USCA1 Opinion
United States Court of Appeals
For the First Circuit
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No. 95-1495
MENORAH INSURANCE COMPANY, LTD.,
Plaintiff-Appellee,
v.
INX REINSURANCE CORPORATION,
Defendant-Appellant.
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No. 95-1497
MENORAH INSURANCE COMPANY, LTD.,
Plaintiff-Appellant,
v.
INX REINSURANCE CORPORATION
Defendant-Appellee.
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APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Jose Antonio Fuste, U.S. District Judge]
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Before
Lynch, Circuit Judge,
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Campbell, Senior Circuit Judge,
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Watson,* Senior Judge.
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Luis A. Melendez-Albizu, Jaime Sifre Rodriguez, and Sanchez-
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Betances & Sifre, were on brief for Menorah Insurance Company, Ltd.
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Juan H. Saavedra Castro was on brief for INX Reinsurance
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Corporation.
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December 26, 1995
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*Of the United States Court of International Trade, sitting by
designation.
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LYNCH, Circuit Judge. After unsuccessfully
LYNCH, Circuit Judge.
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attempting to invoke arbitration under international business
contracts, Menorah Insurance Company obtained an $812,907
default judgment in an Israeli court against INX Reinsurance
Corporation and then sought to enforce the judgment in a
Puerto Rican court. After waiting a year, and on the eve of
having an exequatur judgment entered against it, INX removed
the action to the U.S. District Court for Puerto Rico under
the Convention on the Recognition and Enforcement of Foreign
Arbitral Awards, implemented in 9 U.S.C. 201 et seq.
__ ____
(1994).1 The federal court found that INX had waived
arbitration and remanded. We affirm because INX has both
explicitly and implicitly waived arbitration.
Under seven reinsurance treaties between them,
Menorah, an Israeli company, and INX, a Puerto Rican
corporation, agreed that "all disputes" between them would
be arbitrated and should be settled "in an equitable rather
than in a strictly legal manner."2 The locus of arbitration
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1. The Convention was opened for signature on June 10, 1958,
330 U.N.T.S. 38, and is reprinted in 9 U.S.C.A. 201 n.
(West Supp. 1995).
2. The arbitration clause presented by INX as being
representative provides that:
All disputes which may arise between the
two contracting parties with reference to
the Interpretation or the carrying out of
this Agreement or to any matter
originating therefrom or in any way
connected with the same, and whether
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3
was to be Tel Aviv, Israel. Each side was to appoint an
arbitrator and should the two arbitrators disagree, then an
"Umpire," previously designated by the two arbitrators, would
decide. There was a default provision of sorts: "In the
event of either party failing to appoint an umpire within two
months after arbitration has been supplied [sic] for under
the question in dispute, then in either such case the
arbitrators and/or umpire shall be appointed by the chairman
for the time being of the Israeli Fire Insurance
Association."
Menorah made a claim to INX for over $750,000 under
the reinsurance treaties, to which INX replied that it owed
no more than $178,000 and intimated that fraud accounted for
the $500,000 difference. After unsuccessful negotiations,
Menorah, on July 1, 1992, informed INX by letter that it
would seek arbitration, asked INX to assent to arbitration
and appoint its arbitrator, said if INX failed to appoint an
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arising before or after the termination
of notice under this agreement shall be
entitled [sic] in an equitable rather
than a strictly legal manner and in such
cases the parties agree to submit to the
decision of arbitrator, one to be chosen
by the Company and the other by the
Reinsurer and in the event of
disagreement between these two, then an
Umpire, who shall have been chosen by the
said two arbitrators previous to their
entering upon the reference, the
arbitrators and/or umpire shall be
managers or chief officials of fire
Insurance and/or reinsurance companies.
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arbitrator, Menorah would ask that one be appointed for INX,
and that if INX failed to assent, then Menorah would feel
"free to pursue all other legal and judicial measures
available." INX responded promptly that it would not
arbitrate, that its financial condition was precarious, and
that even if ordered to arbitrate, its financial condition
would preclude it from doing so.
On September 10, 1992, Menorah filed suit in Tel
Aviv against INX. Although actually served, INX chose not to
respond or contest, and default judgment was entered against
it for $812,907, interest at an annual rate of 11%, costs and
attorneys' fees. INX did not pay nor did it seek to remove
the default.
