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.
MR. JUSTICE FORTAS delivered the opinion of the Court.
This case presents the question whether the federal court or an
arbitrator is to resolve a claim of "fraud in
Page 388 U. S. 397
the inducement," under a contract governed by the United States
Arbitration Act of 1925, [
Footnote
1] where there is no evidence that the contracting parties
intended to withhold that issue from arbitration.
The question arises from the following set of facts. On October
7, 1964, respondent, Flood & Conklin Manufacturing Company, a
New Jersey corporation, entered into what was styled a "Consulting
Agreement," with petitioner, Prima Paint Corporation, a Maryland
corporation. This agreement followed by less than three weeks the
execution of a contract pursuant to which Prima Paint purchased F
& C's paint business. The consulting agreement provided that,
for a six-year period, F & C was to furnish advice and
consultation "in connection with the formulae, manufacturing
operations, sales and servicing of Prima Trade Sales accounts."
These services were to be performed personally by F & C's
chairman, Jerome K. Jelin, "except in the event of his death or
disability." F & C bound itself for the duration of the
contractual period to make no "Trade Sales" of paint or paint
products in its existing sales territory or to current customers.
To the consulting agreement were appended lists of F & C
customers, whose patronage was to be taken over by Prima Paint. In
return for these lists, the covenant not to compete, and the
services of Mr. Jelin, Prima Paint agreed to pay F & C certain
percentages of its receipts from the listed customers and from all
others, such payments not to exceed $225,000 over the life of the
agreement. The agreement took into account the possibility that
Prima Paint might encounter financial difficulties, including
bankruptcy, but no corresponding reference was made to possible
financial problems which might be encountered by F & C. The
agreement stated that it "embodies the entire understanding of the
parties
Page 388 U. S. 398
on the subject matter." Finally, the parties agreed to a broad
arbitration clause, which read in part:
"Any controversy or claim arising out of or relating to this
Agreement, or the breach thereof, shall be settled by arbitration
in the City of New York, in accordance with the rules then
obtaining of the American Arbitration Association. . . ."
The first payment by Prima Paint to F & C under the
consulting agreement was due on September 1, 1965. None was made on
that date. Seventeen days later, Prima Paint did pay the
appropriate amount, but into escrow. It notified attorneys for F
& C that, in various enumerated respects, their client had
broken both the consulting agreement and the earlier purchase
agreement. Prima Paint's principal contention, so far as presently
relevant, was that F & C had fraudulently represented that it
was solvent and able to perform its contractual obligations,
whereas it was, in fact, insolvent, and intended to file a petition
under Chapter XI of the Bankruptcy Act, 52 Stat. 905, 11 U.S.C. §
701
et seq., shortly after execution of the consulting
agreement. Prima Paint noted that such a petition was filed by F
& C on October 14, 1964, one week after the contract had been
signed. F & C's response, on October 25, was to serve a "notice
of intention to arbitrate." On November 12, three days before
expiration of its time to answer this "notice," Prima Paint filed
suit in the United States District Court for the Southern District
of New York, seeking rescission of the consulting agreement on the
basis of the alleged fraudulent inducement. [
Footnote 2] The complaint asserted that the
federal court had diversity jurisdiction.
Page 388 U. S. 399
Contemporaneously with the filing of its complaint, Prima Paint
petitioned the District Court for an order enjoining F & C from
proceeding with the arbitration. F & C cross-moved to stay the
court action pending arbitration. F & C contended that the
issue presented -- whether there was fraud in the inducement of the
consulting agreement -- was a question for the arbitrators, and not
for the District Court. Cross-affidavits were filed on the merits.
On behalf of Prima Paint, the charges in the complaint were
reiterated. Affiants for F & C attacked the sufficiency of
Prima Paint's allegations of fraud, denied that misrepresentations
had been made during negotiations, and asserted that Prima Paint
had relied exclusively upon delivery of the lists, the promise not
to compete, and the availability of Mr. Jelin. They contended that
Prima Paint had availed itself of these considerations for nearly a
year without claiming "fraud," noting that Prima Paint was in no
position to claim ignorance of the bankruptcy proceeding, since it
had participated therein in February of 1965. They added that F
& C was revested with its assets in March of 1965.
The District Court granted F & C's motion to stay the action
pending arbitration, holding that a charge of fraud in the
inducement of a contract containing an arbitration clause as broad
as this one was a question for the arbitrators, and not for the
court. For this proposition it relied on
Robert Lawrence Co. v.
Devonshire Fabrics, Inc., 271 F.2d 402 (C.A.2d Cir.1959),
cert. granted, 362 U.S. 909, dismissed under Rule 60, 364
U.S. 801 (1960). The Court of Appeals for the Second Circuit
dismissed Prima Paint's appeal. It held that the contract in
question evidenced a transaction involving interstate commerce;
that, under the controlling
Robert
Page 388 U. S. 400
Lawrence Co. decision, a claim of fraud in the
inducement of the contract generally -- as opposed to the
arbitration clause itself -- is for the arbitrators, and not for
the courts, and that this rule -- one of "national substantive law"
-- governs even in the face of a contrary state rule. [
Footnote 3] We agree, albeit for
somewhat different reasons, and we affirm the decision below.
The key statutory provisions are §§ 2, 3, and 4 of the United
States Arbitration Act of 1925. Section 2 provides that a written
provision for arbitration
"in any maritime transaction or a 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. [
Footnote 4]"
Section 3 requires a federal court in which suit has been
brought "upon any issue referable to arbitration under an agreement
in writing for such arbitration" to stay the court action pending
arbitration once it is satisfied that the issue is arbitrable under
the agreement. Section 4 provides a federal remedy for a party
"aggrieved by the alleged failure, neglect, or refusal of another
to arbitrate under a written agreement for arbitration," and
directs the federal court to order arbitration once it is satisfied
that an agreement for arbitration has been made and has not been
honored. [
Footnote 5]
Page 388 U. S. 401
In
Bernhardt v. Polygraphic Co., 350 U.
