Kamaya Co., Ltd. v. American Property Consultants, Ltd., 40801-1-I

• Decision Date: 27 July 1998
• Docket Number: No. 40801-1-I,40801-1-I
• Court: Washington Court of Appeals
• Parties: KAMAYA CO., LTD., a Japanese corporation; Pacific Business Investment, Inc., a Washington corporation; Ft Limited Co., a Japanese corporation; Hisa Yoshi Yazaki, an individual; Kazuo Ito and Kimiko Ito, husband and wife; Tomoyuki Katayama, an individual, Appellants, v. AMERICAN PROPERTY CONSULTANTS, LTD., a Japanese corporation; APC, Inc., a Delaware corporation; Steven P. Quaiver and Miwako Quaiver, husband and wife; Michael Peterson and Jane Doe Peterson, husband and wife; Alan Peterson, an individual; Grancorp, Inc., a Washington corporation; Michael Heijer and Jill Heijer, husband and wife; Jeff Bynum and Jane Doe Bynum, husband and wife; Jennifer Cobb and Jane Doe Cobb, husband and wife, Respondents, Second & Broad, Inc., a Washington corporation; Granaten U.S.A., Inc., a Washington corporation; Stig Modig and Jane Doe Modig, husband and wife; Hans Thulin and Jane Doe Thulin, husband and wife; Sven-Eric Hansson and Jane Doe Hansson, husband and wife; Lennart Molvin and Jane Doe Molvin, husband and wife, Defendants.

Page 703

91 Wn.App. 703

959 P.2d 1140

KAMAYA CO., LTD., a Japanese corporation; Pacific Business Investment, Inc., a Washington corporation; Ft Limited Co a Japanese corporation; Hisa Yoshi Yazaki, an individual Kazuo Ito and Kimiko Ito, husband and wife; Tomoyuki Katayama, an individual, Appellants, v. AMERICAN PROPERTY CONSULTANTS, LTD., a Japanese corporation APC, Inc., a Delaware corporation; Steven P. Quaiver and Miwako Quaiver, husband and wife; Michael Peterson and Jane Doe Peterson, husband and wife; Alan Peterson, an individual; Grancorp, Inc., a Washington corporation Michael Heijer and Jill Heijer, husband and wife; Jeff Bynum and Jane Doe Bynum, husband and wife; Jennifer Cobb and Jane Doe Cobb, husband and wife, Respondents, Second & Broad, Inc., a Washington corporation; Granaten U.S.A., Inc., a Washington corporation; Stig Modig and Jane Doe Modig, husband and wife; Hans Thulin and Jane Doe Thulin, husband and wife; Sven-Eric Hansson and Jane Doe Hansson, husband and wife; Lennart Molvin and Jane Doe Molvin, husband and wife, Defendants.

No. 40801-1-I.

Court of Appeals of Washington, Division 1.

July 27, 1998.

Howard M. Goodfriend, Edwards, Sieh, Smith & Goodfriend P.S., Seattle, F. F. Fouad, New York, N.Y., for Appellants.

Jay H. Zulauf, Mundt, MacGregor, Happel, Falconer, Zulauf & Hall, Michael H. Himes, Douglas W. Greene, Perkins Coie, John H. Chun, Seattle, for Respondents.

KENNEDY, Chief Judge.

Plaintiffs--a group of passive investors in a Japanese real estate partnership--appeal the trial court's order compelling them to arbitrate their fraud-in-the-inducement of the partnership agreement claims with American Property Consultants, Ltd., and its officers and directors (the APC Defendants). Plaintiffs contend that their fraud-in-the-inducement claims are not arbitrable under the partnership agreement's arbitration clause because the partnership agreement contains a Japanese choice-of-law provision. And--according to Plaintiffs--under Japanese law, general arbitration clauses do not cover fraud-in-the-inducement claims. Alternatively, Plaintiffs contend that if their fraud-in-the-inducement claims are arbitrable, the trial court erred in not compelling arbitration between them and all of the defendants, including Grancorp, Inc., and its officers and directors (the Grancorp Defendants).

Even assuming that general arbitration clauses do not cover fraud-in-the-inducement claims under Japanese law, a general choice- of-law provision is not an effective means by which to unequivocally exclude an otherwise arbitrable dispute from arbitration. See Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 59-60, 115 S.Ct. 1212, 131 L.Ed.2d 76 (1995). Therefore, the trial court properly ordered Plaintiffs to arbitrate their fraud-in-the-inducement claims with the APC Defendants.

But the Grancorp Defendants--by filing their Memorandum in Support of the APC Defendants' Motion to Compel Arbitration--in effect joined in the APC Defendants' Motion to Compel Arbitration. And once a party moves to compel arbitration of a particular dispute and the court determines that the parties have agreed to arbitrate that dispute, the court must order the parties to proceed with arbitration. See Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 217-18, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985). Therefore, the trial court abused its discretion by not compelling arbitration between Plaintiffs and the Grancorp Defendants. Accordingly, we affirm in part, reverse in part, and remand with instructions to compel immediate arbitration between Plaintiffs and both the APC Defendants and the Grancorp Defendants, in Tokyo, Japan.

