Insurance Co. of North America v. ABB Power Generation

Decision Date21 May 1996
Docket NumberNo. 95 Civ. 0406(LAK).,95 Civ. 0406(LAK).
Citation925 F. Supp. 1053
PartiesINSURANCE COMPANY OF NORTH AMERICA and Fidelity Casualty Insurance Company of New York, as subrogees of AES Placerita, Inc., Plaintiffs, v. ABB POWER GENERATION, INC., Defendant.
CourtU.S. District Court — Southern District of New York



Thomas J. Skeffington, Robert A. Stern, Clausen Miller, New York City, for Plaintiffs.

Stuart I. Parker, Kennard M. Goodman, Pollack & Greene, New York City, for Defendant.


KAPLAN, District Judge.

Plaintiffs commenced this action in New York Supreme Court, New York County, seeking (1) a declaratory judgment that their claims under a contract between their subrogor and defendant are not barred by applicable statutes of limitations, and (2) an order compelling arbitration of their claims. Defendant removed the case to this Court on the ground that the parties are of diverse citizenship and has counterclaimed for a declaration that (1) plaintiffs' contract claims are barred by the applicable statutes of limitations, (2) plaintiffs' tort claims are not arbitrable, and (3) defendant therefore may not be compelled to submit to arbitration.


On September 13, 1985, AES Placerita, Inc. ("AES") and defendant BBC Brown Boveri, Inc. ("BBC")1 entered into a contract under which defendant agreed to construct a cogeneration facility. The facility, located in Newhall, California, was intended to produce steam to be sold to the operator of an adjacent oil field for use in recovering oil and to generate electricity for sale to Southern California Edison. Defendant in fact designed and constructed the facility and procured necessary equipment. By the end of August 1988, defendant had tested the facility's performance and concluded that it met the contractual performance specifications. On September 9, 1988, AES acknowledged final acceptance of the plant.

On January 9, 1991, a steam turbine at the facility suffered what the parties describe as a "catastrophic breakdown" while in service. The turbine was badly damaged and the facility was put out of service until June 1991. The cause of the breakdown is disputed. It may have been the result of defects in the turbine, defects in the computerized system which controlled the turbine, errors by the personnel operating the facility, or negligence of personnel who serviced the turbine.

AES filed a claim with its insurers, plaintiffs Insurance Company of North America and Fidelity Casualty Insurance Company of New York, for the cost of repairing the turbine and for the business lost as a result of the interruption in service. Plaintiffs paid AES in excess of $5.5 million and, on December 16, 1992, asserted claims against defendant both in contract and in tort as AES's subrogees. In the event that defendant refused to pay their claim, plaintiffs demanded arbitration under the contract between AES and defendant. Plaintiffs and defendant agreed to attempt to resolve the matter between themselves before resorting to arbitration. As part of that effort, they agreed to toll any and all statutes of limitations applicable to plaintiffs' claims as of December 16, 1992. In December 1994, having concluded that efforts to resolve the dispute had failed, plaintiffs filed this action in New York Supreme Court to compel arbitration.

The arbitration clause that plaintiffs seek to enforce reads, in relevant part, as follows:

"34.1 Agreement to Binding Arbitration. All disputes between the parties hereto shall be resolved in accordance with the provisions of this Article 34.0, by an arbitration panel ... except that the Panel shall have no authority to act upon a claim if the party claimed against could successfully assert the statute of limitations as a bar to such claim if a law suit were brought on it. The panel shall weigh all evidence presented at the arbitration and shall issue its decision based upon that evidence."
* * * * * *
"34.9 Applicable Law. The foregoing agreement to arbitrate and any other agreement to arbitrate with an additional person in connection with the Project shall be specifically enforceable under the prevailing arbitration laws of the State of New York." (Stipulated Trial Exhibit 1, Art. 34.0)2

Elsewhere, the contract provides:

As to any question involving the legal effect of this contract or its construction or interpretation, the law of the State of California shall apply." (Id., Art. 29)

In light of these contractual provisions, the parties contest whether the Court or the arbitration panel is to decide statutes of limitations questions,3 whether New York's or California's statutes of limitations are applicable, which statutes under California law, if any, are applicable, and the outcome of application of those statutes. Defendant contends also that it is not obliged to arbitrate tort claims advanced by plaintiffs.