S. 198 (1956), this Court held that the stay provisions
of § 3, invoked here by respondent F & C, apply only to the two
kinds of contracts specified in §§ 1 and 2 of the Act, namely those
in admiralty or evidencing transactions in "commerce." Our first
question, then, is whether the consulting agreement between F &
C and Prima Paint is such a contract. We agree with the Court of
Appeals that it is. Prima Paint acquired a New Jersey paint
business serving at least 175 wholesale clients in a number of
States, and secured F & C's assistance in arranging the
transfer of manufacturing and selling operations from New Jersey to
Maryland. [
Footnote 6] The
consulting agreement was inextricably tied to this interstate
transfer and to the continuing operations of an interstate
manufacturing and wholesaling business. There could not be a
clearer case of a contract evidencing a transaction in interstate
commerce. [
Footnote 7]
Page 388 U. S. 402
Having determined that the contract in question is within the
coverage of the Arbitration Act, we turn to the central issue in
this case: whether claim of fraud in the inducement of the entire
contract is to be resolved by the federal court, or whether the
matter is to be referred to the arbitrators. The courts of appeals
have differed in their approach to this question. The view of the
Court of Appeals for the Second Circuit, as expressed in this case
and in others, [
Footnote 8] is
that --
except where the parties otherwise intend --
arbitration clauses, as a matter of federal law, are "separable"
from the contracts in which they are embedded, and that, where no
claim is made that fraud was directed to the arbitration clause
itself, a broad arbitration clause will be held to encompass
arbitration of the claim that the contract itself was induced by
fraud. [
Footnote 9] The Court
of Appeals for the First
Page 388 U. S. 403
Circuit, on the other hand, has taken the view that the question
of "severability" is one of state law, and that, where a State
regards such a clause as inseparable, a claim of fraud in the
inducement must be decided by the court.
Lummus Co. v.
Commonwealth Oil Ref. Co., 280 F.2d 915, 923-924 (C.A. 1st
Cir.),
cert. denied, 364 U.S. 911 (1960). [
Footnote 10]
With respect to cases brought in federal court involving
maritime contracts or those evidencing transactions in "commerce,"
we think that Congress has provided an explicit answer. That answer
is to be found in § 4 of the Act, which provides a remedy to a
party seeking to compel compliance with an arbitration agreement.
Under § 4, with respect to a matter within the jurisdiction of the
federal courts save for the existence of an arbitration clause, the
federal court is instructed to order arbitration to proceed once it
is satisfied that "the making of the agreement for arbitration or
the failure to comply [with the arbitration agreement] is not in
issue." [
Footnote 11]
Accordingly, if the claim is fraud in the inducement of the
arbitration clause itself -- an issue which
Page 388 U. S. 404
goes to the "making" of the agreement to arbitrate -- the
federal court may proceed to adjudicate it. [
Footnote 12] But the statutory language does not
permit the federal court to consider claims of fraud in the
inducement of the contract generally. Section 4 does not expressly
relate to situations like the present in which a stay is sought of
a federal action in order that arbitration may proceed. But it is
inconceivable that Congress intended the rule to differ depending
upon which party to the arbitration agreement first invokes the
assistance of a federal court. We hold, therefore, that, in passing
upon a § 3 application for a stay while the parties arbitrate, a
federal court may consider only issues relating to the making and
performance of the agreement to arbitrate. In so concluding, we not
only honor the plain meaning of the statute, but also the
unmistakably clear congressional purpose that the arbitration
procedure, when selected by the parties to a contract, be speedy,
and not subject to delay and obstruction in the courts.
There remains the question whether such a rule is
constitutionally permissible. The point is made that, whatever the
nature of the contract involved here, this case is in federal court
solely by reason of diversity of citizenship, and that, since the
decision in
Erie R. Co. v. Tompkins, 304 U. S.
64 (1938), federal courts are bound in diversity cases
to follow state rules of decision in matters which are
"substantive", rather than "procedural,"
Page 388 U. S. 405
or where the matter is "outcome determinative."
Guaranty
Trust Co. v. York, 326 U. S. 99
(1945). The question in this case, however, is not whether Congress
may fashion federal substantive rules to govern questions arising
in simple diversity cases.
See Bernhardt v. Polygraphic Co.,
supra, at
350 U. S. 202,
and concurring opinion at
350 U. S. 208.
Rather, the question is whether Congress may prescribe how federal
courts are to conduct themselves with respect to subject matter
over which Congress plainly has power to legislate. The answer to
that can only be in the affirmative. And it is clear beyond dispute
that the federal arbitration statute is based upon and confined to
the incontestable federal foundations of "control over interstate
commerce and over admiralty." H.R.Rep. No. 96, 68th Cong., 1st
Sess., 1 (1924); S.Rep. No. 536, 68th Cong., 1st Sess., 3 (1924).
[
Footnote 13]
Page 388 U. S. 406
In the present case, no claim has been advanced by Prima Paint
that F & C fraudulently induced it to enter into the agreement
to arbitrate "[a]ny controversy or claim arising out of or relating
to this Agreement, or the breach thereof." This contractual
language is easily broad enough to encompass Prima Paint's claim
that both execution and acceleration of the consulting agreement
itself were procured by fraud. Indeed, no claim is made that Prima
Paint ever intended that "legal" issues relating to the contract be
excluded from arbitration, or that it was not entirely free so to
contract. Federal courts are bound to apply rules enacted by
Congress with respect to matters -- here, a contract involving
commerce -- over which it has legislative power. The question which
Prima Paint requested the District Court to adjudicate
preliminarily to allowing arbitration to proceed is one
Page 388 U. S. 407
not intended by Congress to delay the granting of a § 3 stay.
Accordingly, the decision below dismissing Prima Paint's appeal
is
Affirmed.
MR. JUSTICE HARLAN: In joining the Court's opinion, I desire to
note that I would also affirm the judgment below on the basis of
Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d
402 (C.A.2d Cir.1959),
cert. granted, 362 U.S. 909,
dismissed under Rule 60, 364 U.S. 801 (1960).
[
Footnote 1]
9 U.S.C. §§ 1-14.
[
Footnote 2]
Although the letter to F C's attorneys had alleged breaches of
both consulting and purchasing agreements, and the fraudulent
inducement of both, the complaint did not refer to the earlier
purchase agreement, alleging only that Prima Paint had been
"fraudulently induced to accelerate the execution and closing
date of the [consulting] agreement herein, from October 21, 1964 to
October 7, 1964. . . ."
[
Footnote 3]
Whether a party seeking rescission of a contract on the ground
of fraudulent inducement may in New York obtain judicial resolution
of his claim is not entirely clear.
Compare Exercycle Corp. v.
Maratta, 9 N.Y.2d 329, 334, 174 N.E.2d 463, 465 (1961),
and Amerotron Corp. v. Maxwell Shapiro Woolen Co., 3
App.Div.2d 899, 162 N.Y.S.2d 214 (1957),
aff'd, 4 N.Y.2d
722, 148 N.E.2d 319 (1958),
with Fabrex Corp. v. Winard Sales
Co., 23 Misc.2d 26, 200 N.Y.S.2d 278 (1960). In light of our
disposition of this case, we need not decide the status of the
issue under New York law.
[
Footnote 4]
The meaning of "maritime transaction" and "commerce" is set
forth in § 1 of the Act.
[
Footnote 5]
See infra at
388 U. S.
403-404.
