Marchant v. Mead-Morrison Manufacturing Co.

By contract dated May 25, 1922, Mead-Morrison Manufacturing Company, a Maine corporation, agreed to sell to Bear Tractors, Inc., a New York corporation, 500 tractors to be manufactured according to specifications and to be delivered in installments. There was an arbitration clause in the following form: “ If for any reason any controversy or difference of opinion shall arise as to the construction of the terms and conditions of this contract, or as to its performance, it is mutually agreed that the matter in dispute shall be settled by arbitration, each party to select an arbitrator, and the two so selected to select a third, and the decision of the majority of such arbitrators given after a full hearing and consideration of the matter in controversy shall be final and binding upon the parties, and a condition precedent to any suit upon or by reason of any such controversy or difference. The cost of such arbitration shall be paid by the party against whom the majority of such arbitrators render such decis'on.” The contract was closed in East Boston, Mass., and there the tractors were to be manufactured and delivery was to be made.

Bear Tractors, Inc., the buyer, became bankrupt in

There followed a long contest with twenty-seven hearings, thousands of pages of testimony, and hundreds of exhibits. At its close a majority of the arbitrators filed a report to the effect that the seller had made default in the performance of the contract, and that its default had brought about the bankruptcy of the buyer with a loss of all the capital invested in the enterprise. The capital thus lost, excluding moneys not invested in reliance on the contract, was fixed in the report at $849,006.76. The award was for that amount with the costs of the proceeding.

From the judgment entered on the award there was an

Cross-appeals are now before us. The seller, the defendant in the arbitration, is dissatisfied because the award has been allowed to stand as an adjudication of its fault. The buyer, the plaintiff in the arbitration, is dissatisfied because the damages, if there have been any, must be assessed and recovered through proceedings in the courts.

(1) The appeal by the defendant is a challenge to the order directing arbitration. The challenge must be heeded even now if the order is merely void, an assumption of unlicensed power. The award can be no stronger than the prop on which it rests. The challenge comes too late, however, if power being present, there has been merely error in the use of it (Fauntleroy v. Lum, 210 U. S. 230 , 235; Marin v. Augedahl, 247 U. S. 142 , 149; Wagner Co. v. Lyndon, 262 U. S. 226 , 231). An order for the specific- performance of an agreement to arbitrate a controversy is one that finally determines a special proceeding (Ho siery Manufacturers Corp. v. Goldston, 238 N. Y. 22 , 25, 26). The proceeding thus ended is not a part of the arbitration that is thereby set in motion. It is subject to direct review as a separable controversy.

Two reasons are advanced by counsel for the seller why the order has collapsed for defect of jurisdiction.

The order, it is said, is void, because the parties to the contract in agreeing to arbitrate their differences had in view an arbitration in Massachusetts, and not performance somewhere else. Whether this was their meaning was, however, a question of construction, to be determined like any other question of construction by the judge receiving the petition. Jurisdiction was not dependent upon his determining it correctly. We must distinguish between the place of performance in respect of manufacture and delivery and the place of performance for the settlement of differences. The contract was to be performed in Massachusetts to the extent that the things to be sold were to be there manufactured and delivered. The conclusion does not follow of necessity that the remedy prescribed for the settlement of differences was to be sought in the same forum. At common law, general contracts of arbitration, though not specifically enf orcible, were not held to be illegal. This is seen from the fact that in case they were broken there might be a recovery of damages (Matter of Berhovitz v. Arbib & Houlberg, Inc., 230 N. Y. 261 , 271; Red Cross Line v. Atlantic Fruit Co., 264 U. S. 109 , 121). The statute of New York does not bring the contract into being, but adds a new implement, the remedy of specific performance, for its more effectual enforcement. This remedy may lawfully be extended to contracts of manufacture made in Massachusetts and there to be performed, unless it is one of the terms of the arbitration clause, implied if not express, that the arbitration shall proceed n a particular locality. Express restriction there is none in the contract now before us. Whether one is to be implied is a question of intention to be determined in the light of context and occasion. That is what was done. The court in the discharge of its