On September 2, 1993, Menorah filed an exequatur3
action in the Superior Court in San Juan to enforce the
judgment. INX moved to dismiss, claiming for the first time
that the controversies between the parties had to be
arbitrated. On August 8, 1994, the court denied the motion,
finding that INX had waived arbitration and that the Israeli
judgment was valid, and ordered INX to answer. INX answered,
again claiming arbitration, and counterclaimed that Menorah's
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3. "Exequatur" refers to an action to execute a judgment
from another jurisdiction. See Seetransport Wiking Trader
___ ___________________________
Schiffahrtsgesellschaft MBH & Co. v. Navimpex Centrala
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Navala, 29 F.3d 79, 81-82 (2d Cir. 1994).
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failure to submit the exequatur action to arbitration was in
breach of its contractual duty of good faith. On October 14,
1994, the Superior Court issued an order to show cause why
the petition for exequatur should not be granted. In
response, INX removed the action to the federal court under 9
U.S.C. 205.4
The federal court remanded the case on March 15,
1995, finding that INX had waived arbitration and the
remaining claims were not subject to the federal arbitration
scheme. Now, over three years after Menorah's original
request for arbitration was refused and after the travel of
this matter internationally through three different courts,
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4. Section 205 provides:
Where the subject matter of an action or
proceeding pending in a State court
relates to an arbitration agreement or
award falling under the Convention, the
defendant or the defendants may, at any
time before the trial thereof, remove
such action or proceeding to the district
court of the United States for the
district and division embracing the place
where the action or proceeding is
pending. The procedure for removal of
causes otherwise provided by law shall
apply, except that the ground for removal
provided in this section need not appear
on the face of the complaint but may be
shown in the petition for removal. For
the purposes of Chapter 1 of this title
any action or proceeding removed under
this section shall be deemed to have
been brought in the district court to
which it is removed.
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INX asks us to reverse the district court and send the matter
to arbitration.
Review of a district court's determination of
waiver of arbitration is plenary. See Commercial Union Ins.
___ ______________________
Co. v. Gilbane Bldg. Co., 992 F.2d 386, 390 (1st Cir. 1993);
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Leadertex, Inc. v. Morganton Dyeing & Finishing Corp., 67
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F.3d 20, 25 (2d Cir. 1995). "[T]he findings upon which the
[legal] conclusion [of waiver] is based are predicate
questions of fact, which may not be overturned unless clearly
erroneous." Price v. Drexel Burnham Lambert, Inc., 791 F.2d
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1156, 1159 (5th Cir. 1986).
In the increasingly international business world,
the use of arbitration agreements may be particularly
important to avoid the
uncertainty [that] will almost inevitably
exist with respect to any contract
touching two or more countries, each with
its own substantive laws and conflict-of-
laws rules. A contractual provision
specifying in advance the forum in which
disputes shall be litigated and the law
to be applied is, therefore, an almost
indispensable precondition to achievement
of the orderliness and predictability
essential to any international business
transaction.
Scherk v. Alberto-Culver Co., 417 U.S. 506, 516 (1974).
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These same interests motivated this country to adopt and
implement the Convention, under which this case was removed
to federal court:
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The goal of the Convention, and the
principal purpose underlying American
adoption and implementation of it, was to
encourage the recognition and enforcement
of commercial arbitration agreements in
international contracts and to unify the
standards by which agreements to
arbitrate are observed and arbitral
awardsareenforcedinthesignatorycountries.
Id. at 520 n.15.
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Against this backdrop of a strong United States
policy favoring arbitration, INX essentially makes two
arguments. The district court erred, it says, in deciding
that it waived arbitration in the events of 1992. In any
event, INX says, it now has the right to have the question of
the enforceability of the Israeli judgment, including INX's
counterclaim, determined by an arbitrator.
The district court did not err on either the facts
or the law. The explicit waiver came when INX was invited to
arbitrate in July 1992. INX expressly declined. It is not
saved from that declination by the fact that Menorah had
offered in the July 1, 1992 letter to have an arbitrator
appointed for INX. That offer too was declined and INX said
it was both unwilling and unable to participate in the
arbitration.5
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5. INX claims the agreement required an arbitrator be
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appointed for it if it declined to do so. The language,
hardly a model of clarity, does not so directly provide, and
easily could have done so were that the intent.
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The implicit waiver came from INX's entire course
of conduct. This court has repeatedly held that "parties may
waive their right to arbitration and present their dispute to
a court." Caribbean Insurance Services, Inc. v. American
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Bankers Life Assurance Co., 715 F.2d 17, 19 (1st Cir. 1983).