FACTS

The APC Defendants and the Grancorp Defendants, among others, formed Inter Co-op No.2 ("IC-2")--a Japanese partnership (or kumiai )--to purchase, own, and operate a parcel of Seattle real estate. Kamaya Co., Ltd, Pacific Business Investment, Inc., FT Limited Co., Hisayoshi Yazaki, Kazuo Ito, Kimiko Ito, and Tomoyuki Katayama (Plaintiffs)--a mostly Japanese group of passive investors--purchased shares in IC-2. Each investor executed a real estate purchase and sale agreement (in English), a special power-of-attorney (in English), and a partnership agreement (in Japanese). The partnership agreement contains an internal dispute resolution provision--which includes a mandatory arbitration clause--and a general Japanese choice-of-law provision covering essentially the entire agreement.

After a dispute arose concerning the partnership, the passive investors filed suit against the APC Defendants and the Grancorp Defendants, among others, alleging various violations of the Securities Act of Washington, RCW 21.20, including fraud-in-the-inducement of the partnership agreement as a whole. In response, the APC Defendants filed a Memorandum and Motion to Compel Arbitration requesting the trial court to stay the proceedings and refer Plaintiffs' claims to mediation and arbitration in Japan. The Grancorp Defendants then filed a Memorandum in Support of the APC Defendants' Motion to Compel Arbitration. The trial court granted the APC Defendants' motion, staying the proceedings against all of the defendants but only compelling arbitration between Plaintiffs and the APC Defendants.

Plaintiffs appeal.

DISCUSSION

I. Arbitrability of Plaintiffs' Fraud-in-the-Inducement Claims

Plaintiffs contend that Japanese law governs the arbitrability of their fraud-in-the-inducement of the partnership agreement claims, because the partnership agreement contains a general Japanese choice-of-law provision. The APC Defendants, on the other hand, contend that the Federal Arbitration Act, 9 U.S.C.A. §§ 1-307 (West 1970 and West Supp.1998) (FAA), governs the arbitrability of Plaintiffs' fraud-in-the-inducement claims, notwithstanding the agreement's Japanese choice-of-law provision, because the partnership agreement is a contract affecting commerce. See 9 U.S.C.A. § 2. We reject both of these "all-or-nothing" approaches to resolving the issue of which law governs the arbitrability of Plaintiffs' fraud-in-the-inducement claims. Although the FAA governs whether the parties agreed to arbitrate a particular contractual dispute, the contract's choice-of-law provision is a pertinent factor that courts must consider in applying the FAA.

A. Applicability of the Federal Arbitration Act

In 1925, Congress enacted Chapter 1 of the FAA to abolish "the longstanding judicial hostility to arbitration agreements that had existed at English common law and had been adopted by American courts, and to place arbitration agreements upon the same footing as other contracts." Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 111 S.Ct. 1647, 1651, 114 L.Ed.2d 26 (1991). Chapter 1 of the FAA applies in both state and federal courts, and covers all contracts within Congress's power to regulate under the Commerce Clause. See Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 272, 277, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995); see also 9 U.S.C.A. § 2.

In 1970, Congress enacted Chapter 2 of the FAA, which ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. See 9 U.S.C.A. §§ 201-08. Chapter 2 expanded the FAA's coverage "into the field of international commerce, providing for the enforcement of arbitration clauses in commercial transactions in countries that are parties to the Convention." Quasem Group, Ltd. v. W.D. Mask Cotton Co., 967 F.Supp. 288, 290 n. 1 (W.D.Tenn.1997) (citing 9 U.S.C.A. § 202). "The goal of the Convention, and the principal purpose underlying American adoption and implementation of it, was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and arbitral awards are enforced in the signatory countries." Scherk v. Alberto-Culver Co., 417 U.S. 506, 520 n. 15, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974).

Chapter 2 mandates that both state and federal courts of the United States enforce the Convention. See 9 U.S.C.A. §§ 201, 205. "Article II of the Convention imposes a mandatory duty on the courts of a Contracting State to recognize, and enforce an agreement to arbitrate unless the agreement is 'null and void, inoperative or incapable of being performed.' " Riley v. Kingsley Underwriting Agencies, Ltd., 969 F.2d 953, 959 (10th Cir.1992) (citing 9 U.S.C.A. § 201 note). All actions and proceedings falling under the Convention are "deemed to arise under the laws and treaties of the United States." 9 U.S.C.A. § 203. But Chapter 1 of the FAA applies to cases brought under Chapter 2 only to the extent that Chapter 1 "is not in conflict with [Chapter 2] or the Convention as ratified by the United States." 9 U.S.C.A. § 208.

Plaintiffs do not dispute that the IC-2 partnership agreement--which was marketed and promoted in Japan to elicit investors in Seattle real estate--is a commercial transaction affecting international commerce. And all possibly interested nations--the United States, Japan, and Sweden ¹--are Contracting States to the Convention. See 9 U.S.C.A. § 201 note. Therefore, Chapter 2 of the FAA and the Convention--and Chapter 1 of the FAA to the extent it does not conflict--govern the arbitrability of Plaintiffs' fraud-in-the-inducement claims. See McDermott Int'l, Inc. v. Lloyds Underwriters, 944 F.2d 1199, 1208 (5th Cir.1991) ("The parties recognize that this suit concerns an arbitration agreement and is not entirely between United States citizens, so [Chapter 2] governs this case.").

For example, in Becker Autoradio U.S.A., Inc. v. Becker Autoradiowerk GmbH, 585 F.2d 39, 43 (3d Cir.1978), the court was asked to decide whether a West German corporation and a Pennsylvania corporation should be required to arbitrate their contractual dispute. The court held, notwithstanding ordinary choice-of-law analysis, that the federal substantive law of arbitrability...