A second objection, more perplexing, is urged now for the first time. The order, it is said, is void, in so far as it appoints a third arbitrator, not nominated by the other two, but designated by the court. The effect of such an order, we are told, is not merely to give specific performance in New York of a contract to arbitrate made in Massachusetts: the effect is to nullify the contract by exacting a form of arbitration inconsistent with the promise. The parties promised to submit to the decision of two men chosen by themselves and of a third to be chosen by the two. They said nothing in the contract as to the choice of a third if the two could not agree. The statute of New York to the effect that in the event of a lapse for this or other cause a third arbitrator or an umpire may be designated by the court is binding in respect of contracts made in our State or in contemplation of our laws. It is then read into the contract as an implied term of the engagement. To read it into contracts made in other States and without reference to our laws, is something very different. The law of the forum tells us whether the remedy for the breach of an agreement shall be specific performance or damages. The law of the place of contract defines the content of the agreement upon which the remedy shall operate. A State is without power to modify by its statutes the terms, express or implied, of contracts made in other States in contemplation of their laws. The case may be supposed of an agreement made in Boston that a controversy shall be arbitrated by the Chamber of Commerce of that city, with the express provision that in no event shall there be arbitration by any one else. If the law of Massachusetts refuses to permit the appointment of a substitute, the law of New York may not modify by statute the content of the

We think the argument is fallacious in assuming as a premise that there has been nullification of a contract under the compulsion of a statute rather than enforcement of the contract by discarding the subordinate and preserving the essential.

A helpful analogy may be found in contracts for the sale of land or for the renewal of leases at a price or a rental to be fixed by appraisers appointed by the parties. The method of selection may fail, and yet the court may give effect to the dominant intention through the agency of appraisers chosen by itself and subject to its scrutiny (Mutual Life Ins. Co. v. Stephens, 214 N. Y. 488 , 495). Nice distinctions must then be drawn between a method of selection that is an auxiliary incident and one so wrought into the substance, so much a part of an organic whole, as to be accounted of the essence (Castle Creek Water Co. v. City of Aspen, 146 Fed. Rep. 8 , 12; Kaufman v. Liggett, 209 Penn. St. 87 ; Grosvenor v. Flint, 20 R. I. 21 ; Kelso v. Kelly, 1 Daly, 419 ; Weir v. Barker, 104 App. Div. 112 ; State Reserve Bank v. Swift & Co., 32 Fed. Rep. [2d] 590; Dinham v. Bradford, L. R. [5 Ch. App.] 518; Fry on Specific Perf. [6th ed.] §§ 355 to 364). The line of division is often shadowy and doubtful.

Contracts to submit to arbitration must answer to like tests, elusive though they be. There may be a dominant intention to arbitrate at all events, the machinery of selection being merely modal and subordinate. If so, the failure of the means will not involve as a consequence the frustration of the end. Equity will give specific performance of the principal engagement with variations of method appropriate to the facts. “ It is the privilege of a Court in such circumstances and it is its duty to come to the assistance of parties by the removal of the impasse and the extrication of their rights ” (Cameron v. Cuddy,

We are not required to determine whether there was error in the ruling that the means were in this instance subordinate and incidental rather than indispensable and primary. We are to determine merely this, whether there was a question of intention exacting for its answer the application of the judicial mind, the comparison and appraisal of analogies and precedents. If so, the determination, however erroneous, is proof against attack, unless challenged by direct review (Schuylkill Fuel Corp. v. Nieberg Realty Corp., 250 N. Y. 304 , 306). The separating line between nullity and error is not an easy one to draw. If a court were to order arbitration under the mere impulse of a desire to settle a controversy expeditiously and cheaply, reciting, however, in the order that no contract to arbitrate had been made by the contending parties, its determination would be void, for power in such circumstances would be lacking altogether (Vallely v. Northern Fire Ins. Co., 254 U. S. 348 , 353; Yamashita v. Hinkle, 260 U. S. 199 ; United States v. Walker, 109 U. S. 258 , 266). On the other hand, if a court were to find the existence of such a promise upon insufficient evidence, or were to enlarge through misconstruction the scope of a submission, an award dependent upon such an order could not be treated as a nullity (Fauntleroy v. Lum, supra). The question like so many others is one of proportion and degree.

With this line of approach, the pathway becomes visible. We assume in favor of the defendant that it is possible to phrase an arbitration clause with a method of selection so transparently essential as to leave no room whatever for the process of construction. This might be so, for illustration, if there were a promise to arbitrate through a named person, and no one else (cf. Matter of Inter-Ocean Food Products, Inc., 206 App. Div. 426 ).

We have' considered at such length the validity of the order to proceed to arbitration for the reason that if not binding upon us' now as res judicata, it may not be held binding under the rule of stare decisis. A denial of a motion for leave to' appeal is not equivalent to an affirmance of the order thus withdrawn from review. It1 does

(2) The appeal by the plaintiff is next to be considered.

