanto made these expenditures the guaranteed yield would be satisfied; in fact, one of Halcon's officers conceded that it would not.

Discussions between representatives of Monsanto and Halcon continued through November, 1966. On December 22, 1966, Monsanto advised Halcon that it had considered Halcon's recommendations, had "determined not to spend the added capital via this process" and stated that "for Monsanto the books are now closed."

On July 11, 1967, Monsanto advised Halcon of its intent to "cannibalise the various bits and pieces of the plant" and sought assurance from Halcon that "none of the plant is protected by patents" or otherwise. The plant was shut down in July, 1968, without the guarantee ever having been satisfied.

In November, 1968, a Monsanto representative sought a meeting with a Halcon representative with respect to the plant. A meeting was held on January 9, 1969, at which time Monsanto's claims for damages as a result of Halcon's failure to meet the guarantee in the agreement were discussed. A detailed breakdown of the dollar amount of the claims was furnished on April 22, 1969, by Monsanto to Halcon "to facilitate discussions."

A written demand for arbitration of the claims in accordance with the arbitration clause of the May 7, 1962, agreement was made by letter from Monsanto to Halcon dated December 9, 1969. Halcon filed an action against Monsanto in the Delaware Court of Chancery on December 15, 1969, seeking to enjoin Monsanto from proceeding to arbitration. On December 19, 1969, Monsanto filed its petition in the district court seeking an order directing Halcon to proceed to arbitration and staying the proceedings in Delaware. Halcon filed its answer to the petition, including an affirmative defense based on laches, and Monsanto moved for immediate relief; both parties submitted affidavits in support of their respective positions.

The district court found that it had jurisdiction over the subject matter and parties and entered an order directing Halcon to proceed to arbitration and staying the proceedings in the Court of Chancery in Delaware. The district court disposed of the laches defense by holding that the merits of that defense were to be determined by the arbitrators and not by the court. The district court concluded, "The parties agreed to submit all controversies to arbitration; had they intended to preclude arbitration of the issue of laches they could have expressly so provided in their contract. Moreover, by leaving the matter of laches to the arbitrators the purposes of the Arbitration Act, avoiding the expense and delay of pre-arbitration court proceedings, are fulfilled."

The agreement between the parties dated May 7, 1962, stated that it and certain exhibits attached to it "constitute the full understanding between the parties hereto with reference to the subject matter hereof * * * and neither party shall claim any amendment, modification or release from any provision hereof * * * unless such agreement is in writing signed by the other party and specifically states that it is an amendment to this Agreement."

The agreement further provided:

The failure of a party hereto at any time to exercise any of its rights or options under this Agreement, save rights and options specifically limited as to date of exercise thereof, shall not be, or be construed to be, a waiver of such rights or options or prevent such party from subsequently asserting or exercising such rights or options (emphasis added).

The language of the agreement "in the event the guarantee * * * has not been fulfilled or discharged," provided for Monsanto to elect certain options "at any time" after the first anniversary of the start-up of the plant, followed by meetings of the parties "to determine a course of action to be followed."

The agreement also included a broad arbitration clause, which read in part:

All claims, disputes, questions and controversies (other than claims of breach of secrecy obligations) that shall arise under or in connection with this Agreement which cannot be resolved between the parties shall be submitted to and be determined by a board of three arbitrators. Any such arbitration shall be conducted at Chicago, Illinois. * * *

The board so constituted shall conduct the arbitration pursuant to the Commercial Arbitration Rules then in effect of the American Arbitration Association. * * *

This agreement to arbitrate shall be specifically enforceable under the prevailing law with respect to enforcement of arbitration awards. * * *

Halcon contends that Monsanto was obliged to demand arbitration in December, 1966, and that its failure to do so has impaired Halcon's ability to defend against Monsanto's claims: one witness has since left Halcon's employ and now resides in Australia; Halcon has no witnesses for the period after May, 1967, when its employees left the plant site; and "it cannot give a concrete demonstration of the feasibility of its proposal for plant improvement through performance tests and inspection of the plant operations" since the plant is shut down and dismantled.

The answer to the question of whether the merits of the defense of laches as raised in the circumstances of this case are to be determined by the arbitrators or by the court depends in the first instance upon a reading of the statute.

Section 2 of the Arbitration Act of 1925 provides in part, "A written provision in * * * a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction * * * shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract" (emphasis added).

Section 4 provides in part:

The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.

In this case there is no dispute as to the "making" of the agreement which included the arbitration clause or as to the failure of Halcon to comply with the clause. But Halcon contends that "making" includes "unmaking" and that laches "unmakes" the agreement to arbitrate.

The doctrine of laches, like statutes of limitations, merely bars the remedy but does not discharge the right. 6 Williston, Contracts § 2002, page 5628 (Rev.Ed., 1938); Campbell v. Holt, 115 U.S. 620, 6 S.Ct. 209, 29 L.Ed. 483 (1885). It is a shield of equitable defense rather than a sword for the investiture or divestiture of legal title or right. 27 Am.Jur.2d, Equity § 152, 30A C.J.S. Equity § 113. When laches are applied, the contract becomes unenforceable but not invalid. Cf. Restatement of Contracts, § 86. Thus the Restatement of Contracts distinguishes between voidable contracts (such as those induced by fraud, mistake or duress) and unenforceable contracts (such as those where enforcement is barred because of a statute of limitations, discharge in bankruptcy or statute of frauds). Restatement of Contracts, §§ 13, 14. Assuming that the positive "making" of Section 4 infers the negative "unmaking," such "unmaking" would appear to be limited to invalidation rather than to rendering unenforceable.

In considering the meaning of the word "making" in Section 4, note must also be taken of the meaning of "revocation" in Section 2. The word "revocation," when used in a contractual...