Reconstruction Finance Corp. v. Harrisons & Crosfield

Decision Date08 May 1953
Docket NumberNo. 177,Docket 22581.,177
Citation204 F.2d 366
PartiesRECONSTRUCTION FINANCE CORP. v. HARRISONS & CROSFIELD, Limited.
CourtU.S. Court of Appeals — Second Circuit

Harold E. Jacobsen, New York City, (Abram Glaser, New York City, of counsel), for petitioner-appellant.

Donovan, Leisure, Newton, Lumbard & Irvine, New York City (Burr F. Coleman, New York City, of counsel), for respondent-appellee.

Before SWAN, Chief Judge, and CLARK and FRANK, Circuit Judges.

FRANK, Circuit Judge.

1. This is an appeal from an order (1) dismissing the petition of the Reconstruction Finance Corporation, the plaintiff,1 which sought an order permanently enjoining defendant from arbitrating a claim asserted against plaintiff and (2) granting defendant's cross-petition which sought an order directing plaintiff to proceed with arbitration in accord with a request for arbitration served on plaintiff by defendant.2 The facts are stated in Judge Weinfeld's opinion, 106 F.Supp. 358, and need not here be repeated in detail. Plaintiff in its brief in this court says that the sole question it urges on this appeal is "whether the Court or the arbitrators should determine that the Statute of Limitations (or laches) has or has not barred the contractual right which the Appellee seeks to enforce." Briefly, then, for purposes of this appeal, the facts may be stated thus: In 1941, Rubber Reserve Company, a corporation wholly owned by the United States, made written contracts with defendant as the seller of crude rubber to be shipped from the Netherlands East Indies to the United States; the contracts obligated Rubber Reserve to take out insurance on these shipments, but it did not do so; some of the shipments were destroyed in transit by enemy action in 1942; defendant claims that, because of Rubber Reserve's failure to take out the insurance, defendant suffered a large financial loss; plaintiff, as the statutory successor of Rubber Reserve, succeeded to its rights, obligations and liabilities; each of the contracts with Rubber Reserve contains a clause which provides that, "Failing amicable settlement, all claims, disputes or controversies arising under or in relation to this contract shall be determined by arbitration"; "amicable settlement" having failed, defendant, on September 14, 1951, served on plaintiff a request for arbitration of its claim grounded on the foregoing.

2. Plaintiff's basic position is this: (a) Section 48 of the New York Civil Practice Act provides that an "action upon a contract obligation" must be commenced "within six years after the cause of action has accrued."3 By statutory definition, for this purpose an "action" includes a "special proceeding."4 The New York arbitration statute provides that an arbitration thereunder "shall be deemed a special proceeding".5 (b) The controversies which are here the subject of the proposed arbitration relate to alleged breaches, occurring in 1942, of the obligation of Rubber Reserve, under the 1941 contracts, to place insurance upon the shipments. (c) Those breaches occurred more than six years before plaintiff sought to initiate the arbitration by its notice of September 1951. (d) Any action by defendant on account of those breaches is therefore barred. (e) This bar covers not only a suit in court but also an arbitration, which is an "action upon a contract obligation". On this basis, plaintiff argues that there was no existing valid obligation when defendant asked for arbitration in September 1951, and that, accordingly, the district court erred in not preventing but, instead, ordering arbitration, since, as a result of the order, the arbitrators may give defendant an award despite the bar of the limitations statute.6

Plaintiff cites no decision, anywhere, relative to this question. The highest New York court has held that the New York arbitration statute "only requires the contract to have been made and does not require that it shall continue to be in existence", with the consequence that the issue of cancellation is for the arbitrators.6a That court has also held that whether "the respondents were let out of the contract when the war excluded performance thereof by the appellant" was "an issue which was clearly * * * described in the * * * arbitration clause" and therefore properly within the arbitration ordered by the lower court.7 Those recent decisions are in line with our own, interpreting the federal arbitration Act as designed to favor arbitration,8 and with the provisions of that Act9 U.S.C. § 4 — which make it clear that a federal court, in a suit asking it to compel arbitration, should (except as noted below in discussing laches) deal with no issues except (1) the making of an agreement to arbitrate, and (2) the failure, neglect or refusal of the other party to perform that agreement.