[
Footnote 6]
This conclusion is amply supported by an affidavit submitted to
the District Court by Prima Paint's own president, which read in
part:
"The agreement entered into between the parties on October 7,
1964, contemplated and intended an orderly transfer of the assets
of the defendant to the plaintiff, and further contemplated and
intended that the defendant would consult, advise, assist and help
the plaintiff so as to insure a smooth transition of manufacturing
operations to Maryland from New Jersey, together with the sales and
servicing of customer accounts and the retention of the said
customers."
The affidavit's references to a "transfer of the assets" cannot
fairly be read to mean only "expertise and know-how . . . and a
covenant not to compete," as argued by counsel for petitioner.
[
Footnote 7]
It is suggested in dissent that, despite the absence of any
language in the statute so indicating, we should construe it to
apply only to "contracts between merchants for the interstate
shipment of goods." Not only have we neither the desire nor the
warrant so to amend the statute, but we find persuasive and
authoritative evidence of a contrary legislative intent.
See,
e.g., the House Report on this legislation which proclaims
that
"[t]he control over interstate commerce [one of the bases for
the legislation] reaches not only the actual physical interstate
shipment of goods, but also contracts relating to interstate
commerce."
H.R.Rep. No. 96, 68th Cong., 1st Sess., 1 (1924). We note, too,
that were the dissent's curious narrowing of the Statute correct,
there would have been no necessity for Congress to have amended the
statute to exclude certain kinds of employment contracts.
See § 1. In any event, the anomaly urged upon us in
dissent is manifested by the present case. It would be remarkable
to say that a contract for the purchase of a single can of paint
may evidence a transaction in interstate commerce, but that an
agreement relating to the facilitation of the purchase of an entire
interstate paint business and its reestablishment and operation in
another State is not.
[
Footnote 8]
In addition to
Robert Lawrence Co., supra, see In re
Kinoshita & Co., 287 F.2d 951 (C.A.2d Cir.1961). With
respect to claims other than fraud in the inducement, the court has
followed a similar process of analysis.
See, e.g., Metro
Industrial Painting Corp. v. Terminal Constr. Co., 287 F.2d
382 (C.A.2d Cir.1961) (dispute over performance);
El Hoss
Engineer. & Transport Co. v. American Ind. Oil Co., 289
F.2d 346 (C.A.2d Cir.1961) (where, however, the court found an
intent not to submit the issue in question to arbitration).
[
Footnote 9]
The Court of Appeals has been careful to honor evidence that the
parties intended to withhold such issues from the arbitrators and
to reserve them for judicial resolution.
See El Hoss Engineer.
& Transport Co. v. American Ind. Oil Co., supra. We note
that categories of contracts otherwise within the Arbitration Act
but in which one of the parties characteristically has little
bargaining power are expressly excluded from the reach of the Act.
See § 1.
[
Footnote 10]
These cases and others are discussed in a recent Note,
Commercial Arbitration in Federal Courts, 20 Vand.L.Rev. 607,
622-625 (1967).
[
Footnote 11]
Section 4 reads in part:
"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."
[
Footnote 12]
This position is consistent both with the decision in
Moseley v. Electronic Facilities, 374 U.
S. 167,
374 U. S. 171,
374 U. S. 172
(1963), and with the statutory scheme. As the "saving clause" in §
2 indicates, the purpose of Congress in 1925 was to make
arbitration agreements as enforceable as other contracts, but not
more so. To immunize an arbitration agreement from judicial
challenge on the ground of fraud in the inducement would be to
elevate it over other forms of contract -- a situation inconsistent
with the "saving clause."
[
Footnote 13]
It is true that the Arbitration Act was passed 13 years before
this Court's decision in
Erie R. Co. v. Tompkins, supra,
brought to an end the regime of
Swift v.
Tyson, 16 Pet. 1 (1842), and that, at the time of
enactment, Congress had reason to believe that it still had power
to create federal rules to govern questions of "general law"
arising in simple diversity cases -- at least, absent any state
statute to the contrary. If Congress relied at all on this
"oft-challenged" power,
see Erie R. Co., 304 U.S. at
304 U. S. 69, it
was only supplementary to the admiralty and commerce powers, which
formed the principal bases of the legislation. Indeed, Congressman
Graham, the bill's sponsor in the House, told his colleagues that
it "only affects contracts relating to interstate subjects and
contracts in admiralty." 65 Cong.Rec.1931 (1924). The Senate Report
on this legislation similarly indicated that the bill "[relates] to
maritime transactions and to contracts in interstate and foreign
commerce." S.Rep. No. 536, 68th Cong., 1st Sess., 3 (1924).
Non-congressional sponsors of the legislation agreed. As Mr.
Charles L. Bernheimer, chairman of the Arbitration Committee of the
New York Chamber of Commerce, told the Senate subcommittee, the
proposed legislation
"follows the lines of the New York arbitration law, applying it
to the fields wherein there is Federal jurisdiction. These fields
are in admiralty and in foreign and interstate commerce."
Hearing on S. 4213 and S. 4214, before the Subcommittee of the
Senate Committee on the Judiciary, 67th Cong., 4th Sess., 2 (1923).
In the joint House and Senate hearings, Mr. Bernheimer answered
"Yes; entirely," to the statement of the chairman, Senator
Sterling, that "What you have in mind is that this proposed
legislation relates to contracts arising in interstate commerce."
Joint Hearings on S. 1005 and H.R. 646 before the Subcommittees of
the Committees on the Judiciary, 68th Cong., 1st Sess., 7 (1924).
Mr. Julius Henry Cohen, draftsman for the American Bar Association
of the proposed bill, said the sponsor's goals were:
"[F]irst . . . to get a State statute,
and then to get a
Federal law to cover interstate and foreign commerce and
admiralty, and, third, to get a treaty with foreign
countries."
Joint Hearings,
supra, at 16 (emphasis added).
See
also Joint Hearings,
supra, at 27-28 (statement of
Mr. Alexander Rose). Mr. Cohen did submit a brief to the
Subcommittee urging a jurisdictional base broader than the commerce
and admiralty powers, Joint Hearings,
supra, at 37-38, but
there is no indication in the statute or in the legislative history
that this invitation to go beyond those powers was accepted, and
his own testimony took a much narrower tack.
MR. JUSTICE BLACK, with whom MR. JUSTICE DOUGLAS and MR. JUSTICE
STEWART join, dissenting.
The Court here holds that the United States Arbitration Act, 9
U.S.C. § 1-14, as a matter of federal substantive law, compels a
party to a contract containing a written arbitration provision to
carry out his "arbitration agreement" even though a court might,
after a fair trial, hold the entire contract -- including the
arbitration agreement -- void because of fraud in the inducement.