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In Caribbean, we found waiver where the party claiming
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arbitration delayed doing so until six months after it was
sued and it had entered a stipulation for a speedy trial in
exchange for a "reprieve from a likely contempt finding."
Id. at 20. In Jones Motor Co. v. Chauffeurs, Teamsters and
___ _______________ _________________________
Helpers Local Union No. 633, 671 F.2d 38, 43 (1st Cir.),
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cert. denied, 459 U.S. 943 (1982), we found waiver where
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eleven months of litigation occurred before arbitration was
first raised, saying:
[T]o require that parties go to
arbitration despite their having advanced
so far in court proceedings before
seeking arbitration would often be
unfair, for it would effectively allow a
party sensing an adverse court decision a
second chance in another forum.
That sentiment applies here. In Gutor Int'l AG v. Raymond
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Packer Co., 493 F.2d 938, 945 (1st Cir. 1974), we found
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waiver where a party unconditionally submitted part of an
arbitrable matter to the courts, but later attempted to take
advantage of the arbitration clause when the opposing party
counterclaimed. Cf. Raytheon Co. v. Automated Business
___ _____________ __________________
Systems, Inc., 882 F.2d 6, 8 (1st Cir. 1989) (defendant
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waived issue of whether it consented to issue of punitive
damages being submitted to arbitration by delaying and then
raising it in desultory manner on first day of arbitration
and not pursuing it).
It has been the rule in this Circuit that in order
for plaintiffs to prevail on "their claim of waiver, they
must show prejudice." Sevinor v. Merrill Lynch, Pierce,
_______ _______________________
Fenner & Smith, Inc., 807 F.2d 16, 18 (1st Cir. 1986)
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(finding no prejudice where defendants explicitly and
promptly raised arbitration as a defense to a suit); accord
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Commercial Union, 992 F.2d at 390. Because there was ample
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prejudice here, as the district court found, we have no
reason to reconsider whether to apply the litmus test of a
showing of prejudice to establish waiver or to apply a
totality of circumstances test, as other circuits have done.
See Metz v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 39
___ ____ _____________________________________________
F.3d 1482, 1489 (10th Cir. 1994) (applying a "totality of the
circumstances" test for the determination of waiver, where
prejudice was but one factor); S+L+H S.p.A. v. Miller-St.
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Nazianz, Inc., 988 F.2d 1518, 1527 (7th Cir. 1993).
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Ignoring its failure to appear in the Israeli
action,6 INX characterizes its delay of over a year in
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6. INX asserts that its inaction during the proceedings in
Israel was justified by its desire to preserve its right to
challenge the jurisdiction of the Israeli court. But INX
voluntarily entered into reinsurance agreements with an
Israeli corporation that specified Tel Aviv as the site for
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seeking arbitration as insufficient to show prejudice. There
is no per se rule that a one year delay is or is not
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sufficient to support waiver. Cf. J & S Constr. Co., Inc. v.
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Travelers Indem. Co., 520 F.2d 809 (1st Cir. 1975) (thirteen
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month delay and participation in discovery was not enough to
constitute a showing of prejudice). The period of delay here
was not one in which information useful to the ultimate
resolution of the dispute was being procured through
discovery. Cf. Cabinetree of Wis., Inc. v. Kraftmaid
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Cabinetry, Inc., 50 F.3d 388, 391 (7th Cir. 1995) (explaining
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that delay alone is not automatically a source of prejudice
and that on occasion it can comprise time the parties spend
in determining information they would need in arbitration
anyway). INX chose not to invoke arbitration from July 1992
until October 1993 and Menorah bore the costs of proceeding
to try to obtain the sums it thought owed. See Van Ness
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Townhouses v. Mar Indus. Co., 862 F.2d 754, 759 (9th Cir.
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1988) (waiver found where party made conscious decision to
delay demand for arbitration while continuing to seek
judicial determination of arbitrable claims). There was no
error in the district court's finding that Menorah incurred
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any arbitration proceedings. In the commercial context a
forum selection clause, even one for arbitration, confers
personal jurisdiction on the courts of the chosen forum. See
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Unionmutual Stock Life Ins. Co. of Am. v. Beneficial Life
________________________________________ ________________
Ins. Co., 774 F.2d 524, 527 (1st Cir. 1985).