Making all assumptions (arguendo) most favorable to Reconstruction Finance Corporation,9 we think defendant must win on the issue of the statute of limitations. Considering an arbitration as "An action upon a contract obligation", within the meaning of the New York limitations statute, we then ask upon what "contract obligation" the "action"i. e., the arbitration — is grounded. The answer is the "contract obligation," contained in each contract, to submit to arbitration "all claims, disputes or controversies under this contract." The "claim" or "controversy" which defendant seeks to have submitted to arbitration relates to a different "contract obligation," said to have been breached by Reconstruction Finance Corporation's predecessor, Rubber Reserve, i. e., the obligation to procure insurance. But, for purposes of the provision of the six-year statute applicable to arbitration as an "action," the crucial "contract obligation" consists of the obligation to arbitrate. The New York statute provides that the "action" — here the arbitration — must be begun "within six years after the cause of action has accrued". The "cause of action" for breach of the obligation to arbitrate did not "accrue" until defendant recently asked Reconstruction Finance Corporation to arbitrate the "controversy," and Reconstruction Finance Corporation then refused to comply. Wherefore, we hold that (making all the assumptions we previously noted) the statute of limitations had not barred the arbitration regarded as an "action." The effect of the limitations statute on the asserted obligations to obtain insurance will be determined by the arbitrators.

3. There remains the possibility that defendant's right to arbitration is barred by laches. For as a court, when asked to enter an order, under the federal Arbitration Act, requiring a party to arbitrate as he promised, sits "in equity,"10 passing on a prayer for specific performance, it must take into account equity considerations,11 and notably laches.12 We have therefore appropriately said that a demand for arbitration must be made within a "reasonable time."13 And the same equitable considerations are active when, as here, one party to an arbitration agreement asks that arbitration be enjoined because of lapse of time.

Laches may be operative with respect to the obligation to arbitrate although with respect thereto the statute has not run.14 But a heavy burden rests on Reconstruction Finance Corporation, as the party setting up laches as a defense, to establish facts which constitute laches in the particular circumstances of this particular case. Judge Phillips admirably stated the rule in Shell v. Strong, 10 Cir., 151 F.2d 909, 911: "Lapse of time alone does not constitute laches. Delay will not bar relief where it has not worked injury, prejudice, or disadvantage to the defendant or others adversely interested. Since laches is an equitable defense, its application is controlled by equitable considerations. It cannot be invoked to defeat justice, and it will be applied only where the enforcement of the right asserted will work in justice. * * * Under ordinary circumstances, a suit in equity will not be stayed for laches before, and will be stayed after, the time fixed by the analogous statute, but if unusual conditions or extraordinary circumstances make it inequitable to allow the prosecution of a suit after a briefer, or to forbid its maintenance after a longer, period than that fixed by the analogous statute, a court of equity will not be bound by the statute, but will determine the extraordinary case in accordance with the equities which condition it. When a suit is brought within the time fixed by the analogous statute, the burden is on the defendant to show, either from the face of the complaint or by his answer, that extraordinary circumstances exist which require the application of the doctrine of laches. On the other hand, when the suit is brought after the statutory time has elapsed, the burden is on the complainant to aver and prove circumstances making it inequitable to apply laches to his case." As here plaintiff did not discharge its burden, we affirm.

It is suggested that this result will discourage the insertion of arbitration clauses in contracts, for (it is said) parties will fear that they will be compelled to let arbitrators decide controversies after the lapse of (say) thirty or fifty years. To this argument there are two answers: (a) If the delay is accompanied by other circumstances, as a result of which serious prejudice would follow if arbitration were permitted, then laches can be successfully advanced in court to block any arbitration. (b) More important, the parties to a contract embodying an arbitration clause can, of course, easily put in it an "express time limitation."15

CLARK, Circuit Judge (dissenting).

As Judge Frank's opinion shows, there seems to be no exact precedent for a decision here; we have been cited to none and have discovered none. The closest authority is our own statement in Son Shipping Co. v. De Fosse & Tanghe, 2 Cir., 199 F.2d 687, 689: "We are aware that the...

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