Schlaifer v. Sedlow

Oct 14, 1980
Versions:51 N.Y.2d 181
412 N.E.2d 1294
433 N.Y.S.2d 67
1980 N.Y. LEXIS 2640

Lead Opinion

OPINION OF THE COURT

Per Curiam.

The order of the Appellate Division should be affirmed, with costs. Whether the general release signed by respondent was the product of economic duress and what effect should be given to it in any event are issues to be resolved by the arbitrator pursuant to the arbitration agreement made by the parties.

On March 31, 1964 respondent Sedlow and three individuals entered into a stockholders agreement with Charles Schlaifer & Company, Inc., an advertising agency and the corporate appellant. On the following day Sedlow and the corporation entered into a related employment agreement. The stockholders agreement and the employment contract contained paral lei arbitration provisions that "[a]ll disputes, differences and controversies arising out of, under or in connection with this agreement shall be settled and finally determined by arbitration”. Differences of opinion between the parties and the assertion by Sedlow of claims under his agreements with the corporation led to the payment by the corporation to him of $5,000, and the execution and delivery to the corporation by him of the familiar form of boiler plate general release, releasing all claims from the beginning of the world to the date of the release with no mention made of either the stockholders agreement or the agreement of employment. Sedlow now seeks arbitration of his claim that under the agreements he is entitled to 5% of the corporate profits and 5% of the corporate stock. The controversy between the parties which is presented to us focuses not on the merits of Sedlow’s substantive claim but only on what effect the general release had on the arbitration provisions of the prior agreements.

The contention of the. corporation that the effect to be given the general release should be determined by the courts and that the courts should conclude that it operated to wipe out the arbitration agreements ignores the separability of provisions as to forum selection from the substantive provisions of an agreement, fails to recognize the character and function of a general release, and overlooks the significance of our pertinent decisions. In Matter of Minkin (Halperin) (279 App Div 226, affd 304 NY 617), on which the corporate appellant and the dissenter rely so heavily, we were confronted with an instrument of cancellation, by which the parties had expressly agreed that their prior agreement "is hereby cancelled and declared of no further force and effect, and said agreement shall be interpreted as though it had not been executed”— that is, there was a complete nullification, ab initio, of every provision of the prior agreement, including its arbitration clause.*

To be sharply distinguished from such an instrument of obliteration is a general release of claims, particularly where, as here, it has been executed and delivered in exchange for the payment of a significant sum of money. A general release is based on the assumption that there was a prior valid agreement out of the substantive provisions of which certain asserted claims had arisen, and manifests a subsequent agreement pursuant to which those claims have been given up and released. In legal effect then a general release accompanying a settlement of a substantive dispute is a form of contract termination with respect to the substantive rights of the parties under the original agreement. Unlike a cancellation, however, it falls short of a complete nullification of every provision of the prior agreement both substantive and procedural. Thus in the absence of express provision to the contrary, where the differences between the parties relate only to the substantive terms of their agreement, they will be held in releasing claims to have dealt only with such substantive rights and obligations, not with the separate and distinct subject of choice of the arbitration forum for the resolution of disputes.

Once the parties to a broad arbitration clause have made a valid choice of forum, as here, all questions with respect to the validity and effect of subsequent documents purporting to work a modification or termination of the substantive provisions of their original agreement are to be resolved by the arbitrator (cf. Matter of Stein-Tex [Ide Mfg. Co.], 9 AD2d 288, mot for lv to app den 7 NY2d 711; Matter of Lipman [Haeuser Shellac Co.] 289 NY 76). Because voluntary arbitration is the creature of contract it is of course open to the parties in any instrument in which they modify the substantive provisions of their original agreement, as well to provide explicitly for modification or termination of their agreement to arbitrate. (See Matter of American Ins. Co. [Messinger—Aetna Cas. & Sur. Co.] 43 NY2d 184, 193-194; County of Sullivan v Edward L. Nezelek, Inc., 42 NY2d 123, 128.) In the case now before us, however, there is no reference either in the general release or in the October 12, 1976 letter of transmittal to Sedlow’s right to seek arbitration. Nor is there any indication that when the general release was executed it was the intention of the parties to cancel or terminate their agreement to arbitrate, as well as to settle their substantive differences.

Notes

We held in Minkin that whether the cancellation agreement had been induced by coercion and duress was an issue to be resolved by the court. Entirely aside from the distinction, which is critical for present purposes, between a cancellation and a general release, it may be that, while questions as to the scope and effect of a cancellation agreement would be for the court, issues as to coercion or fraud in its inducement would now be held to be for the arbitrator in view of our subsequent decision in Matter of Weinrott [Carp] (32 NY2d 190).