The Court holds, what is to me fantastic, that the legal issue of a
contract's voidness because of fraud is to be decided by persons
designated to arbitrate factual controversies arising out of a
valid contract between the parties. And the arbitrators who the
Court holds are to adjudicate the legal validity of the contract
need not even be lawyers, and in all probability will be
nonlawyers, wholly unqualified to decide legal issues, and, even if
qualified to apply the law, not bound to do so. I am by no means
sure that thus forcing a person to forgo his opportunity to try his
legal issues in the courts where, unlike the situation in
arbitration, he may have a jury trial and right to appeal, is not a
denial of due process of law. I am satisfied, however, that
Congress did not impose any such procedures in the Arbitration Act.
And I am fully satisfied that a
Page 388 U. S. 408
reasonable and fair reading of that Act's language and history
shows that both Congress and the framers of the Act were at great
pains to emphasize that nonlawyers designated to adjust and
arbitrate factual controversies arising out of valid contracts
would not trespass upon the courts' prerogative to decide the legal
question of whether any legal contract exists upon which to base an
arbitration.
I
The agreement involved here is a consulting agreement in which
Flood & Conklin agreed to perform certain services for, and not
to compete with, Prima Paint. The agreement contained an
arbitration clause providing that "[a]ny controversy or claim
arising out of or relating to this Agreement . . . shall be settled
by arbitration in the City of New York." F & C, contending that
Prima had failed to make a payment under the contract, sent Prima a
"Notice of Intention to Arbitrate" pursuant to the New York
Arbitration Act. [
Footnote 2/1]
Invoking diversity jurisdiction, Prima brought this action in
federal district court to rescind the entire consulting agreement
on the ground of fraud. The fraud allegedly consisted of F &
C's misrepresentation, at the time the contract was made, that it
was solvent and able to perform the agreement, while, in fact, it
was completely insolvent. Prima alleged that it would not have made
any contract at all with F & C but for this misrepresentation.
Prima simply contended that there was never a meeting of minds
between the parties. F & C moved to stay Prima's lawsuit for
rescission pending arbitration of the fraud issue raised by Prima.
The lower courts, relying on the
Page 388 U. S. 409
Second Circuit's decision in
Robert Lawrence Co. v.
Devonshire Fabrics, Inc., 271 F.2d 402,
cert.
granted, 362 U.S. 909,
dismissed, 364 U.S. 801, held
that, as a matter of "national substantive law," the arbitration
clause in the contract is "separable" from the rest of the
contract, and that allegations that go to the validity of the
contract in general, as opposed to the arbitration clause in
particular, are to be decided by the arbitrator, not the court.
The Court today affirms this holding for three reasons, none of
which is supported by the language or history of the Arbitration
Act. First, the Court holds that, because the consulting agreement
was intended to supplement a separate contract for the interstate
transfer of assets, it is itself a "contract evidencing a
transaction involving commerce," the language used by Congress to
describe contracts the Act was designed to cover. But in light of
the legislative history which indicates that the Act was to have a
limited application to contracts between merchants for the
interstate shipment of goods, [
Footnote
2/2] and in light of the express failure of Congress to use
language
Page 388 U. S. 410
making the Act applicable to all contracts which "affect
commerce," the statutory language Congress normally uses when it
wishes to exercise its full powers over commerce, [
Footnote 2/3] I am not at all certain that the Act
was intended to apply to this consulting agreement. Second, the
Court holds that the language of § 4 of the Act provides an
"explicit answer" to the question of whether the arbitration clause
is "separable" from the rest of the contract in which it is
contained. Section 4 merely provides that the court must order
arbitration if it is "satisfied that the making of the agreement
for arbitration . . . is not in issue." That language, considered
alone, far from providing an "explicit answer," merely poses the
further question of what kind of allegations put the making of the
arbitration agreement in issue. Since both the lower courts assumed
that, but for the federal Act, New York law might apply, and that,
under New York law, a general allegation of fraud in the inducement
puts into issue the making of the agreement to arbitrate
(considered inseparable
Page 388 U. S. 411
under New York law from the rest of the contract), [
Footnote 2/4] the Court necessarily holds
that federal law determines whether certain allegations put the
making of the arbitration agreement in issue. And the Court
approves the Second Circuit's fashioning of a federal separability
rule which overrides state law to the contrary. The Court thus
holds that the Arbitration Act, designed to provide merely a
procedural remedy which would not interfere with state substantive
law, authorizes federal courts to fashion a federal rule to make
arbitration clauses "separable" and valid. And the Court approves a
rule which is not only contrary to state law, but contrary to the
intention of the parties and to accepted principles of contract law
-- a rule which indeed elevates arbitration provisions above all
other contractual provisions. As the Court recognizes, that result
was clearly not intended by Congress. Finally, the Court summarily
disposes of the problem raised by
Erie R. Co. v. Tompkins,
304 U. S. 64,
recognized as a serious constitutional problem in
Bernhardt v.
Polygraphic Co., 350 U. S. 198, by
insufficiently supported assertions that it is "clear beyond
dispute" that Congress based the Arbitration Act on its power to
regulate commerce, and that, "[i]f Congress relied at all on" its
power to create federal law for diversity cases, such reliance "was
only supplementary."
Page 388 U. S. 412
II
Let us look briefly at the language of the Arbitration Act
itself as Congress passed it. Section 2, the key provision of the
Act, provides that
"[a] written provision in . . . a contract . . . involving
commerce to settle by arbitration a controversy thereafter arising
out of such contract . . . shall be valid, irrevocable, and
enforceable,
save upon such grounds as exist at law or in
equity for the revocation of any contract."
(Emphasis added.) Section 3 provides that,
"[i]f any suit . . . be brought . . .
upon any issue
referable to arbitration under an agreement in writing for
such arbitration, the court . . .
upon being satisfied that the
issue involved in such suit . . . is referable to arbitration under
such an agreement, shall . . . stay the trial of the action
until such arbitration has been had. . . . [
Footnote 2/5]"
(Emphasis added.) The language of these sections could not, I
think, raise doubts about their meaning except to someone anxious
to find doubts. They simply mean this: an arbitration agreement is
to be enforced by a federal court unless the court, not the
arbitrator, finds grounds "at law or in equity for the revocation
of any contract." Fraud, of course, is one of the most common
grounds for revoking a contract. If the contract was procured by
fraud, then, unless the defrauded party elects to affirm it, there
is absolutely no contract, nothing to be arbitrated. Sections 2 and
3 of the Act assume the existence of a valid contract. They merely
provide for enforcement where such a valid contract
Page 388 U. S. 413
exists. These provisions were plainly designed to protect a
person against whom arbitration is sought to be enforced from
having to submit his legal issues as to validity of the contract to
the arbitrator. The legislative history of the Act makes this
clear. Senator Walsh of Montana, in hearings on the bill in 1923,
observed,
"The court has got to hear and determine whether there is an
agreement of arbitration, undoubtedly, and it is open to all
defenses, equitable and legal, that would have existed at law. . .
