COMPREHENSIVE MERCHANDISING CATALOGS, INC., a New York Corporation, Plaintiff-Appellee, v. MADISON SALES CORP., an Illinois Corporation, Defendant-Appellant.
No. 75-1037.
United States Court of Appeals, Seventh Circuit.
Argued May 19, 1975. Decided Aug. 20, 1975.
1210
Daniel A. Costigan, Chicago, Ill., for plaintiff-appellee.
Before CASTLE, Senior Circuit Judge, BAUER, Circuit Judge, and EAST*, Senior District Judge.
CASTLE, Senior Circuit Judge.
Plaintiff Comprehensive Merchandising Catalogs, Inc., a New York corporation, brought а diversity action in the district court to enforce a default judgment for $10,302.47 obtained against
I.
The controversy stems from a purchase order form used by customers to purchase catalogs from the plaintiff. The purchase order form sets forth the price of each catalog depending on the number of catalogs ordered, and provides a space to indicate the number of catalogs desired. The purchase order form, dated January 20, 1971, was signed by the defendant‘s Vice-President, Jack Perlstein, but the space for indicating the quantity of catalogs needed was left blank.
The purchase order form also cоntains paragraphs numbered from one to eighteen and grouped under the heading “Conditions Covering All Orders.” Two of the paragraphs are relevant to this dispute. Paragraph 10.A. provides:
Any controversy or claim arising or relating to this contract or the breach thereof, (or in connection with оther work or services utilizing materials produced or used in the performance of the contract), shall be settled by arbitration, in accordance with the rules then obtaining of the American Arbitration Association, and judgment [sic] upon the award rendered may be entered in an appropriatе court of the forum, state or federal, having jurisdiction. The arbitration hearing shall be held at the main office of the American Arbitration Association in Manhattan, City and State of New York.
Paragraph 10.B. provides:
In any legal proceeding relating to this arbitration, including (but not limited to) proceeding to institute the said arbitration or to сonfirm, vacate or modify the arbitration award or to appeal an order or judgment relating thereto, the parties waive personal service and agree that in such case personal service may be made by registered or certified mail directed to either party at its address herein set forth or to any later address known to the other. In such case, said proceeding shall be returnable at least thirty days (but not more than forty days except by agreement of the parties) after the mailing of the papers instituting said proceeding and should the party so served fail to answer or respond to said proceeding in the time limited and set forth in said papers, it shall be deemed to be in default. If, however, the party instituting said legal proceedings relating to said arbitration chooses to make service in the manner provided by the Civil Practice Law and Rules of the State of New York, the time limited in said Civil Practice Law and Rules as to the return date of said proceeding, shall prevail.
In March 1971, the defendant denied that it had ordered or authorized the purchase of any catalogs, and the plaintiff consequently instituted arbitration proceedings in New York. The defendant aрparently received proper notice of the demand for arbitration, but did not
II.
It is well-settled that parties to а contract may agree to submit to the jurisdiction of a particular court and may also agree as to the manner and method of notice.2 D. H. Overmyer Co. v. Frick Co., 405 U.S. 174, 185 (1972); National Equipment Rental, Ltd. v. Szukhent, 375 U.S. 311, 315-316 (1964); Gilbert v. Burnstine, 255 N.Y. 348, 174 N.E. 706 (1931). In this case, the personal jurisdiction of the New York court depends upon paragraphs 10.A. and 10.B. of the contract.3 There is no contention that thе plaintiff did not comply with those provisions.
It is also well-established, however, that a state court judgment is not entitled to full faith and credit in a second forum if that judgment was rendered without jurisdiction over either the person or the subject matter, and whether there was such jurisdiction is open to inquiry in the second forum. Milliken v. Meyer, 311 U.S. 457, 462 (1940). Arguing frоm the premise that personal jurisdiction over it depends upon validity of the entire contract, the defendant contends that we are therefore required to ascertain the validity of that contract in order to determine whether the New York court had jurisdiction. In essence, the defendant аrgues that the question of personal jurisdiction merges into an evaluation of the merits of the validity of the contract. The defendant asserts that the whole contract is invalid because an essential term, the quantity of catalogs desired, was not supplied.
We do not think it is permissible, however, to determine the effect of the omission of the quantity term because we are of the opinion that under New York law the jurisdictional provisions of the contract are unaffected by this claim of contract invalidity. We think this result follows from consideration of the issue of separability of arbitration clauses from the contract in which they are contained.
The issue of separability generally arises in the situation where, pursuant to a contract containing an arbitration clause, a party moves to either compel or stay arbitration. Usually, the party opposing arbitration has argued that the entire contract was procured by fraudulent inducement, and that therefore the court must decide the issue of fraudulent inducement before the arbitration clause is considered applicable. In Matter of Weinrott (Carp), 32 N.Y.2d 190, 344 N.Y.S.2d 848, 298 N.E.2d 42 (1973), the New York Court of Appeals, in re-examining its own position on that matter, considered the dеveloped case law, and rejected that argument. The court con-
The theoretical underpinning of the Wrap-Vertiser [Matter of Wrap-Vertiser Corp., 3 N.Y.2d 17, 163 N.Y.S.2d 639, 143 N.E.2d 366 (1957)] approach can be found in the assertion that one fraud is fraud to all. There is a lоng line of New York cases holding that an arbitration agreement was generally not separable from the principal contract and, therefore, if the substantive provisions of the contract were to fall, the entire contract including an arbitration clause would also fall.
