Kahn Lucas Lancaster, Inc. v. Lark Int'l Ltd.

• Citation: 186 F.3d 210
• Decision Date: 01 August 1997
• Docket Number: Docket No. 97-9436
• Parties: (2nd Cir. 1999) KAHN LUCAS LANCASTER, INC., Plaintiff-Appellee, v. LARK INTERNATIONAL LTD., Defendant-Appellant
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 210

186 F.3d 210 (2nd Cir. 1999)

KAHN LUCAS LANCASTER, INC., Plaintiff-Appellee, v. LARK INTERNATIONAL LTD., Defendant-Appellant.

Docket No. 97-9436

August Term, 1997

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

Argued: June 12, 1998

Decided: July 29, 1999

Appeal from a judgment of the United States District Court for the Southern District of New York (Denise L. Cote, Judge), entered August 15, 1997, granting plaintiff's motion under 9 U.S.C. § 206 and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards to compel arbitration.

Reversed.

[Copyrighted Material Omitted] Robert K. Gross, New York, NY (Robert D. Popper, Eaton & Van Winkle, New York, NY, on the brief), for Defendant-Appellant.

Andrew J. Goodman, New York, NY (Joseph P. Tucker, Rosner Bresler Goodman & Utterman, LLP, New York, NY, of counsel), for Plaintiff-Appellee.

Before: WALKER, McLAUGHLIN and PARKER, Circuit Judges.

PARKER, Circuit Judge:

Defendant-Appellant Lark International, Ltd., ("Lark") appeals from a judgment of the United States District Court for the Southern District of New York (Denise L. Cote, Judge), entered August 15, 1997, granting Plaintiff-Appellee Kahn Lucas Lancaster, Inc.'s ("Kahn Lucas") motion under 9 U.S.C. § 206 and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Jun. 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 3 (entered into force with respect to the United States, Dec. 29, 1970) (the "New York Convention" or the "Convention"), as implemented, 9 U.S.C. §§ 201-08, to compel arbitration. The judgment was entered in accordance with an Opinion and Order of the district court, dated August 6, 1997, which held that arbitration clauses in certain purchase orders sent by Kahn Lucas to Lark were enforceable under the Convention and bound Lark, despite the fact that Lark had not signed the purchase orders.

We reverse.

I. BACKGROUND

A. Facts

Lark is a Hong Kong corporation which acts as a purchasing agent for businesses seeking to buy and import clothing manufactured in Asia. Kahn Lucas is a New York corporation, with its principal place of business in New York, NY, engaged in the children's clothing business, primarily in reselling imported clothing to major retailers.

Kahn Lucas and Lark enjoyed a business relationship which began in 1988 and pursuant to which Lark would assist Kahn Lucas in arranging for overseas manufacturers to make garments ordered by Kahn Lucas. As part of this relationship, Lark processed Kahn Lucas's purchase orders and invoices. Pursuant to the terms of the purchase orders, as well as the parties' standing practice, the manufacturers would issue Kahn Lucas a seller's invoice for payment once the ordered garments were completed. Lark would then issue a separate invoice to Kahn Lucas for its commission, usually a set percentage of the amount charged by the manufacturer, on the order. Kahn Lucas paid both of these invoices through draw-downs on an existing letter of credit on which Lark was the named beneficiary. Lark would then remit payment to the manufacturer.

The dispute in this case arises from two purchase orders Kahn Lucas issued in early 1995 for children's fleece garments, manufactured in the Philippines, that it was to resell to Sears Roebuck, Inc. (the "Purchase Orders"). The Purchase Orders stated that the garments were "ordered from" Lark, listed "Lark International (Agent)" as seller, and were signed by Kahn Lucas. They were not signed by Lark. The Purchase Orders also clearly indicated that they contained a number of additional terms printed on the reverse side, and were made conditional upon the seller's acceptance of those terms. Included in these terms were clauses relating to arbitration, which stated:

Any controversy arising out of or relating to this Order . . . shall be resolved by arbitration in the City of New York . . . . The parties consent to application of the New York or Federal Arbitration Statutes and to the jurisdiction of the Supreme Court of the State of New York, and of the United States District Court for the Southern District of New York, for all purposes in connection with said arbitration . . . .

(the "Arbitration Clauses"). Lark accepted the Purchase Orders without objection.

In July 1995, the manufacturers issued final invoices relating to the ordered garments, and Lark issued its commission invoice. But citing defective garments and failed deliveries, Kahn Lucas refused to release funds to Lark to pay either the seller's invoices or Lark's commission invoice.