. [
Footnote 2/6]"
Mr. Piatt, who represented the American Bar Association, which
drafted and supported the Act, was even more explicit: "I think
this will operate something like an injunction process, except
where he would attack it on the ground of fraud." [
Footnote 2/7] And then Senator Walsh replied:
"If he should attack it on the ground of fraud,
to rescind
the whole thin, . . . I presume that it merely [is] a question
of whether he did make the arbitration agreement or not, . . . and
then he would possibly set up that he was misled about the contract
and entered into it by mistake. . . . [
Footnote 2/8]"
It is evident that Senator Walsh was referring to situations in
which the validity of the entire contract is called into question.
And Mr. Bernheimer, who represented one of the chambers of commerce
in favor of the bill, assured the Senate subcommittee that "[t]he
constitutional right to jury trial is adequately safeguarded" by
the Act. [
Footnote 2/9] Mr. Cohen,
the American Bar Association's draftsman of the bill, assured the
members of Congress that the Act would not impair the right to a
jury trial, because it deprives a person of that right only when he
has voluntarily and validly waived it by agreeing to submit
certain
Page 388 U. S. 414
disputes to arbitration. [
Footnote
2/10] The court and a jury are to determine both the legal
existence and scope of such an agreement. The members of Congress
revealed an acute awareness of this problem. On several occasions,
they expressed opposition to a law which would enforce even a valid
arbitration provision contained in a contract between parties of
unequal bargaining power. Senator Walsh cited insurance,
employment, construction, and shipping contracts as routinely
containing arbitration clauses and being offered on a "take it or
leave it" basis to captive customers or employees. [
Footnote 2/11] He noted that such
contracts "are really not voluntarily [
sic] things at
all," because "there is nothing for the man to do except to sign
it, and then he surrenders his right to have his case tried by the
court. . . ." [
Footnote 2/12] He
was emphatically assured by the supporters of the bill that it was
not their intention to cover such cases. The significant thing is
that Senator Walsh was not thinking in terms of the arbitration
provisions being "separable" parts of such contracts, parts which
should be enforced without regard to why the entire contracts in
which they were contained were agreed to. The issue for him was not
whether an arbitration provision in a contract was made, but why,
in the context of the entire contract and the circumstances
Page 388 U. S. 415
of the parties, the entire contract was made. That is precisely
the issue that a general allegation of fraud in the inducement
raises: Prima contended that it would not have executed any
contract, including the arbitration clause, if it were not for the
fraudulent representations of F & C. Prima's agreement to an
arbitration clause in a contract obtained by fraud was no more
"voluntary" than an insured's or employee's agreement to an
arbitration clause in a contract obtained by superior bargaining
power.
Finally, it is clear to me from the bill's sponsors'
understanding of the function of arbitration that they never
intended that the issue of fraud in the inducement be resolved by
arbitration. They recognized two special values of arbitration: (1)
the expertise of an arbitrator to decide factual questions in
regard to the day-to-day performance of contractual obligations,
[
Footnote 2/13] and (2) the speed
with which arbitration, as contrasted to litigation, could resolve
disputes over performance of contracts, and thus mitigate the
damages and allow the parties to continue performance under the
contracts. [
Footnote 2/14]
Arbitration serves neither of these functions where a contract is
sought to be rescinded on the ground of fraud. On the one hand,
courts have far more expertise in resolving legal issues which go
to the validity of a contract than
Page 388 U. S. 416
do arbitrators. [
Footnote
2/15] On the other hand, where a party seeks to rescind a
contract and his allegation of fraud in the inducement is true, an
arbitrator's speedy remedy of this wrong should never result in
resumption of performance under the contract. And if the contract
were not procured by fraud, the court, under the summary trial
procedures provided by the Act, may determine with little delay
that arbitration must proceed. The only advantage of submitting the
issue of fraud to arbitration is for the arbitrators. Their
compensation corresponds to the volume of arbitration they perform.
If they determine that a contract is void because of fraud, there
is nothing further for them to arbitrate. I think it raises serious
questions of due process to submit to an arbitrator an issue which
will determine his compensation.
Tumey v. Ohio,
273 U. S. 510.
III
With such statutory language and legislative history, one can
well wonder what is the basis for the Court's surprising departure
from the Act's clear statement which expressly excepts from
arbitration "such grounds as exist at law or in equity for the
revocation of any contract." Credit for the creation of a
rationalization to justify this statutory mutilation apparently
must go to the Second Circuit's opinion in
Robert Lawrence Co.
v. Devonshire Fabrics, Inc., supra. In that decision, Judge
Medina undertook to resolve the serious constitutional problem
which this Court had avoided in
Bernhardt by holding the
Act inapplicable to a diversity case involving an intrastate
contract. That problem was whether the Arbitration
Page 388 U. S. 417
Act, passed 13 years prior to
Erie R. Co. v. Tompkins,
304 U. S. 64, could
be constitutionally applied in a diversity case even though its
application would require the federal court to enforce an agreement
to arbitrate which the state court across the street would not
enforce.
Bernhardt's holding that arbitration is "outcome
determinative," 350 U.S. at
350 U. S. 203,
and its recognition that there would be unconstitutional
discrimination if an arbitration agreement were enforceable in
federal court but not in the state court,
id. at
350 U. S. 204,
posed a choice of two alternatives for Judge Medina. If he held
that the Arbitration Act rested solely on Congress' power, widely
recognized in 1925 but negated in
Erie, to prescribe
general federal law applicable in diversity cases, he would be
compelled to hold the Act unconstitutional as applied to diversity
cases under
Erie and
Bernhardt. [
Footnote 2/16] If he held that the Act rested on
Congress' power to enact substantive law governing interstate
commerce, then the
Erie-Bernhardt problem would be
avoided, and the application of the Act to diversity cases
involving commerce could be saved.
The difficulty in choosing between these two alternatives was
that neither, quite contrary to the Court's position, was "clear
beyond dispute" upon reference to the Act's legislative history.
[
Footnote 2/17] As to the first,
it is clear that Congress intended the Act to be applicable in
diversity cases involving interstate commerce and maritime
Page 388 U. S. 418
contracts, [
Footnote 2/18] and
to hold the Act inapplicable in diversity cases would be severely
to limit its impact. As to the second alternative, it is clear that
Congress, in passing the Act, relied primarily on its power to
create general federal rules to govern federal courts. Over and
over again, the drafters of the Act assured Congress:
"The statute establishes a procedure in the Federal courts. . .