Parties to a contract may agree, if they will, that any and all controversies growing out of it in any way shall be submitted to arbitration. If they do, the courts of New York will give effect to their intention. A submission so phrased, or in form substantially equivalent, does not limit the authority of the arbitrators to an adjudicar

There is nothing in the law, however, that exacts a submission so sweepingly inclusive. The question is one of intention, to be ascertained by the same tests that are applied to contracts generally. Courts are not at liberty to shirk the process of construction under the empire of a belief that arbitration is beneficent any more than they may shirk it if their belief happens to be the contrary. No one is under a duty to resort to these conventional tribunals, however helpful their processes, except to the extent that he has signified his willingness. Our own favor or disfavor of the cause of arbitration is not to count as a factor in the appraisal of the thought of others.

The clause to be interpreted is instinct with tokens of a purpose to encompass the submission with limitations and conditions. It does not say that any and all controversies growing out of the contract shall be settled by arbitration, though the plaintiff would have us hold that its effect is nothing less. The submission is to be confined to controversies or differences of opinion as to “ the construction of the terms and conditions ” of the contract, and controversies or differences as to the “ performance ” of the contract. Each of these phrases is to be weighed in association with the other. Dismemberment may be necessary in aid of the process of analysis, but in the end there must be a synthesis that will bring the severed parts together.

The need for such a synthesis is ignored in plaintiff’s argument, or at least thrown into the shadow. What is emphasized is the provision for arbitration of any controversy touching the performance of the contract, as if it stood by itself, without relation to the context. The words, extracted from their setting, are said to include by implication the consequences of non-performance through all the chain of jural causes. But this is to

We think there was no intention to clothe the arbitrators with power to settle every difference having its genesis in the contract. Their function was more modest. Questions might arise as to the meaning of the contract or the plans and specifications. The arbitrators were to give the answer. Questions might arise as to the per-, formance of covenants and conditions where there was no doubt as to the meaning. Again the arbitrators would answer. If performance had failed in part, there would be questions very often as to the measure of the failure, which would lead to an inquiry as to the diminution in value of the subject-matter of the contract, the worth of what had been done when compared with that omitted. Here again we assume that the arbitrators were expected to estimate the deficiency, and if the price would overpay, to determine the abatement, as upon a claim for recoupment. Reparation to that extent would follow as an incident to the power that had been given them to declare the measure of performance.

They undertook to do much more. They did not limit themselves to fixing the value of what had been done as compared with that omitted according to the practice in recoupment (Mondel v. Steel, 8 M. & W. 858). They charged the dilatory seller with consequential damages of nearly a million dollars on the ground that the effect of the delay was to plunge the buyer into ruin. The rule

We conclude that the award departs from the submission, and is void to that extent. In thus restricting

There remains one other term of the agreement that points the same way. This is the provision to the effect that an award by the arbitrators shall be a condition precedent to a remedy in the courts. Under the rule at common law as established in this State, it was not a bar or defense to a remedy in the courts that the action was maintained in breach of a contract for the settlement of future differences by recourse to arbitration (Pres., etc., D. & H. Canal Co. v. Penn. Coal Co., 50 N. Y. 250 ; United States Asphalt Ref. Co. v. Trinidad Co., 222 Fed. Rep. 1006 ). The operation-of this rule might, however, be avoided if .an award as to specific differences was stated in the contract to be a condition precedent to the existence of a cause of action (Pres., etc., D. & H. Canal Co. v. Penn. Coal Co., supra; Meacham v. Jamestown, etc., R. R. Co., 211 N. Y. 346 ). The condition was ineffective if it extended to all differences, with the result that the grip of the courts would be loosened altogether (Meacham v. Jamestown, etc., R. R. Co., supra; Matter of

Weighing these considerations in all their cumulative force, we are brought to the conclusion that the Appellate Division did not err in modifying the judgment by striking out the award of damages. It is a very easy thing for contracting parties to provide in a few words for a general arbitration if they are minded so to do. They are not to be trapped by a strained and unnatural construction of words of doubtful import into an abandonment of legal remedies, unwilled and unforeseen.

