Sewer v. Paragon Homes, Inc.

• Citation: 351 F. Supp. 596
• Decision Date: 07 December 1972
• Docket Number: Civ. No. 364/1972.
• Parties: Ray SEWER, Plaintiff, v. PARAGON HOMES, INC., et al., Defendants.
• Court: United States District Courts. 3th Circuit. District of the Virgin Islands

351 F. Supp. 596

Ray SEWER, Plaintiff,
v.
PARAGON HOMES, INC., et al., Defendants.

Civ. No. 364/1972.

District Court, Virgin Islands, D. St. Croix.

December 7, 1972.

351 F. Supp. 597

Hodge, Sheen & Finch, Christiansted, St. Croix, V. I., for plaintiff.

Corneiro, Gibbs & Selke, Charlotte Amalie, St. Thomas, V. I., Gamal & Rosskopf, Christiansted, St. Croix, V. I., for defendants.

MEMORANDUM OPINION AND ORDER

WARREN H. YOUNG, District Judge.

The defendants in this case have moved for an Order to stay all legal proceedings pending arbitration of their dispute. This motion thus presents the question whether the Federal Arbitration Act ("the Act") is applicable to the Virgin Islands. Although the contract upon which suit is brought does contain an arbitration clause, plaintiff opposes the motion and prefers to pursue his legal remedies in lieu of arbitration. If local law were to control, he would be able to do this. Arbitration clauses are not specifically enforceable in the Virgin Islands. On the other hand, the Act does make such clauses specifically enforceable. Hence, if it were to control all local actions brought in this court, then defendants' motion must be granted. For the reasons set forth below, I hold that the Act does apply to actions in the District Court of the Virgin Islands. Further proceedings in this action will therefore be stayed pending recourse to the arbitration procedures provided for in the contract between the parties.

This case arose out of a distributorship contract. The principal defendant, Paragon Homes, Inc., ("Paragon") is a manufacturer of prefabricated houses. In 1967 plaintiff ("Sewer") entered into a contract with Paragon Homes, pursuant to which he would become its exclusive distributor and franchised dealer for St. Croix. That relationship is no longer in effect, although the circumstances of its termination are a matter of dispute. Sewer charges a conspiracy among defendants by which the distributorship was unjustifiably transferred to other hands. Paragon has answered and counterclaimed, alleging that Sewer was lackadaisical in the discharge of his duties as their agent. Paragon now moves for a stay, invoking the general arbitration clause of the contract, which provides as follows:

In the event of any dispute or disagreement of any nature whatsoever concerning this Agreement, including but not limited to the terms of the Agreement, the performance thereof, the breach thereof, or its interpretation, the same shall be arbitrated by the American Arbitration Association in the County of Nassau, State of New York, the jurisdiction of which Association and the enforcement of its orders, both parties do hereby consent. In the event of such arbitration, the costs shall be borne equally between the parties.

351 F. Supp. 598

I.

Whether the arbitration clause may be enforced, however, depends on whether the Federal Arbitration Act applies to actions in this Court. If it does not, then local law will control. The Legislature of the Virgin Islands has not enacted an arbitration statute. In the absence of a statute, actions under local law are to be governed by the Restatements approved by the American Law Institute. 1 V.I.C. § 4. The Restatement of Contracts provides that while arbitration clauses are not illegal, neither are they specifically enforceable, and only nominal damages will be awarded for their breach. The Restatement of Contracts § 550 (1932); Sigal v. Three K's Ltd., 456 F.2d 1242 (3rd Cir., 1972).

Congress was evidently dissatisfied with this posture of the common law, and believed that enforceable arbitration agreements would more justly carry out the undertakings of the contracting parties and could prevent considerable unnecessary litigation. Congress therefore passed the Arbitration Act of 1925, 9 U.S.C. §§ 1-14 (1970). Section 2 of the Act provides that, in contracts covering transactions within federal cognizance, arbitration clauses shall be valid and enforceable.¹ Section 3 provides that where an issue is referable to arbitration, a court shall stay its own proceedings "until such arbitration has been had in accordance with the terms of the agreement . . . ."² So far as I am advised, the application of the latter section to this court is an issue of first impression.

For three reasons, I hold that the Arbitration Act applies to mandate stays of legal proceedings conducted in the District Court of the Virgin Islands. First, there is a strong federal policy in favor of arbitration, and Congress should be understood as extending this policy to all areas within its purview. Secondly, this is a "court of the United States" for purposes of the Act, and hence the Act applies in terms. And finally, the case law from other territories has tended to arrive at this same conclusion.

Congressional policy strongly favors arbitration. In recognition of this fact, a very large number of cases have held that doubts or ambiguities in the statute should be resolved in favor of arbitration. See e. g., Kanazawa Ltd. v. Sound Unlimited, 440 F.2d 1239 (9th Cir. 1971); Lundgren v. Freeman, 307 F.2d 104, 109-110 (9th Cir. 1962); Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402 (2nd Cir. 1959), cert. dismissed, 364 U.S. 801, 81 S.Ct. 27, 5 L.Ed.2d 37. The principal limitation placed upon this construction is that the underlying transaction must come within the reach of the substantive lawmaking powers of Congress. Thus, for example, it has been held that in a diversity

351 F. Supp. 599

case the Act must be construed as reaching only a contract relating to a maritime or interstate commerce transaction. Bernhardt v. Polygraphic Co., 350 U.S. 198, 76 S.Ct. 273, 100 L.Ed. 199 (1956). To hold otherwise would create Erie problems by introducing an outcome-determinative federal procedure into a class of suits that are to be governed by state law. No such problems, however, are raised by the case. In the first place, since the houses were to be manufactured in New York and sold in the Virgin Islands, this particular transaction amply affects interstate commerce and hence comes within the federal regulatory powers. Cf. Hilti, Inc. v. Oldach, 392 F.2d 368, 371 n.6 (1st Cir. 1968). Of more general importance, however, is the fact that Congress has the authority to regulate all transactions within the territories. It has evidently chosen to do so here, and to extend the coverage of the Act to all areas within its legislative competence. Section 1 provides that "`commerce', as herein defined, means commerce . . . in any Territory of the United States . . . ." 9 U.S.C. § 1 (1970). Since the usual jurisdictional constraints are thus inapplicable here, we should feel free to apply the standard rule for construction of the Act and resolve any further ambiguities in favor of arbitration

The foregoing policy considerations are supported by the language of the Act itself. Section 3, providing for stays of court actions, applies in terms to "any of the courts of the United States". I construe this language, in the context of this Act, as embracing the District Court of the Virgin Islands. It is true that this is not an Article III court, and legislation addressed to "the district courts of the United States" has been consistently held inapplicable here. See, e. g., Government v. Bell, 392 F.2d 207 (3rd Cir. 1968); Ferguson v. Kwik-Check Winn-Dixie Stores, Inc., 7 V.I. 639 (D.V.I.1970); Callwood v. Callwood, 127 F.Supp. 179, 3 V.I. 61 (D.V.I.1954). However, the phrase "district courts" is a term of art, and I believe that "courts of the United States" has a different and more inclusive meaning. The Supreme Court has noted that the term "district court of the United States" has an "historic significance" as denoting "the constitutional...