. It rests upon the constitutional provision by which Congress is
authorized to establish and control inferior Federal courts. So far
as congressional acts relate to the procedure in the Federal
courts, they are clearly within the congressional power. [
Footnote 2/19]"
And again:
"The primary purpose of the statute is to make enforceable in
the Federal courts such agreements for arbitration, and, for this
purpose, Congress rests solely upon its power to prescribe
Page 388 U. S. 419
the jurisdiction and duties of the Federal courts. [
Footnote 2/20]"
One cannot read the legislative history without concluding that
this power, and not Congress' power to legislate in the area of
commerce, was the "principal basis" of the Act. [
Footnote 2/21] Also opposed to the view that
Congress intended to create substantive law to govern commerce and
maritime transactions are the frequent statements in the
legislative history that the Act was not intended to be "the source
of . . . substantive law." [
Footnote
2/22] As Congressman Graham explained the Act to the House:
"It does not involve any new principle of law except to provide
a simple method . . . in order to give enforcement. . . .
It
creates no new legislation, grants no new rights, except a
remedy to enforce an agreement in commercial contracts and
in
Page 388 U. S. 420
admiralty contracts."
65 Cong.Rec.1931 (1924). (Emphasis added.) Finally, there are
clear indications in the legislative history that the Act was not
intended to make arbitration agreements enforceable in state courts
[
Footnote 2/23] or to provide an
independent federal question basis for jurisdiction in federal
courts apart from diversity jurisdiction. [
Footnote 2/24] The absence of both of these effects --
which normally follow from legislation of federal substantive law
-- seems to militate against the view that Congress was creating a
body of federal substantive law.
Suffice it to say that Judge Medina chose the alternative of
construing the Act to create federal substantive law in order to
avoid its emasculation under
Erie and
Bernhardt.
But Judge Medina was not content to stop there with a holding that
the Act makes arbitration agreements in a contract involving
commerce enforceable in federal court even though the basis of
jurisdiction is diversity and state law does not enforce such
Page 388 U. S. 421
agreements. The problem in
Robert Lawrence, as here,
was not whether an arbitration agreement is enforceable, for the
New York Arbitration Act, upon which the federal Act was based,
enforces an arbitration clause in the same terms as the federal
Act. The problem in
Robert Lawrence, and here, was,
rather, whether the arbitration clause in a contract induced by
fraud is "separable." Under New York law, it was not: general
allegations of fraud in the inducement would, as a matter of state
law, put in issue the making of the arbitration clause. So, to
avoid this application of state law, Judge Medina went further than
holding that the federal Act makes agreements to arbitrate
enforceable: he held that the Act creates a "body of law" that
"encompasses questions of interpretation and construction as
well as questions of validity, revocability and enforceability of
arbitration agreements affecting interstate commerce or maritime
affairs."
271 F.2d at 409.
Thus, 35 years after the passage of the Arbitration Act, the
Second Circuit completely rewrote it. Under its new formulation, §
2 now makes arbitration agreements enforceable "save upon such
grounds as exist at federal law for the revocation of any
contract." And under § 4, before enforcing an arbitration
agreement, the district court must be satisfied that "the making of
the agreement for arbitration,
as a matter of federal law,
is not in issue." And then, when Judge Medina turned to the task of
"the formulation of the principles of federal substantive law
necessary for this purpose," 271 F.2d at 409, he formulated the
separability rule which the Court today adopts -- not because § 4
provided this rule as an "explicit answer," not because he looked
to the intention of the parties, but because of his notion that the
separability rule would further a "liberal policy of promoting
arbitration." 271 F.2d at 410. [
Footnote 2/25]
Page 388 U. S. 422
Today, without expressly saying so, the Court does precisely
what Judge Medina did in
Robert Lawrence. It is not
content to hold that the Act does all it was intended to do: make
arbitration agreements enforceable in federal courts if they are
valid and legally existent under state law. The Court holds that
the Act gives federal courts the right to fashion federal law,
inconsistent with state law, to determine whether an arbitration
agreement was made and what it means. Even if Congress intended to
create substantive rights by passage of the Act, I am wholly
convinced that it did not intend to create such a sweeping body of
federal substantive law completely to take away from the States
their power to interpret contracts made by their own citizens in
their own territory.
First. The legislative history is clear that Congress
intended no such thing. Congress assumed that arbitration
agreements were recognized as valid by state and federal law.
[
Footnote 2/26] Courts would give
damages for their breach, but would simply refuse to specifically
enforce them. Congress thus had one limited purpose in mind: to
provide a party to such an agreement "a remedy formerly denied
him." [
Footnote 2/27]
"Arbitration under the Federal . . . [statute] is simply a new
procedural remedy." [
Footnote
2/28] The Act "creates no new legislation, grants no new
rights, except a remedy to enforce. . . ." [
Footnote 2/29] The drafters of the Act were very
explicit:
"A Federal statute providing for the enforcement of arbitration
agreements does relate solely to procedure
Page 388 U. S. 423
of the Federal courts.
It is no infringement upon the right
of each State to decide for itself what contracts shall or shall
not exist under its laws. To be sure,
whether or not a
contract exists is a question of the substantive law of the
jurisdiction wherein the contract was made."
Committee on Commerce, Trade & Commercial Law, The United
States Arbitration Law and Its Application, 11 A.B.A.J. 153, 154.
(Emphasis added.)
"Neither is it true that such a statute, declaring arbitration
agreements to be valid, is the source of their existence as a
matter of substantive law. . . ."
"So far as the present law declares simply the policy of
recognizing and enforcing arbitration agreements in the Federal
courts, it does not encroach upon the province of the individual
States."
Cohen & Dayton, The New Federal Arbitration Law, 12
Va.L.Rev. 265, 276-277. All this indicates that the § 4 inquiry of
whether the making of the arbitration agreement is in issue is to
be determined by reference to state law, not federal law formulated
by judges for the purpose of promoting arbitration.
Second. The avowed purpose of the Act was to place
arbitration agreements "upon the same footing as other contracts."
[
Footnote 2/30] The separability
rule which the Court applies to an arbitration clause does not
result in equality between it and other clauses in the contract. I
had always thought that a person who attacks a contract on the
ground of fraud and seeks to rescind it has to seek rescission of
the whole, not tidbits, and is not given the option of denying the
existence of some clauses and affirming the existence of others.
Here, F & C agreed both to perform consulting services for
Prima and not to
Page 388 U. S. 424
compete with Prima. Would any court hold that those two
agreements were separable, even though Prima in agreeing to pay F
& C not to compete did not directly rely on F & C's
representations of being solvent? The simple fact is that Prima
would not have agreed to the covenant not to compete or to the
arbitration clause but for F & C's fraudulent promise that it
would be financially able to perform consulting services. As this
Court held in
United States v. Bethlehem Steel Corp.,
315 U. S. 289,
315 U. S.
298:
"Whether a number of promises constitute one contract [and are
non-separable] or more than one is to be determined by
inquiring"
"whether the parties assented to all the promises as a single
whole, so that there would have been no bargain whatever, if any
promise or set of promises were struck out."