(3) An appeal from an intermediate order, certified to us by the Appellate Division, has yet to be considered. During the pendency of the arbitration, an order was made by the Supreme Court at Special Term to the effect that some of the witnesses should be examined in New York and some in Massachusetts. The defendant makes the point that there was no power in the court to direct the course of justice in another jurisdiction. The point might be important if the defendant had refused to participate in any examination of the witnesses not conducted in New York. That is not what it chose to do. Appar

What it seeks to do now is to bring up the order for review in connection ■ with the judgment, though the time for such an appeal, if separately taken, has long ago expired.- The practice is not permissible unless the intermediate order is so related to the judgment that it has “necessarily” affected the final result (Civ. Prac. Act, § 580). So intimate a conjunction is lacking in this case. The fact that the testimony of some witnesses was taken in Massachusetts, rather than in New York, did not necessarily affect the outcome of the trial. There is no reason to believe that the award would have been different if the place of hearing had been changed. These considerations led the Appellate Division to hold that the intermediate order was not subject to review. We think it did not err in dismissing the appeal (Bolles v. Scheer, 225 N. Y. 118 ; Bloom v. National U. B. S. & L. Co., 152 N. Y. 114 ; Roslyn Heights L. & I. Co. v. Burrowes, 22 App. Div. 540 ; Raff v. Koster, Bial & Co., 38 App. Div. 336 .)

(4) The record brings up a question as to the proper form of judgment. The defendant makes the point that the form adopted by the Appellate Division does not conform to its opinion in that provisions unrelated to the breach, and material, if at all, only as affecting the quantum of the loss, were left untouched in the award, which must, therefore, be modified again. We think the criticism is just. By the twe’fth subdivision of the judgment, it is found that “ the failure of Mead-Morrison Manufacturing Co. to manufacture and deliver tractors according to the terms and conditions of the contract resulted in the bankruptcy of Bear Tractors, Inc., caused a ruination of its enterprise and pecuniary loss.” The declaration of these consequences has no place in the

The order of the Appellate Division dismissing the appeal from the intermediate order should be affirmed; and the first question certified answered “ no.” It is unnecessary to answer the other questions.

The judgment of the Appellate Division modifying and as modified affirming the judgment entered on the award should be further modified by striking out the first paragraph of the twelfth subdivision thereof, and as so modified affirmed, without costs to either party.

(dissenting in part). With part of the opinion in this case I am in accord. Arbitration being the remedy in case of a breach of a contract, that remedy could be enforced in accordance with the Arbitration Law of the State of New York in the same way as other legal remedies would follow the procedure peculiar to this State. Thus a question triable before a jury in Massachusetts might be triable before a court without a jury in New York or vice versa. The parties having contracted to submit their differences to arbitration, each to appoint an arbitrator, and these two an umpire, the courts of New York, having jurisdiction of the parties, could appoint the third arbitrator, in accordance with the Arbitration Law, when the two selected had failed to do so. This was but a piece of machinery, a part of procedure .to arrive at a result contracted for by the parties. I, therefore, concur in so much of the opinion of the chief judge as deals with this point.

The arbitration clause reads as follows: “If for any reason any controversy or difference of opinion shall arise as to the construction of the terms and conditions of this contract, or as to its performance, it is mutually agreed that the matter in dispute shall be settled by

This, however, does not lead me to a reversal of the Appellate Division and an affirmance of the award. Although the evidence is not before us in the record, we have the report of the arbitrators, or the majority of them, from which it appears that they exceeded their authority in disposing of the defendant’s money. The contract called for the manufacture of five hundred tractors according to design represented by drawings and specifications to be furnished. The profits which might have been made in the sale of these tractors would be the ordinary measure of damages. Conceding that the arbitrators were not confined to the rigid rules of law and that they might consider losses consequent upon the expenditure made in preparation for the sale of the tractors, the housing of them or other like liabilities incurred — yet it is beyond all reason to charge up to

Entertaining, as I do, however, this view of the case, my conclusion would be that the matter should be sent back for a new hearing before the arbitrators. To submit the question of breach of contract to arbitration, leaving the question of damages to be recovered in an action at law, is to multiply litigation not to lessen it; to complicate our procedure not to simplify it; to burden the business man not to relieve him. Arbitration has been heralded as a ready and speedy relief from the intricacies and delays of the law. We should, if possible, avoid making it another barrier to the settlement of disputes. The answer I know is that the parties have so contracted, to which I reply that to give the word “ performance ” a narrow interpretation leading to these results is to construe the contract contrary to and not in accordance with the intention of the parties.

With this brief statement of my views I favor modifying the order of the Appellate Division by sending this controversy back for the ascertainment of damages.

Lehman, Kellogg and O’Brien, JJ., concur with Cardozo, Ch. J.; Crane, J., votes in memorandum to remit the controversy for the assessment of damages; Pound and Hubbs, JJ., vote to reverse the judgment so far as appealed from by the plaintiff and to reinstate the award.

Order affirmed and judgment accordingly.