Dissenting Opinion

Meyer, J.

(dissenting in part). I agree that there is a difference between the general release of a claim under a contract and the cancellation of a contract, but cannot agree to the result reached by the majority because it ignores the fact that the demand for arbitration in the instant case refers not to one but to two contracts, one of which, unless we are flatly to overrule Matter of Minkin (Halperin) (304 NY 617), Matter of Binger (Thatcher) (304 NY 627), and Matter of Bronston (Glassman) (10 NY2d 158), has been canceled. The order of the Appellate Division should, therefore, be modified by directing that the judgment of Special Term stay arbitration under the contract of March 31, 1964 only and, except as thus modified, the Special Term judgment should be affirmed.

When Sedlow and his former partners, Kaiser and Temple, joined the Schlaifer Agency, individual employment contracts, dated April 1, 1964, and a stockholders agreement among the three of them, Schlaifer and the Schlaifer Company, dated March 31, 1964, were signed. Each employment contract fixed the compensation of the individual employee, provided for a term of two years, and contained an arbitration provision. The stockholders agreement fixed the amount of common stock to which each was entitled (Kaiser 15%, Sedlow and Temple 5% each), required Schlaifer Company, or if it had insufficient surplus then Schlaifer individually, to buy back the stock at the end of two years, and contained its own arbitration clause.

Minkin, Binger and Bronston make clear that when a release not only settles a claim under a contract providing for arbitration but cancels the contract there is no arbitrable issue because there is no longer any agreement to arbitrate. Moreover, the intention of the parties with respect to the operation of the release as a cancellation of the contract is to be gleaned from not only the release but also from any accompanying letter (see Matter of Lipman [Haeuser Shellac Co.], 289 NY 76, 78).

Here Sedlow does not dispute that he received from Schlaifer a letter dated October 12, 1976, together with a general release form which the letter asked that he sign and return, and together with a $5,000 check. Indeed, he acknowledged receipt of the letter by signing a receipt form immediately below Schlaifer’s signature. He also acknowledges that he executed the release, which is dated October 15, 1976, and received and cashed the check.

Considered by itself, the release, it is argued, does not explicitly cancel the March 31, 1964 contract, because it refers only to "contracts” generally and mentions "law, admiralty or equity,” but not arbitration. Whatever deficiency there may be in the release, if any, is, however, supplied by the letter of October 12, 1976, which expressly describes the claims made by Sedlow’s former partners "under the agreement dated March 31, 1964, despite the fact that the agreement expired and no rights survived.” It likewise states that Kaiser, "took his claim to arbitration,” that Sedlow has "acknowledged to me that you do not have any rights under this agreement” and that his signing of the release "will end any possibility of your making such a claim in the future.” There, thus, is no question that Sedlow knew when he signed the release that he was, in fact, terminating the March 31, 1964 agreement and that he was concluding not only any right to litigate but also to arbitrate under the contract. Indeed, he does not now say otherwise, arguing only that he has the right to arbitrate whether his signature of the release after receipt of the October 12, 1976 letter was obtained by economic duress. The same argument was made and rejected in Matter of Minkin (Halperin) (304 NY 617, supra) which held that duress is an issue to be determined in a plenary proceeding at law to set aside the release, not by arbitrators in a proceeding under the arbitration clause of the contract.

As to the April 1, 1964 employment contract between Sedlow and Schlaifer Company, however, it cannot be said, as it can with respect to the March 31, 1964 stockholders agreement, that the parties had evidenced their clear intent to terminate it. The October 12, 1976 letter makes no reference to the employment agreement and, in fact, Sedlow’s employment under the latter agreement continued for another year after the date of that letter. But his continued employment after termination of the March 31, 1964 stockholders agreement could not entitle him to the stock and share of the profits he seeks through his demand for arbitration. The two agreements cannot, after the March 31 agreement has been terminated, be read together as was done in Kaiser’s case (Matter of Schlaifer [Kaiser], 84 Misc 2d 817, affd on opn below 50 AD2d 749), for Sedlow, unlike Kaiser, did indeed abandon, and agree not to assert any rights under, the stockholders agreement (cf. Matter of Schlaifer [Kaiser], 84 Misc 2d, at p 822, supra; and see Hughes v Eddy Valve Co., 147 App Div 356). While that probably means that arbitration under the April 1, 1964 agreement will avail Sedlow nothing, it should not be stayed because that contract was not inten tionally terminated and its arbitration provision, therefore, remains in effect.

Chief Judge Cooke and Judges Gabrielli, Jones and Wachtler concur in Per Curiam opinion; Judge Meyer dissents in part and votes to modify in a separate opinion in which Judges Jasen and Fuchsberg concur.

Order affirmed.