Under this test, all of Prima's promises were part of one,
inseparable contract.
Third. It is clear that had this identical contract
dispute been litigated in New York courts under its arbitration
act, Prima would not be required to present its claims of fraud to
the arbitrator if the state rule of nonseparability applies. The
Court here does not hold today, as did Judge Medina, [
Footnote 2/31] that the body of federal
substantive law created by federal Judges under the Arbitration Act
is required to be applied by state courts. A holding to that effect
-- which the Court seems to leave up in the air -- would flout the
intention of the framers of the Act. [
Footnote 2/32] Yet, under this Court's opinion today --
that the Act supplies not only the remedy of enforcement, but a
body of federal doctrines to determine the validity of an
arbitration agreement -- failure to make the Act
Page 388 U. S. 425
applicable in state courts would give rise to "forum shopping"
and an unconstitutional discrimination that both
Erie and
Bernhardt were designed to eliminate. These problems are
greatly reduced if the Act is limited, as it should be, to its
proper scope: the mere enforcement in federal courts of valid
arbitration agreements.
IV
The Court's summary treatment of these issues has made it
necessary for me to express my views at length. The plain purpose
of the Act as written by Congress was this, and no more: Congress
wanted federal courts to enforce contracts to arbitrate, and
plainly said so in the Act. But Congress also plainly said that
whether a contract containing an arbitration clause can be
rescinded on the ground of fraud is to be decided by the courts,
and not by the arbitrators. Prima here challenged in the courts the
validity of its alleged contract with F & C as a whole, not in
fragments. If there has never been any valid contract, then there
is not now and never has been anything to arbitrate. If Prima's
allegations are true, the sum total of what the Court does here is
to force Prima to arbitrate a contract which is void and
unenforceable before arbitrators who are given the power to make
final legal determinations of their own jurisdiction, not even
subject to effective review by the highest court in the land. That
is not what Congress said Prima must do. It seems to be what the
Court thinks would promote the policy of arbitration. I am
completely unable to agree to this new version of the Arbitration
Act, a version which its own creator in
Robert Lawrence
practically admitted was judicial legislation. Congress might
possibly have enacted such a version into law had it been able to
foresee subsequent legal events, but I do not think this Court
should do so.
I would reverse this case.
[
Footnote 2/1]
N.Y.Civ.Prac. § 7503 (1963) provides that, once a party is
served with a notice of intention to arbitrate,
"unless the party served applies to stay the arbitration within
ten days after such service he shall thereafter be precluded from
objecting that a valid agreement was not made. . . ."
[
Footnote 2/2]
The principal support for the Act came from trade associations
dealing in groceries and other perishables and from commercial and
mercantile groups in the major trading centers. 50 A.B.A.Rep. 357
(1925). Practically all who testified in support of the bill before
the Senate subcommittee in 1923 explained that the bill was
designed to cover contracts between people in different States who
produced, shipped, bought, or sold commodities. Hearing on S. 4213
and S. 4214 before the Subcommittee of the Senate Committee on the
Judiciary, 67th Cong., 4th Sess., 3, 7, 9, 10 (1923). The same
views were expressed in the 1924 hearings. When Senator Sterling
suggested, "What you have in mind is that this proposed legislation
relates to contracts arising in interstate commerce," Mr.
Bernheimer, a chief exponent of the bill, replied: "Yes; entirely.
The farmer who will sell his carload of potatoes, from Wyoming, to
a dealer in the State of New Jersey, for instance." Joint Hearings
on S. 1005 and H.R. 646 before the Subcommittees of the Committees
on the Judiciary, 68th Cong., 1st Sess., 7.
See also id.
at 27.
[
Footnote 2/3]
In some Acts, Congress uses broad language and defines commerce
to include even that which "affects" commerce. Federal Employers'
Liability Act, 35 Stat. 65, § 1, as amended, 45 U.S.C. § 51;
National Labor Relations Act, 49 Stat. 450, § 2, as amended, 29
U.S.C. § 152(7). In other instances, Congress has chosen more
restrictive language. Fair Labor Standards Act of 1938, 52 Stat.
1062, § 6, as amended, 29 U.S.C. § 206. Prior to this case, this
Court has always made careful inquiry to assure itself that it is
applying a statute with the coverage that Congress intended, so
that the meaning in that statute of "commerce" will be neither
expanded nor contracted. The Arbitration Act is an example of
carefully limited language. It covers only those contracts
"involving commerce," and nowhere is there a suggestion that it is
meant to extend to contracts "affecting commerce." The Act not only
uses narrow language, but also is completely without any
declaration of some national interest to be served or some
nationwide comprehensive scheme of regulation to be created, and
this absence suggests that Congress did not intend to exert its
full power over commerce.
[
Footnote 2/4]
Although F & C requested arbitration pursuant to New York
law,
388
U.S. 395fn2/1|>n. 1,
supra, it is not entirely
clear that New York law would apply in absence of the federal Act.
And, as the Court points out, it is not entirely clear whether New
York courts would consider Prima's promise to arbitrate inseparable
from the rest of the contract. But, since Robert Lawrence held and
the lower courts here assumed that application of New York law
would produce a different result, and since the Court deems the
status of state law immaterial to this case, I have assumed
throughout this opinion that, in the absence of the Arbitration
Act, Prima would have been able to obtain judicial resolution of
its fraud allegations under New York law.
[
Footnote 2/5]
This section, unlike § 4, is expressly applicable to situations,
like the present one, where a defendant in a case already pending
in federal court moves for a stay of the lawsuit. In finding an
"explicit answer" in a provision "not expressly" applicable, the
Court almost completely ignores the language of § 3 and the proviso
to § 2, a section which
Bernhardt held to "define the
field in which Congress was legislating." 350 U.S. at
350 U. S.
201.
[
Footnote 2/6]
Senate Hearing,
supra, at 5.
[
Footnote 2/7]
Ibid.
[
Footnote 2/8]
Ibid.
[
Footnote 2/9]
Senate Hearing,
supra, at 2.
[
Footnote 2/10]
"The one constitutional provision we have got is that you have a
right of trial by jury. But you can waive that. And you can do that
in advance. Ah, but the question whether you waive it or not
depends on whether that is your signature to the paper, or whether
you authorized that signature, or whether the paper is a valid
paper or not, whether it was delivered properly. So there is a
question there which you have not waived the right of trial by jury
on."
Joint Hearings,
supra, at 17. It seems quite clear to
me that Mr. Cohen was referring to a jury trial of allegations
challenging the validity of the entire contract.
[
Footnote 2/11]
Senate Hearing,
supra, at 9-11.
