McAllister Bros., Inc. v. A & S Transp. Co.

Decision Date02 May 1980
Docket Number799,Nos. 711,D,s. 711
PartiesMcALLISTER BROTHERS, INC., Petitioner-Appellee-Cross-Appellant, v. A & S TRANSPORTATION CO. and Modern Transportation Co., Respondents-Appellants, and Pollution Control Industries, Inc., and PCI International, Inc., Respondents-Cross-Appellees. ockets 79-7785, 79-7805.
CourtU.S. Court of Appeals — Second Circuit

Emil A. Kratovil, Jr., New York City (Haight, Gardner, Poor & Havens, New York City, Bert I. Weinstein, New York City, of counsel, Saverio Mirarchi, New York City, on brief), for respondents-appellants and respondents-cross-appellees.

Michael J. McAllister, New York City (Lunney & Crocco, New York City, of counsel, James G. Nugent, New York City, on brief), for petitioner-appellee-cross-appellant.

Before FEINBERG, NEWMAN and KEARSE, Circuit Judges.

FEINBERG, Circuit Judge:

Respondents A & S Transportation Co. (A & S) and Modern Transportation Co. (Modern), two affiliated transporters of sludge, appeal from an order entered in the United States District Court for the Southern District of New York, Milton Pollack, J., that compelled them to arbitrate a contract dispute with petitioner McAllister Brothers, Inc. (McAllister), a tugboat company. McAllister cross-appeals from that portion of the order that denied its petition to compel respondents Pollution Control Industries, Inc. (Pollution) and PCI International, Inc. (PCI), to participate in the arbitration. For the reasons stated below, we affirm the order insofar as it compels A & S and Modern to arbitrate their dispute with McAllister. With respect to McAllister's demand for arbitration against Pollution and PCI, we reverse the district court's determination and remand the case for further proceedings.

I

In October 1973, appellants A & S and Modern entered into a five-year contract with McAllister under which McAllister was to provide all towing required by appellants for their sludge removal operations in the Delaware River and in Puerto Rico. The contract bound appellant companies, their "AFFILIATES" AND "SUBSIDIARIES," AND "all other companies of substantially the same stock ownership" as the parent companies. Several clauses of the contract provided for the arbitration of certain disputes; at issue here is the scope and proper interpretation of one such provision clause 4 which provided:

4. Modern (and A & S) shall have the right to seek Tugboat service elsewhere only if the service rendered by McAllister does not meet the standards of the industry and any disagreement with respect to this issue shall be settled in the same manner (arbitration) as set forth in Paragraph 3.

The scanty record before us indicates that from 1973 until 1977, McAllister apparently provided A & S and Modern with tugboat services, and was reimbursed at rates agreed upon under the terms of the contract. However, McAllister's services were terminated in June 1977 in the Delaware River and in June 1978 in Puerto Rico; both terminations occurred before the October 1978 expiration of the contract. McAllister objected to the cancellation of its services, and, in November 1978, served a demand for arbitration on A & S and Modern. McAllister also sought to compel Pollution and PCI to arbitrate, on the ground that both corporations were closely affiliated with Modern and A & S and were thus bound by the contract. All four companies resisted arbitration, and, in July 1979, McAllister filed a petition in the United States District Court for the Southern District of New York to compel arbitration under section 4 of the Federal Arbitration Act, 9 U.S.C. § 4.

Before Judge Pollack, A & S and Modern admitted that they had entered into an arbitration agreement with McAllister and that they had subsequently terminated McAllister's services and rejected its demand for arbitration. Both A & S and Modern contended, however, that they were not bound to arbitrate under section 4 of the Act because the contract, including the arbitration clause, had been abandoned by the parties well before the October 1978 expiration date of the contract. Pollution and PCI argued that they were not parties to the contract and were therefore not bound by the arbitration clause. McAllister, in contrast, claimed that the contract had never been abandoned, that all four companies were bound by its terms, and that the decision to terminate McAllister and seek tugboat services elsewhere raised arbitrable issues under clause 4 of the contract.

Judge Pollack, in a brief memorandum opinion, declined the request of Modern and A & S that he determine that the contract had been abandoned before the termination of McAllister's services, and instead concluded that McAllister's "claim of breach during the existence of the contract is a matter to be decided by the arbitrator pursuant to the contract." The district court reasoned that since the arbitration clause might be susceptible to an interpretation covering the dispute, arbitration should be compelled. However, the court rejected McAllister's motion to compel Pollution and PCI to arbitrate on the ground that they "were not parties to the contract to arbitrate disputes" and could not "be subjected to an arbitration merely because they are affiliated enterprises." Appellants A & S and Modern now contend that the district court erred in relegating to the arbitrator the issue whether the contract, including the arbitration clause, had been abandoned prior to the termination of McAllister's services. In the cross-appeal, McAllister argues that Pollution and PCI, as affiliates of Modern and A & S, were bound by the agreement to arbitrate. We treat these claims in separate sections.

II

As we recently noted in Conticommodity Services, Inc. v. Philipp & Lion, 613 F.2d 1222 (2d Cir. 1980), a district court's scope of inquiry in considering a petition to compel arbitration under section 4 of the Federal Arbitration Act is fairly circumscribed. The relevant statutory language provides A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court . . . for an order directing that such arbitration proceed in the manner provided for in such agreement. . . . 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. . . . If the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof.

Thus, section 4 directs a district court to compel arbitration unless the "making" of an arbitration agreement, or one party's "failure, neglect, or refusal" to arbitrate is in question. However, courts have long recognized that "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." United Steelworkers of America v. Warrior and Gulf Navigation Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 1353, 4 L.Ed.2d 1409 (1960). Accordingly, in considering a motion to compel arbitration, a district court must also make a threshold inquiry into whether the contract's arbitration provisions arguably cover the dispute at hand. In making this determination, "(d)oubts should be resolved in favor of coverage" and arbitration should be compelled "unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute." Id. at 582-83, 80 S.Ct. at 1353.

In the present case, the initial dispute between the parties concerns whether the court or the arbitrator should pass on the claim of Modern and A & S that they cannot be compelled to arbitrate because the contract with McAllister had been abandoned before McAllister's services were discontinued. In determining whether this issue of contract termination is arbitrable, a court must first examine the potential scope of the agreement to arbitrate. If the arbitration clause is broad and arguably covers disputes concerning contract termination, arbitration should be compelled and the arbitrator should decide any claim that the arbitration agreement, because of substantive or temporal...

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