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expenses as a direct result of INX's dilatory behavior and
that that was prejudice enough.
INX suggests that the question of arbitrability
should be decided in the first instance by the arbitrator.
As to that and to INX's argument that the issue of the
enforceability of the Israeli judgment must itself be
arbitrated, we are guided by First Options of Chicago, Inc.
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v. Kaplan, 115 S. Ct. 1920 (1995). There, the court was
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faced with the question of who has the primary power to
decide whether parties agreed to arbitrate the merits of
their dispute. Id. at 1923. Here, we face a variant of that
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question -- who has the primary power to decide whether the
parties agreed to arbitrate the issue of enforceability of a
default judgment following failure to arbitrate under an
arbitration clause. That question is appropriate because it
is conceivable that parties could decide that such
enforceability disputes are subject to arbitration.
"[A]rbitration is simply a matter of contract between the
parties; it is a way to resolve those disputes -- but only
those disputes -- that the parties have agreed to submit to
arbitration."7 Id. at 1924.
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7. There is precedent that, as a matter of law, actions to
enforce foreign money judgments, even those confirming
arbitration awards, are not preempted by the Convention. See
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Island Territory of Curacao v. Solitron Devices, Inc., 489
____________________________ _______________________
F.2d 1313, 1319 (2d Cir. 1973), cert. denied, 416 U.S. 986
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(1974). We think, however, the better rule here is to follow
First Options. See also Mastrobuono v. Shearson Lehman
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So we apply the First Options rule: "Courts should
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not assume that the parties agreed to arbitrate arbitrability
unless there is 'clear and unmistakable' evidence that they
did so." Id. (citations omitted). There is nothing in the
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agreement between INX and Menorah clearly stating that the
question of arbitrability of judgments should be decided by
an arbitrator. Thequestion is onefor resolution by thecourt.
We also agree with the district court that
arbitration of the enforceability of the Israeli judgment is
not required. "[G]iven the principle that a party can be
forced to arbitrate only those issues it specifically has
agreed to submit to arbitration," id. at 1925, we do not
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interpret the silence of the agreement on this point to
create a right of arbitration. And if the agreement could be
read for such an implication, INX has nevertheless waived its
right to arbitrate enforceability of the judgment.
The law does not lend itself to INX's claims and
ultimately, the strong policy reasons favoring arbitration
and underlying the adoption of the Convention would be
undercut, not served, by acceptance of INX's position.
Arbitration clauses were not meant to be another weapon in
the arsenal for imposing delay and costs in the dispute
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Hutton, Inc., 115 S. Ct. 1212, 1216 (1995) (issue of whether
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arbitrator may award punitive damages "comes down to what the
contract has to say about the arbitrability of petitioners'
claim for punitive damages").
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resolution process. Underlying the policy of enforcing
contracts to arbitrate is a belief that where parties can
agree to a mutually optimal method and forum for dispute
resolution, it serves the interests of efficiency and economy
to allow them to do so. Cf. Mitsubishi Motors Corp. v. Soler
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Chrysler-Plymouth, Inc., 473 U.S. 614, 633 (1985); Glass &
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Allied Workers Int'l Union, Local 182B v. Excelsior Foundry
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Co., 56 F.3d 844, 848 (7th Cir. 1995) ("Arbitration is a
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service sold in a competitive market. The rules adopted by
the sellers are presumptively efficient."); see also Steven
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Shavell, Alternative Dispute Resolution: An Economic
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Analysis, 24 J. Legal Stud. 1, 8-9 (1995) (a central
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rationale for encouraging parties to contract for their own
method of dispute resolution is that they are likely to agree
to the most efficient forum to serve their needs).
In the context of international contracts, the
opportunities for increasing the cost, time and complexity of
resolving disputes are magnified by the presence of multiple
possible fora, each with its own different substantive rules,
procedural schematas, and legal cultures. This is fertile
ground for manipulation and mischief, and acceptance of INX's
arguments would lead to the very problems the Convention
sought to avoid. Cf. Elizabeth Warren, Bankruptcy
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Policymaking in an Imperfect World, 92 Mich. L. Rev. 336,
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348-49 (1993) (Differences among legal systems provide
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incentives for "nonproductive strategic behavior" as debtors
attempt to take advantage of opportunities presented in ways
that are wasteful and drive up costs.). "The intention
behind such [arbitration] clauses, and the reason for
judicial enforcement of them, are not to allow or encourage
parties to proceed, either simultaneously or sequentially in
multiple forums." Cabinetree, 50 F.3d at 390.
