Opinion
No.CV 99-8094 (JBW).
April 27, 2000.
Judgment, Memorandum, and Order
I. Facts
This case arises out of a construction project to build Harlem USA in New York City. The general contractor of the project, Gotham Construction Company, LLC entered into a subcontract with Metropolitan Steel Industries in which the latter agreed to supply and erect the structural steel and associated materials the project required. In order to fulfil its obligations, Metropolitan entered into a purchase order with WS Erectors, Inc. In December 1999 WS sued Metropolitan for alleged breach if its agreement. Jurisdiction was premised upon diversity of citizenship.
Metropolitan moved to stay the action pending arbitration. According to the defendant, WS was bound by the Purchase Order which incorporated an arbitration agreement contained in the Subcontract.
The Purchase Order incorporates the Subcontract by reference as follows:
Subcontractor [Metropolitan] shall have the same fights and remedies against the Vendor [WS] with respect to such acts, things and obligations as the Contractor [Gotham] may have against [Metropolitan] under the Subcontract with the same force and effect as if every such right or remedy were set forth in full herein.
Among the provisions in the Subcontract is an arbitration agreement:
Any claim, dispute or other matter arising out of or related to this Agreement shall be subject to mediation as a condition precedent to arbitration or the institution of legal or equitable proceedings by either party. The parties agree that mediation proceedings hereunder shall be in accordance with the Construction Industry Mediation Rules of the American Arbitration Association currently in effect.
Any claim, dispute or other matter in question or arising out of or related to this Agreement shall be subject to arbitration. Prior to Arbitration, the parties shall endeavor to resolve disputes through mediation as provided for hereunder. Arbitration hereunder shall be conducted pursuant to the Construction Industry Arbitration Rules of the American Arbitration Association.
According to Metropolitan, this arbitration agreement is part of the Purchase Order and must be followed. WS contends that under New York law, this agreement to arbitrate is not deemed to be incorporated into the Purchase Order and that, even if it is, Metropolitan has waived its right to arbitration.
II. Law
A. Enforceability of Arbitration Agreement
The parties agree that the Purchase Order in general is governed by New York law. The defendant nonetheless contends that the issue of whether the arbitration agreement is incorporated is determined by the Federal Arbitration Act (FAA); its contention is correct.
Although the FAA does not serve as an independent basis of jurisdiction, "[i]t creates a body of federal substantive law establishing and regulating the duty to honor an agreement to arbitrate."Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 n. 32 (1982). The FAA applies whenever a contract "evidenc[es] a transaction involving interstate commerce." 9 U.S.C. § 2; see also Barbier v. Shearson Lehman Hutton Inc., 948 F.2d 117, 120 (2d Cir. 1991). Commerce is defined as "commerce among the several states or with foreign nations." 9 U.S.C. § 1. Since this case involves the shipment of steel from Pennsylvania to New York, the requirement is obviously satisfied.
Because the FAA is triggered, federal law determines whether the purchase order — itself clearly enforceable under New York law — embodies by reference an agreement to arbitrate. See Southland Corp. v. Keating. 465 U.S. 1, 12 (1984); Genesco, Inc. v. T. Kakiuchi Co., Ltd., 815 F.2d 840, 845 (2d Cir. 1987); see also Gingiss Int'l. Inc. v. Bormet, 58 F.3d 328, 33 1-32 n. 3 (7th Cir. 1995). Although courts will look to general state law contract principles in determining the validity of an agreement to arbitrate, the FAA "preempts state law which treats arbitration agreements differently from any other contracts." Progressive Cas. Ins. Co. v. C.A. Reaseguradora Nacional de Venezuela, 991 F.2d 42, 46 (2d Cir. 1993); see also Perry v. Thomas, 482 U.S. 483, 492 n. 9 (1987). Accordingly, the rule of New York law which provides that arbitration agreements will not be enforced "in the absence of an express, unequivocal agreement to that effect," Marlene Indus. Corp. v. Carnac Textiles, Inc., 380 N.E.2d 239, 242 (N.Y. 1978), is preempted. See Progressive Cas. Ins. Co., 991 F.2d at 46.
Under the FAA, an agreement to incorporate an arbitration agreement by reference is valid. In Progressive Casualty Insurance, the court of appeals for the Second Circuit addressed this issue. The case involved an insurance policy stating that it was "Subject to Facultative Reinsurance Agreement" (FRA). The FRA was a separate agreement between different parties which contained an arbitration clause. The court held that the parties to the Policy were required to submit to arbitration.
In reaching its conclusion, the Second Circuit relied on general principles of New York contract law to determine whether the contract was valid. It found that there was no dispute that the Policy was signed and that it was meant to be final and binding. See id. In addition, "[u]nder New York law, in the absence of fraud or other wrongful conduct, a party who signs a written contract is conclusively presumed to know its contents and to assent to them." Id. (citing Level Export Corp. v. Wolz, Aiken Co., 111 N.E.2d 218 (N.Y. 1953)). Nevertheless, it was federal law which governed whether the contract validly incorporated the arbitration agreement contained in the FRA.
In the instant case, there is no dispute that the parties signed a contract that was intended to be final. No contention is made that Metropolitan engaged in fraud or other wrongful conduct. WS's only argument that the arbitration clause is not incorporated into the Purchase Order is that New York law requires a clear statement of an agreement to arbitrate. As the court in Progressive Casualty Insurance made clear, regardless of New York law the FAA does not require such a clear statement. See also Gingiss Int'l, 58 F.3d at 33 1-32 ("Under federal law, a subcontract with a guarantor or surety may incorporate a duty to arbitrate by reference to an arbitration clause in a general contract." (footnote omitted)); Maxum Foundations., Inc. v. Salus Corp., 779 F.2d 974, 978-80 (4th Cir. 1985).
The language used in the Purchase Order unambiguously incorporates the Subcontract and its arbitration agreement. It must be enforced.
B. Waiver
WS's contention that Metropolitan waived its right to arbitration is equally unavailing. Waiver will only be found "when a party engages in protracted litigation that results in prejudice to the opposing party."Cotton v. Slone, 4 F.3d 176, 179 (2d Cir. 1993). In determining whether a party waived its right to arbitration, the court considers a number of factors including:
(1) the time elapsed from the commencement of litigation to the request for arbitration; (2) the amount of litigation (including exchanges of pleadings, any substantive motions, and discovery); and (3) proof of prejudice, including taking advantage of pre-trial discovery not available in arbitration, delay and expense.SR Co. of Kingston v. Latona Trucking, Inc., 159 F.3d 80, 83 (2d Cir. 1998), cert. dismissed, 120 S.Ct. 629 (1999).
All the SR factors support Metropolitan's contention that waiver has not occurred. The complaint was filed on December 18, 1999. Metropolitan's answer was submitted on February 7, 2000; it listed as an affirmative defense the arbitration clause incorporated in the Purchase Order. In fact, the first motion made in this action was Metropolitan's request for a stay pending arbitration. Metropolitan has moved promptly to exercise its rights. WS has not shown any prejudice.
Metropolitan's motion for a stay pending arbitration is granted. The case is dismissed.
SO ORDERED.