Prima Paint Corp. v. Flood & Conklin Mfg. Co. - 388 U.S. 395 (1967)


U.S. Supreme Court

Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967)

Prima Paint Corp. v. Flood & Conklin Mfg. Co.

No. 343

Argued March 16, 1967

Decided June 12, 1967

388 U.S. 395

Syllabus

Respondent (F & C), a New Jersey corporation which manufactured and sold paint and paint products to wholesale customers in a number of States, entered into a contract with petitioner (Prima), a Maryland corporation, whereby F & C agreed to perform consulting and other services relating to the transfer of operations from F & C to Prima and agreed not to compete with Prima, for which Prima agreed to pay, over the six-year life of the contract, certain percentages of receipts from sales. The contract, which stated that it "embodies the entire understanding of the parties," contained a broad arbitration clause that

"[a]ny controversy . . . arising out of this agreement, or the breach thereof, shall be settled by arbitration in the City of New York in accordance with the rules . . . of the American Arbitration Association."

Almost a year later, after the first payment had become due, Prima notified F C that F & C had broken the consulting agreement and an earlier agreement involving Prima's purchase of F & C's paint business. Prima's chief contention was that F & C had fraudulently represented that it was solvent and able to perform its obligations, whereas it was insolvent and planned to file a bankruptcy petition shortly after executing the consulting agreement. F & C responded by serving a notice of intention to arbitrate, whereupon Prima filed this diversity action in federal court for rescission of the consulting agreement on the basis of the alleged fraudulent inducement and contemporaneously sought to enjoin F & C from proceeding with arbitration. The United States Arbitration Act of 1925 provides, in § 2, that a written arbitration provision

"in any . . . contract evidencing a transaction involving commerce . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract;"

in § 3, that a federal court in which suit is brought upon an issue referable to arbitration by an arbitration agreement must stay the court action pending arbitration once it has decided that the issue is arbitrable under the agreement; and, in § 4, that a federal court whose assistance is invoked by a party seeking to compel

Page 388 U. S. 396

another to arbitrate, if satisfied that an arbitration agreement has not been honored and that "the making of the agreement for arbitration or the failure to comply [with the arbitration agreement] is not in issue," shall order arbitration. The District Court granted a motion filed by F & C to stay the action pending arbitration, and the Court of Appeals dismissed Prima's appeal.

Held:

1. The contract clearly evidenced a transaction involving interstate commerce, and came within the coverage of the Arbitration Act. P. 388 U. S. 401.

2. In passing upon an application for a stay of arbitration under § 3 of the Act, a federal court may not consider a claim of fraud in the inducement of the contract generally, but "may consider only the issues relating to the making and performance of the agreement to arbitrate." Pp. 388 U. S. 402-404.

3. The Act prescribes the manner in which federal courts are to treat questions relating to arbitration clauses in contracts which involve interstate commerce or admiralty, "subject matter over which Congress plainly has power to legislate." Hence, state rules allocating functions between court and arbitrator do not control. Pp. 388 U. S. 404-405.

4. Since the claim of fraud here relates to inducement of the consulting agreement generally, rather than in the arbitration clause, and there is no evidence that the parties intended to withhold this issue from arbitration, there is no basis for granting a stay under § 3. Pp. 388 U. S. 406-407.

360 F.2d 315, affirmed.



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