In re the Arbitration between Prima Products, Inc. & Aquella Products, Inc.

280 A.D. 109, 111 N.Y.S.2d 558, 1952 N.Y. App. Div. LEXIS 3403

• Court: Appellate Division of the Supreme Court of the State of New York
• Decided: March 25, 1952
• Status: Published

Opinions

Bergan, J.

By several assignments the respondent Aquella Products, Inc., and Usines De La Seigneurie, which as a matter of convenience will here be called the “ French Corporation ”, have succeeded to reciprocal contractual obligations undertaken in 1945 for the sale of paint.

Among other things Aquella agreed to pay the French Corporation .royalties on sales made throughout an extensive territory. In 1949, Aquella assigned to appellant Prima Products, Ine. its rights under that contract within a portion, but not all, of the territory set forth in the 1945 agreement.

Prima agreed with Aquella, among other things, to pay the royalties due under the 1945 contract for paint sold within the territory it had acquired, and to hold Aquella “ harmless for any claim or demand ” arising from Aquella’s 1945 contract.

In case of any controversy “ under this agreement between the parties hereto ” which they are “ unable to adjust between themselves ” either party could resort to arbitration. Aquella and the French Corporation by the 1945 agreement were also committed to the arbitration of “ any controversy under this agreement between the parties hereto.”

In June, 1951, the French Corporation instituted against Aquella an arbitration proceeding which sought an accounting for paint sold within the territory covered in the 1945 contract between Aquella and Prima. Other matters in controversy between the French Corporation and Aquella, with which Prima could have no concern were swept within the petition for arbitration.

As a respondent in the arbitration proceeding instituted by the French Corporation, Aquella filed a petition addressed to the Administrator of the American Arbitration Association. On the title to the proceeding, Aquella added to the enumerated parties Prima, as a “ Third Party Eespondent ”.

Its petition to the Administrator recited the institution of the proceeding for arbitration by the French Corporation; alleged the assignment to Prima of some of the rights under the contract with the French Corporation; averred that an “ unsettled controversy exists ” with Prima “ and therefore impleads ” Prima “ herein as a third respondent ”. Its requested relief was that Prima be directed to answer “ this petition ” and to proceed with the arbitration.

Prima, thereupon, instituted a judicial proceeding in the Supreme Court to stay the arbitration on the ground that no controversy exists and that there is no authority in law or by the terms of its agreement to arbitrate, or under the rules of the American Arbitration Association to join it as a third party.

The court at Special Term was of opinion that there was an arbitrable controversy between these parties and expressed the view that procedurally arbitration ought to follow the “ enlightened ” practice which courts have adopted in respect of bringing in third parties.

We deal first with the arbitrable nature of the controversy. Arbitration, so the parties had contracted, was to be resorted to for a “ controversy under this agreement,” and “ between the parties hereto ”. Aquella’s petition to the Administrator shows no dispute with Prima “ under ” its agreement. It shows merely that under another agreement with another party covering in some part the subject matter with which it also agreed with Prima, it has been called upon to arbitrate in pursuance of an arbitration clause to which Prima is a stranger.

It has been a consistent judicial policy in supervising arbitration facilities first of all to examine the question whether an actual controversy exists. A good example is Matter of Webster v. Van Allen (217 App. Div. 219). The parties there had an agreement to arbitrate any dispute over the purchase and sale of property. Notes were given arising out of the transactions and were not paid. There was no dispute over the notes or the nonpayment and court was of the opinion that the obligation under the notes was not a “ controversy ” within the intention of the parties. The availability of the “ remedy ” i.e., arbitration, rests upon whether there is a “ genuine controversy ”. (Davis, J., p. 221.)

No present controversy between Aquella and Prima is shown about anything, nor are any facts stated in the petition of Aquella to the Administrator or in the proof before the Special Term which would suggest an existing controversy, except of course, on the procedural point whether Prima can or cannot be required to become a party in the French Corporation’s arbitration proceeding.

All this does not amount to a controversy under the contract within its express language in respect of arbitration. The language can be read in no other way, we think, than in the usual sense of meaning a disagreement between the parties about the way one or the other has effected the assumed conditions of the contract. That somebody else charges one of the parties with a collateral liability arising from the same subject matter is not usually regarded as a controversy “ between ” the parties.

Prima agreed by its contract to hold Aquella harmless from any claim or demand by the French Corporation arising from Prima’s performance of its contract. But this right would not" mature to the point of becoming1 an arbitrable controversy between the parties until, gathered in from the whole area of controversy between Aquella and the French Corporation, it had been ascertainable what part was attributable to Prima’s contract. When it was ascertained what the claim against Aquella was, this in turn would become arbitrable between Aquella and Prima only after it was shown, as the contract required, that it was a ‘ ‘ controversy * * * which they are unable to adjust between themselves ”.

Besides this, the procedure in arbitration under this agreement does not provide the facilities for widened adjudication afforded by the New York civil practice. The third-party practice in the court is not based on an expansive concept of what is a controversy. It is based, rather, upon the judicial economy implied when one controversy can be envisaged before maturity from the existence of another one.

This becomes manifest from the language describing the party who may be brought in by a defendant as one “ who is or may be liable to him for all or part of the plaintiff’s claim against him”. (Civ. Prac. Act, § 193-a.) This is not necessarily, or even often, an existing controversy between defendant and the third party; it is a provision, merely, for a potential controversy.

No doubt contracting parties could make enforcible agreements for the arbitration of potential related disputes on the perimeter of controversy, but it is clear from the language of the agreement before us and from the Commercial Arbitration Rules of the American Arbitration Society both that the parties here have not done so and that no intent to have done so is implicit from existing and accepted arbitration procedure.

The judicial process has been able to reach out to get ultimate adjudication of all liabilities possible and implied from existing litigation because the court is able to exert the compulsion of public power and the Legislature, and the judges themselves, have felt it wise and economical to exercise it in this direction.

A compulsion is exerted on the absent party to come in, as indeed it is exerted on the defendant in the first place, and this sort of compulsion is a hallmark of judicial power. But compulsion is the antithesis of arbitration. People are often in court without any consent at all and, indeed, against their strongest wishes in the premises. But if they are in an arbitration proceeding they are there solely upon their free initial submission. That judicial compulsion is sometimes needed to carry out what the parties freely agreed in the first place to do, does not change the freedom of jurisdictional choice in its inception.

We do not regard it as an admissible construction of the arbitration clause between Aquella and Prima, that Prima thereby consented to become a party to another arbitration proceeding in which it may have an interest but concerning which no present controversy with Aquella is shown.

That it might be useful and perhaps convenient to do this in arbitration adds nothing to the argument in a case where the words of a contract become the measure of the court’s authority.

The order denying petitioner’s application for a stay of the arbitration proceedings should be reversed, with $20 costs and disbursements to the appellant, and the motion granted, with $10 costs.