See also Joint
Hearings,
supra, at 15.
[
Footnote 2/12]
Senate Hearing,
supra, at 9.
[
Footnote 2/13]
"Not all questions arising out of contracts ought to be
arbitrated. It is a remedy peculiarly suited to the disposition of
the ordinary disputes between merchants as to questions of fact --
quantity, quality, time of delivery, compliance with terms of
payment, excuses for nonperformance, and the like. It has a place
also in the determination of the simpler questions of law -- the
questions of law which arise out of these daily relations between
merchants as to the passage of title, the existence of warranties,
or the questions of law which are complementary to the questions of
fact which we have just mentioned."
Cohen & Dayton, The New Federal Arbitration Law, 12
Va.L.Rev. 265, 281 (1926).
[
Footnote 2/14]
See, e.g., Senate Hearing,
supra, at 3.
[
Footnote 2/15]
"It [arbitration] is not a proper remedy for . . . questions
with which the arbitrators have no particular experience and which
are better left to the determination of skilled judges with a
background of legal experience and established systems of law."
Cohen & Dayton,
supra, at 281.
[
Footnote 2/16]
Mr. Justice Frankfurter chose this alternative in his concurring
opinion in
Bernhardt, 350 U.S. at
350 U. S. 208,
and even the Court there suggested that its pre-
Erie
decision in
Shanferoke Coal & Supply Corp. v. Westchester
Service Corp., 293 U. S. 449,
which applied the Act to an interstate contract in a diversity
case, might be decided differently under the
Bernhardt
holding that arbitration is outcome determinative, 350 U.S. at
350 U. S.
202.
[
Footnote 2/17]
For an analysis of these alternatives,
see generally
Symposium, Arbitration and the Courts, 58 Nw.U.L.Rev. 466 (1963);
Note, 69 Yale L.J. 847 (1960).
[
Footnote 2/18]
The House Report accompanying the Act expressly stated:
"The purpose of this bill is to make valid and enforceable
agreements for arbitration contained in contracts involving
interstate commerce . . .
or which may be the subject of
litigation in the Federal courts."
H.R.Rep. No. 96, 68th Cong., 1st Sess., 1 (1924) (emphasis
added). Mr. Cohen and a colleague, commenting on the Act after its
passage, explained:
"The Federal courts are given jurisdiction to enforce such
agreements whenever, under the Judicial Code, they would have had
jurisdiction. . . . Where the basis of jurisdiction is diversity of
citizenship, the dispute must involve $3000 as in suits at
law."
Cohen & Dayton,
supra, at 267.
See, e.g.,
Committee on Commerce, Trade & Commercial Law, The United
States Arbitration Law and Its Application, 11 A.B.A.J. 153, 156;
Note, 20 Ill.L.Rev. 111 (1925). The bill, as originally drafted by
the American Bar Association, 49 A.B.A. Rep. 51-52 (1924), and
introduced in the House, H.R. No. 646, 68th Cong., 1st Sess.
(1924), 65 Cong.Rec. 11081-11082 (1924), expressly provided in §
8
"[t]hat if the basis of jurisdiction be diversity of citizenship
. . . the district court . . . shall have jurisdiction . . .
hereunder notwithstanding the amount in controversy is
unascertained. . . ."
Though that provision was deleted by the Senate, the omission
was not intended substantially to alter the law. 66 Cong.Rec. 3004
(1925).
[
Footnote 2/19]
Committee on Commerce, Trade & Commercial Law,
supra, 11 A.B.A.J. at 154.
[
Footnote 2/20]
Joint Hearings,
supra, at 38.
[
Footnote 2/21]
Although Mr. Cohen, in a brief filed with Congress, suggested
that Congress might rely on its power over commerce, he added that
there were "questions which apparently can be raised in this
connection,"
id. at 38, and expressly denied that "the
proposed law depends for its validity upon the exercise of the
interstate commerce and admiralty powers of Congress,"
id.
at 37. And when he testified, he made the point clearer:
"So what we have done . . . [in New York] is that we have . . .
made it a part of our judicial machinery. That is what we have
done. But it cannot be done under our constitutional form of
government and cover the great fields of commerce until you
gentlemen do it, in the exercise of your power to confer
jurisdiction on the Federal courts. The theory on which you do this
is that you have the right to tell the Federal courts how to
proceed."
Id. at 17.
The legislative history which the Court recites to support its
assertion that Congress relied principally on its power over
commerce consists mainly of statements that the Act was designed to
cover only contracts in commerce, and that is certainly true. But
merely because the Act was designed to enforce arbitration
agreements only in contracts in commerce does not mean that
Congress was primarily relying on its power over commerce in
supplying that remedy of enforceability.
[
Footnote 2/22]
Cohen & Dayton,
supra, at 276.
[
Footnote 2/23]
See, e.g., Cohen & Dayton,
supra, at 277;
Committee on Commerce, Trade & Commercial Law,
supra,
at 155, 156. Mr. Rose, representing the Arbitration Society of
America, suggested that the Act might have the beneficial effect of
encouraging States to enact similar laws, Joint Hearings,
supra, at 28, but Mr. Cohen assured Congress:
"Nor can it be said that the Congress of the United States,
directing its own courts . . . , would infringe upon the provinces
or prerogatives of the States. . . . [T]he question of the
enforcement relates to the law of remedies, and not to substantive
law. The rule must be changed for the jurisdiction in which the
agreement is sought to be enforced. . . . There is no disposition
therefore by means of the Federal bludgeon to force an individual
State into an unwilling submission to arbitration enforcement."
Id. at 390.
[
Footnote 2/24]
This seems implicit in § 3's provision for a stay by a "court in
which such suit is pending" and § 4's provision that enforcement
may be ordered by
"any United States district court which, save for such
agreement, would have jurisdiction under Title 28, in a civil
action or in admiralty of the subject matter of a suit arising out
of the controversy between the parties."
[
Footnote 2/25]
It should be noted that the New York courts apparently do not
find any inconsistency between application of a nonseparability
rule and that State's policy of enforcing arbitration agreements, a
policy embodied in a statute from which the federal Act was
copied.
[
Footnote 2/26]
S.Rep. No. 536, 68th Cong., 1st Sess., 2 (1924); Joint Hearings,
supra, at 38.
[
Footnote 2/27]
Cohen & Dayton,
supra, at 271.
[
Footnote 2/28]
Id. at 279.
[
Footnote 2/29]
65 Cong.Rec.1931 (1924).
[
Footnote 2/30]
H.R.Rep. No. 96, 68th Cong., 1st Sess. (1924).
[
Footnote 2/31]
"This is a declaration of national law equally applicable in
state or federal courts." 271 F.2d at 407.
[
Footnote 2/32]
See 388
U.S. 395fn2/23|>n. 23,
supra.