Prudential Lines, Inc. v. Exxon Corp.

• Decision Date: 28 March 1983
• Docket Number: No. 191,D,191
• Citation: 704 F.2d 59
• Parties: In the Matter of the Arbitration between PRUDENTIAL LINES, INC., Petitioner-Appellee, and EXXON CORPORATION, Respondent-Appellant. ocket 82-7330.
• Court: U.S. Court of Appeals — Second Circuit

Page 59

704 F.2d 59

In the Matter of the Arbitration between PRUDENTIAL LINES INC., Petitioner-Appellee and EXXON CORPORATION, Respondent-Appellant.

No. 191, Docket 82-7330.

United States Court of Appeals Second Circuit.

Argued Oct. 14, 1982.

Decided March 28, 1983.

David A. Nourse, New York City (Nourse & Bowles, New York City, of counsel; John P. Sandercock, Kirlin, Campbell & Keating, New York City, on brief), for respondent-appellant.

William C. Clarke, New York City (Charles W. Gerber, Barrett, Smith, Schapiro, Simon & Armstrong, New York City, of counsel), for petitioner-appellee.

Before VAN GRAAFEILAND and PIERCE, Circuit Judges, and WYATT, ^* District Judge.

PIERCE, Circuit Judge:

Exxon Corporation (Exxon) appeals from an order by Judge Charles S. Haight in the United States District Court for the Southern District of New York entered on April 1, 1982. ¹ The order compelled Exxon to arbitrate a contract dispute involving $2,177,751 in alleged damages pursuant to the United States Arbitration Act, 9 U.S.C. Sec. 4 (1976) (the Act), with Prudential Lines, Inc. (Prudential), a United States-flag steamship line. For the reasons stated below, we affirm the district court's order.

I

Prudential is a Delaware corporation with its principal place of business in the Southern District of New York; Exxon is a New Jersey corporation having offices in the Southern District of New York. The jurisdiction of this Court is based upon the provisions of the United States Arbitration Act, 9 U.S.C. Sec. 4 (1976), and the maritime subject matter, 28 U.S.C. Sec. 1333 (1976). On November 22, 1961, Prudential "bareboat" chartered its vessel for a 15 year term commencing with the date of delivery to Exxon. ² The vessel was delivered to Exxon in May, 1964 and redelivery was to be made in May, 1979. Under Clause 7 of the agreement, Exxon was to have full control over the vessel during the term of the charter.

At the end of the term, Exxon was to redeliver the vessel to Prudential pursuant to the instructions set forth in Clause 16 of the charter party. Clause 16(a) required Exxon to redeliver the vessel in as good order as it was at the time of delivery to Exxon, except for damage resulting from ordinary wear and tear. Clause 16(b) called for a joint survey of the vessel at the time of redelivery "on drydock and afloat" by representatives of the two parties and required that "[s]uch representatives by an instrument in writing shall jointly agree upon and designate the repairs or work necessary to place the vessel on the date of redelivery in the condition required by this Clause 16." Clause 16(c) required the charterer to perform all necessary repairs prior to redelivery or, at the owner's option and with the consent of the Mortgagee of the vessel, to discharge such responsibility by payment for the repairs and lost time to the owner. Clause 16(d) provided that "[a]cceptance of the vessel by Owner shall be conclusive evidence of Charterer's compliance with any and all of the Charterer's obligations under this charter with respect to the vessel's class and condition at the time of redelivery."

Also relevant to this litigation were the arbitration provisions of the charter, Clauses 13(d) and 25. Clause 13(d) provided in part:

Should any dispute arise between the Owner and the Charterer in respect to the responsibility for repairs, renewals or replacements, or as to the condition of the vessel at the time of redelivery, the matter shall be decided by arbitration as provided in Clause 25.

Clause 25 provided:

Should any dispute arise under this agreement, the matter in dispute shall be referred to three persons, one to be appointed by Owner, one by Charterer, and the third by the two so chosen; and their decision or that of any two of them shall be final, and their award may be made a rule of court and a judgment or decree entered thereon.

In 1979, when the term of the charter was about to end, the owner Prudential appointed Carter Morrell, an independent marine surveyor, to conduct the survey on its behalf in compliance with the requirements of Clause 16(b). Morrell was a naval architect and marine engineer who had supervised the construction of the vessel, had worked as a consultant to Prudential, and had assisted in making a survey of the vessel in 1975. Morrell attended the vessel at the redelivery port, and participated in the joint survey in May, 1979.