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Neither efficiency nor economy are served by
adopting INX's arguments. The scenario here -- in which a
party knowingly opts out of the arbitration for which it has
contracted (even if driven by looming insolvency8), sits on
its hands while a default judgment is entered against it
after service, refuses to pay, requires an enforcement action
be filed against it, and only then cries "arbitration" --
undermines both the certainty and predictability which
arbitration agreements are meant to foster. Cf. Mitsubishi
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Motors, 473 U.S. at 631 (Courts should avoid inviting
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"'unseemly and mutually destructive jockeying by the parties
to secure tactical litigation advantages. . . . [It would]
damage the fabric of international commerce and trade, and
imperil the willingness and ability of businessmen to enter
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8. Ordinarily in a dispute between on-going commercial
players "reputational" costs serve to soften inclinations to
obtain an advantage in a single dispute. But where a party
is in financial distress, these reputational checks become
far less effective. Cf. Ronald J. Gilson, Value Creation by
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Business Lawyers: Legal Skills and Asset Pricing, 94 Yale L.
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J. 239, 289-90 (1984).
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into international commercial agreements.'") (quoting Scherk,
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417 U.S. at 516-17); see also Gilmore v. Shearson/Am.
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Express Inc., 811 F.2d 108, 112 (2d Cir. 1987) (parties
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should not be permitted to use a delayed assertion of
arbitration as a "tactic in a war of attrition designed to
make the litigation too expensive for plaintiff"); Allied-
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Bruce Terminix Cos. v. Dobson, 115 S. Ct. 834, 841 (1995) (in
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interpreting the Federal Arbitration Act court notes that
Congress intended to help parties avoid costs and delay).
The order remanding this case to the Superior Court
of Puerto Rico is also appropriate, under either of two
alternative interpretations of the Convention. Section 205
allows removal if the subject matter of the [state] court
action "relates to an arbitration agreement . . . falling
under the Convention," and it is arguable, though far from
certain, that an action to enforce a default judgment where a
defense is that the parties agreed to arbitrate is an action
"relating to an arbitration agreement." If the case is
viewed as being properly removed on the basis of both the
plaintiff's enforcement action and the counterclaim, then the
finding of waiver ultimately removed the basis for federal
jurisdiction.9
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9. Menorah argues that this court lacks appellate
jurisdiction because the district court's remand order was
based on a determination of its lack of subject matter
jurisdiction over the removed case and that 28 U.S.C.
1447(d) (1994) bars the review of such a determination. See
___
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If, on the other hand, the removal was based on the
counterclaim alone, the pendent claim could be remanded.
Principles of pendent jurisdiction allowed the district court
to exercise its discretion and relinquish jurisdiction over a
removed case where all the federal claims were gone and only
pendent exequatur claims remained. See 28 U.S.C. 1367(c)
___
(1994); Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 348-
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52, 355 n.11 (1988); Rodriguez v. Comas, 888 F.2d 899, 904
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n.20 (1st Cir. 1989). Since this case had been in the
Commonwealth's courts for over a year prior to its removal
and was on the verge of resolution, the court's exercise of
discretion to remand the pendent claims was particularly
appropriate.
The district court's order remanding the case to
the Superior Court of Puerto Rico, so that the exequatur
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Things Remembered, Inc. v. Petrarca, 64 U.S.L.W. 4035, 4036
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(U.S. Dec. 5, 1995). Menorah also argues that the
district court erred in granting removal of the proceedings
in the first place. Since Menorah easily wins an affirmance
on the substantive issue of waiver, we decline to decide the
jurisdictional issues raised by it. See Norton v. Mathews,
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427 U.S. 524, 528-33 (1976) (where merits can be easily
resolved in favor of the party challenging jurisdiction,
resolution of complex jurisdictional inquiry may be avoided);
Lambert v. Kysar, 983 F.2d 1110, 1118 n.11 (1st Cir. 1993);
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Rhode Island Hosp. Trust Nat'l Bank v. Howard Communications
____________________________________ _____________________
Corp., 980 F.2d 823, 829 (1st Cir. 1992). INX in turn argues
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that there is no jurisdiction to hear Menorah's argument that
the case was improperly removed to federal court. Because we
do not reach those arguments, we need not address that
jurisdictional issue either.
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action may proceed, is affirmed. Double costs are awarded to
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Menorah.
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