* * * * * *
A contrary view was taken by the seminal case of Lawrence Co. v. Devonshire Fabrics, 271 F.2d 402 [2d Cir.], supra which held that an arbitration clause is separable from the balance of the contract. (See, also, Lummus Co. v. Commonwealth Oil Refining Co., 280 F.2d 915, 925 [1 Cir.].) The cases holding that the arbitration clause is separable assert that the fraud must go to the arbitration provision itself in order to avoid submission to arbitration. (Hamilton Life Ins. Co. of N. Y. v. Republic Nat. Life Ins. Co., 408 F.2d 606, 610 [2d Cir.].) Of course, if the alleged fraud was part of a grand scheme that permeated the entire contract, including the arbitration provision, the arbitration provision should fall with the rest of the contract. (See Moseley v. Electronic & Missile Facilities, Inc., 374 U.S. 167 (1963); Housekeeper v. Lourie, 39 A.D.2d 280, 333 N.Y.S.2d 932, supra.)
The technical argument about separability or nonseparability has often obscured the main goal of the court‘s inquiry which is to discern the parties’ intent. (See, generally, 43 St.John‘s L.Rev. 1.) When the parties to a contract have reposed in arbitrators all questions concerning the “validity, interpretation or enforcement” of their agreement, they have selected their tribunal and no doubt they intеnd it to determine the contract‘s “validity” should the necessity arise. Judicial intervention based upon a nonseparability contract theory in arbitration matters prolongs litigation, and defeats, as this case conclusively demonstrates, two of arbitration‘s primary virtues, speed and finality (see Amicizia Societa Nav. v. Chilean Nitrate & Iodine Sales Corp., 274 F.2d 805, 808 [2 Cir.], cert. den. 363 U.S. 843 (1960)).
* * * * * *
Since we now hold that an arbitration provision of a contract is separable, the agreement to arbitrate would be “valid” even if the substantive portions of the contract were induced by fraud.
Id. at 197-198, 344 N.Y.S.2d at 854, 298 N.E.2d at 46-47 (footnote omitted). See also Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967).
Consequently, we similarly believe that under the present circumstances paragraphs 10.A. and 10.B. are also independent of this assertion of contract invalidity, and therefore since these provisions establish the jurisdiction of the New York court, we cannot inquire into the effect of the quantity omission. Here, the defendant does not contend that Vice-President Perlstein‘s signature
Interocean Shipping Co. v. National Shipping & Trading Corp., 462 F.2d 673 (2d Cir. 1972) and A/S Custodia v. Lessin International, Inc., 503 F.2d 318 (2d Cir. 1974), do not suggest that the substantive validity of the contract must be examined. In those cases, facts surrounding the formation and execution of the contracts enforcing arbitration clauses brought into question whether there was “a meeting of the minds” and therefore whether any contractual relationship existed at all. Thus, it was concluded that whether a contract existed must be resolved before there could be arbitration. As stated previously, however, we do not think that omission of the quantity term by itself evidences a similar absence of a contractual relationship.5
Since we conclude that this claim of contract invalidity does not have any impact on the force of the jurisdictional and notice provisions, the New York court, by consent, had personal jurisdiction over the defendant. We are therefore precluded from inquiring into the merits of the validity of the contract, and the New York judgment is entitled to full faith and credit.
The judgment of the district court is Affirmed.
BAUER, Circuit Judge (dissenting).
I must respectfully dissent.
The majority opinion, it seems to me, does violence to some very fundamental concepts of contract law. While I am most willing to agree that “parties to a contract may agree to submit to the jurisdiction of a particular court and may also agree as to the manner and method of notice” as recited in the majority opinion, I am unwilling to agree that a signature on an “order form” without any indication as to what was ordered constitutes a “contract.”
In order to arbitrate, or select a forum to try, issues arising from disagreements over a contract, I would suggest that there must be a contract. In its very simplest terms a contract has always been described as a “promise for a promise” or, even more elementary, “a meeting of the minds“. The document relied upon in this case leaves to total imagination the number of catalogs to be delivered or paid for. It totally lacks the essential requisites fоr the existence of a contract. There is no possible way, by examining the document, that anyone can tell what performance is called for by either of the signing parties. Nor is there any document in existence in
The majority opinion discusses the “separability” of arbitration agreements and quotes at length from the Matter of Weinrott, 32 N.Y.2d 192, 344 N.Y.S.2d 848, 298 N.E.2d 42. It is interesting to note that Weinrott involves a defense of fraudulent inducement—a defense which admits a prima facie valid contract. In such a case, I agree that an arbitration agreement can be binding irrespectivе of the merits of the defense. In the instant case, the document relied on is not a contract in any sense and there is therefore nothing to arbitrate or adjudicate. The doctrine of separability has no application because there is nothing to separate. There is nothing required tо be delivered, nothing required to be paid, and nothing to arbitrate. We need not inquire into the validity of the “contract“—there is no “contract“.
The judgment of the district court should be reversed and the case dismissed.
Notes
Id. at 196, 344 N.Y.S.2d at 853, 298 N.E.2d at 45.All disputes, controversies or claims arising hereunder, the interpretation of any of the provisions or the performance called for thereunder shall be settled by arbitration in New York, in accordance with the rules then obtaining of the American Arbitration Association and any decision arising therefrom may be entered as a judgment in any court of competent jurisdiction.