Numerous factual claims are made by both parties as to events surrounding the redelivery of the vessel. Since the district court was deciding whether to compel arbitration and not the merits of the parties' claims, it made no findings of fact in this regard in its decision entered April 1, 1982. The court did note, however, that at the redelivery port, Prudential's representative, Morrell, executed a written "Certificate of Acceptance and Redelivery." During the period between May 25, 1979 and August, 1979, Exxon alleges that the vessel was in Prudential's sole control.

Exxon argues that execution of this certificate by Morrell in light of Clause 16(d), described above, constituted acceptance of the vessel. Thus, any claim for damage that Prudential as owner might have had against Exxon was allegedly extinguished by this "acceptance" of the vessel under Clause 16(d).

Prudential states that after May 25, 1979, it learned that anticipated repairs would cost more than $1,000,000 and on March 18, 1980, submitted a claim to Exxon for $2,177,751. Exxon refused to pay. On January 23, 1981, Prudential demanded arbitration of the dispute and subsequently designated an arbitrator, as required by the charter party. Exxon failed to reciprocate, as required by Clause 25. On May 18, 1981, Prudential filed its petition in the district court for an order to compel arbitration of its claim.

In a memorandum opinion and order dated June 17, 1981, Judge Haight initially denied Prudential's petition to compel arbitration. He found that Prudential had accepted the vessel, and held "[t]hat acceptance constitutes 'conclusive evidence' of respondent's compliance with those very obligations whose alleged breach petitioner now seeks to submit to arbitration. But the issue is foreclosed, and nothing remains to be arbitrated." The court also rejected Prudential's argument that Morrell was not authorized to accept the vessel and held that Prudential had "clothed" him with apparent authority.

Prudential filed a motion for reconsideration which was granted by the district judge on September 9, 1981 to further consider the question of whether the authority vel non, actual or apparent, of petitioner's surveyor to execute the certificate of redelivery was an arbitrable dispute. Upon reconsideration, Judge Haight entered a decision on April 1, 1982, and noted that the briefs and oral arguments focused on whether the issue of Morrell's authority was collateral to the agreement between the parties or " 'inextricably tied up with the merits of the underlying dispute,' and thus 'wholly derivative of issues that fall within the scope of the arbitration clause.' " 535 F.Supp. at 293, quoting McAllister Bros. v. A & S Transp. Co., 621 F.2d 519, 523 (2d Cir.1980). In reversing his earlier decision, he concluded that the issue of Morrell's authority was not collateral. He noted that in his earlier decision, he had erroneously "assumed without analysis that the issue of the surveyor's authority could be decided by the Court on the motion papers, and need not be submitted to the arbitrators." 535 F.Supp. at 293.

Exxon filed a notice of appeal on April 27, 1982 and moved for a stay pending appeal pursuant to Fed.R.Civ.P. 62(d) and Rule 42 of the Civil Rules of the Southern District of New York, when Prudential demanded that Exxon proceed with arbitration despite the pending appeal. By an order entered May 25, 1982, the district court denied the motion. On appeal of the denial of that motion, a stay was granted by this court on June 15, 1982, on condition that Exxon file a bond or other security in an amount the district court deemed proper on remand.

II

The issue presented herein is whether the district court erred in granting Prudential's petition to compel arbitration. In particular, we must review the district court's decision that the dispute over the responsibility for repairs, and sub-issues encompassed within the main dispute, were arbitrable. ³ In light of the persuasive dissenting opinion of Judge Wyatt, we shall also address the serious equitable considerations presented herein.

III

This action was brought pursuant to the United States Arbitration Act, 9 U.S.C. Sec. 4 (1976), which provides in part that:

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. ⁴

Thus, under Section 4, it must be established that: (1) an arbitration agreement exists; (2) the dispute falls within the scope of the arbitration agreement (i.e., "under a written agreement for arbitration"); and (3) the dispute does not involve the making of the agreement or the failure to comply therewith.

Here, there is no dispute concerning the first requirement of Section 4. As noted above, two clauses of the charter provided for arbitration. Nor is there any disagreement regarding the third requirement since Exxon contests neither the making of the agreement nor that it has refused to arbitrate the dispute with Prudential over a matter covered by the arbitration clauses of the charter party. See Mercury Constr. Corp. v....