B. Proceedings Below

Unable to achieve a satisfactory settlement with Lark and the manufacturers, Kahn Lucas sued Lark in the United States District Court for the Southern District of New York, invoking diversity jurisdiction and alleging breach of contract, breach of warranty, negligence, and breach of fiduciary duty. Lark responded to the complaint with a motion to dismiss for lack of personal jurisdiction. Kahn Lucas responded by asserting numerous bases upon which to premise personal jurisdiction, including transient jurisdiction (as one of Lark's officers had been served while in New York) and the New York long arm statute, N.Y. C.P.L.R. § 302(a)(1). In an Opinion and Order dated February 24, 1997, the district court held that it did not have personal jurisdiction over Lark to adjudicate the then-pending claims, but also held that, given the Arbitration Clauses, it would have personal jurisdiction over Lark if Kahn Lucas were to seek to compel arbitration. See Kahn Lucas Lancaster, Inc. v. Lark Int'l Ltd., 956 F. Supp. 1131, 1139 (S.D.N.Y. 1997) ("Kahn Lucas I"). Accordingly, the district court conditionally dismissed Kahn Lucas's claims, but stayed the dismissal to afford Kahn Lucas the opportunity to bring a motion to compel arbitration.

By motion brought pursuant to 9 U.S.C. § 206 and the Convention, Kahn Lucas converted its complaint into a motion to compel Lark to arbitrate the dispute in accordance with the Arbitration Clauses. Kahn Lucas also filed a demand for arbitration with the American Arbitration Association. Lark opposed the motion to compel arbitration. Lark argued that it was not bound by the provisions of the Purchase Orders because the Purchase Orders were directed towards the sellers of the garments to which they related, namely the manufacturers, and not towards Lark. Lark also argued that the Arbitration Clauses were not enforceable under the Convention because Lark had not signed the Purchase Orders.

In an Opinion and Order dated August 6, 1997, the district court granted Kahn Lucas's motion to compel arbitration. Kahn Lucas Lancaster, Inc. v. Lark Int'l Ltd., No. 95 CIV. 10506, 1997 WL 458785 at *8 (S.D.N.Y. Aug. 11, 1997) ("Kahn Lucas II"). The district court first noted that subject matter jurisdiction could only be properly based on section 203 of the implementing statutes of the Convention, 9 U.S.C. § 203, which provides an independent basis for subject matter jurisdiction; it could not be based on diversity. Id. at *3 (citing Matimak Trading Co. v. Khalily, 118 F.3d 76 (2d Cir. 1997) (holding that Hong Kong corporations are not citizens of a foreign state for purposes of diversity jurisdiction)). Section 203 states that "[a]n action or proceeding falling under the Convention shall be deemed to arise under the laws and treaties of the United States." 9 U.S.C. § 203.

The court next focused on whether the Arbitration Clauses were enforceable under the Convention so as to vest the court with jurisdiction under section 203. The Convention provides that "[e]ach Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them . . . concerning a subject matter capable of settlement by arbitration." New York Convention art. II, § 1. The Convention goes on to define "agreement in writing" to include "an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams." New York Convention art. II, § 2. Although Lark had not signed the Purchase Orders, the district court held that the Purchase Orders represented an "arbitral clause in a contract," and therefore an "agreement in writing" to arbitrate sufficient to bring the dispute within the Convention. In holding that an arbitral clause in a contract need not be signed by the parties to be enforceable under the Convention, the district court relied on the only appellate case interpreting this section of the Convention, Sphere Drake Ins. PLC v. Marine Towing, Inc., 16 F.3d 666, 669 (5th Cir. 1994) (outlining, without much analysis, article II, section 1 of the Convention as including "(1) an arbitral clause in a contract or (2) an arbitration agreement, (a) signed by the parties or (b) contained in an exchange of letters or telegrams"), and declined to follow Sen Mar, Inc. v. Tiger Petroleum Corp., 774 F. Supp. 879, 882 (S.D.N.Y. 1991) ("An arbitration clause is enforceable only if it is found in a signed writing or an exchange of letters.").

The district court then turned to Lark's argument that it should not be bound by the Arbitration Clauses because it was not the seller of the garments. The district court held that the Purchase Orders embodied "an agreement between Kahn Lucas and Lark for the sale of goods, as opposed to an agreement between Kahn Lucas and the manufacturers." Kahn Lucas II, 1997 WL 458785 at *5. The district court relied on the fact that Kahn Lucas and Lark were the only parties mentioned on the Purchase Orders, and on the fact that Kahn Lucas was to pay Lark directly for the garments ultimately delivered under the Purchase Orders. See id. Finally, the district court found that Lark was bound to the terms of the Purchase Orders despite the fact it did not sign them because it manifested assent to the Purchase Orders by performing under...