The parties agreed to a trial on a stipulated record consisting of certain stipulations of fact as well as other evidence. They have consented to the Court making findings of fact from this record. This is the Court's decision after trial.

Arbitrability of the Statutes of Limitations Questions

In resolving the question whether the Court or the arbitration panel is to decide the limitations questions, in light of the contractual choice of law clause selecting New York arbitration law, the Court must consider several principles. Since the contract evidences a transaction involving interstate commerce, the Federal Arbitration Act (the "FAA") applies, notwithstanding the parties' selection of New York law. See PaineWebber Inc. v. Bybyk, 81 F.3d 1193, 1197 (2d Cir.1996). The parties may contract to apply state arbitration law, but the FAA declares a "national policy favoring arbitration" and preempts any state law provision that would "require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration." Mastrobuono v. Shearson Lehman Hutton, Inc., ___ U.S. ___, ___ - ___, 115 S.Ct. 1212, 1215-16, 131 L.Ed.2d 76 (1995) (citing Southland Corp. v. Keating, 465 U.S. 1, 10, 104 S.Ct. 852, 858, 79 L.Ed.2d 1 (1984)). This is consistent with the policy of the FAA that arbitration agreements, like all contracts, are to be enforced to give effect to the parties' intent. Volt Information Sciences, Inc. v. Board of Trustees of the Leland Stanford Jr. Univ., 489 U.S. 468, 476, 109 S.Ct. 1248, 1254, 103 L.Ed.2d 488 (1989).

In deciding whether the parties contracted to arbitrate the limitations questions, the Court will interpret the contract according to state law governing the formation of contracts. First Options of Chicago, Inc. v. Kaplan, ___ U.S. ___, ___, 115 S.Ct. 1920, 1924, 131 L.Ed.2d 985 (1995). The Court must add to the usual rules of construction, however, the principle that the FAA requires any ambiguity regarding the scope of arbitrable issues under the contract to be resolved in favor of arbitration where there is a valid agreement to arbitrate. Id.; Bybyk, 81 F.3d at 1198.4

This case turns on interpretation of language contained in Article 34, the arbitration provision of the parties' contract, excepting from the scope of the arbitrators' authority any claim against which a party "could successfully assert the statute of limitations as a bar ... if a law suit were brought on it." The Court's task is to determine whether the parties intended by this language to reserve decision of statutes of limitations questions for the courts.

Under New York law, chosen by the parties to govern enforcement of the arbitration provisions of their contract, statutes of limitations questions are resolved by the courts. Smith Barney, Harris Upham & Co. v. Luckie, 85 N.Y.2d 193, 623 N.Y.S.2d 800, 647 N.E.2d 1308, cert. denied, ___ U.S. ___, 116 S.Ct. 59, 133 L.Ed.2d 23 (1995). In light of substantive law under the FAA in this Circuit to the effect that timeliness is for the arbitrators rather than the court,5 however, the state law which the parties have selected might not, in itself, be regarded as determinative of the question whether the parties intended that courts resolve the statutes of limitations questions. See, e.g., Bybyk, 81 F.3d at 1200 (holding that New York choice of law clause did not bar arbitration of timeliness issues). In this case, however, the agreement has the unusual feature of selecting New York law specifically to govern enforcement of the arbitration clause, distinct from the choice of law clause that governs the substance of the contract. Cf. Mastrobuono, ___ U.S. ___, ___, 115 S.Ct. 1212, 1219 (holding that where contract contained New York choice of law clause, but indicated that arbitration was to be conducted according to rules of NASD, scope of arbitrators' authority was determined by NASD rules rather than New York law). More importantly, the arbitration clause itself states that the arbitrators have no authority to act on claims that would be barred by the applicable statutes of limitations. While this is not quite the same as saying that the statutes of limitations questions are to be resolved by the courts, the Court is at a loss to imagine what else this exception to the authority of the arbitrators could mean. Nor have the parties offered any plausible alternative suggestion.6 Thus, the choice of New York law strongly supports the view that the parties intended the courts to determine issues of timeliness.

This conclusion drawn from the face of the arbitration agreement is further supported by applying standard rules of construction, as instructed by First Options. ___ U.S. at ___, 115 S.Ct. at 1924. Interpreting the parties' arbitration agreement to mean that arbitrators rather than courts are to decide statutes of limitations questions would render the limitation on the arbitrators' power provided for in the contract ineffec...

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