Sandvik AB v. Advent Intl Corp , 220 F.3d 99 ( 2000 )

Opinions of the United
2000 Decisions States Court of Appeals
for the Third Circuit
7-21-2000
Sandvik AB v. Advent Intl Corp
Precedential or Non-Precedential:
Docket 00-5063
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Filed July 21, 2000
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
NO. 00-5063
SANDVIK AB
v.
ADVENT INTERNATIONAL CORP; ADVENT
INTERNATIONAL GMBH; GLOBAL PRIVATE EQUITY III
L.P.; GLOBAL PRIVATE EQUITY III-A L.P.; GLOBAL
PRIVATE EQUITY III-B L.P.; ADVENT PGGM GLOBAL L.P.;
ADVENT PARTNERS GPE-III LP; ADVENT PARTNERS (NA)
GPE-III L.P.; ADVENT EURO-ITALIAN DIRECT
INVESTMENT PROGRAM L.P.; ADVENT EUROPEAN
CO-INVESTMENT PROGRAM L.P.; ADVENT PARTNERS
L.P.; RALF HUEP; GLOBAL PRIVATE EQUITY III-C L.P.
Advent International Corp.; Global Private Equity III L.P.;
Global Private Equity III-A L.P.; Global Private Equity III-B
L.P.; Advent PGGM Global L.P.; Advent Partners GPE-III LP;
Advent Partners (NA) GPE-III L.P.;
Advent Euro-Italian Direct Investment Program;
Advent European Co-Investment Program L.P.;
Advent Partners L.P. Global Private Equity III-C L.P.,
Appellants
On Appeal From the United States District Court
For the District of Delaware
(D.C. Civ. No. 99-cv-00486)
District Judge: Honorable Roderick R. McKelvie
Argued: April 27, 2000
Before: BECKER, Chief Judge, BARRY and
BRIGHT* Circuit Judges.
_________________________________________________________________
* Honorable Myron H. Bright, United States Circuit Judge for the Eighth
Circuit, sitting by designation.
(Filed: July 21, 2000)
ROBERT B. DAVIDSON, ESQUIRE
(ARGUED)
Baker & McKenzie
805 Third Avenue
New York, NY 10022
THOMAS PEELE, ESQUIRE
Baker & McKenzie
815 Connecticut Avenue, NW
Washington, DC 20006
Counsel for Appellants
WILLIAM P. QUINN, JR., ESQUIRE
(ARGUED)
BRIAN T. FEENEY, ESQUIRE
Morgan, Lewis, & Bockius LLP
1701 Market Street
Philadelphia, PA 19103-2921
ARTHUR G. CONNOLLY, JR.,
ESQUIRE
Connolly, Bove, Lodge & Hutz
1220 Market Street
P.O. Box 2207
Wilmington, DE 19899-2207
Counsel for Appellee
OPINION OF THE COURT
BECKER, Chief Judge.
This appeal arises under the Federal Arbitration Act
("FAA"), 9 U.S.C. S 1 et seq. It requires that we consider
the enforceability of an arbitration clause in a putative
contract between Sandvik AB, a Swedish manufacturing
corporation, and Advent International Corporation, which is
an equity investment firm based in the United States and
incorporated in Delaware, and its associated investment
funds for the sale of certain Sandvik subsidiaries to a joint
venture company to which Advent would contribute capital.
2
When Advent communicated that it did not view itself as
bound by the agreement, Sandvik filed a suit in Delaware
state court, and that suit was removed to the District Court
for the District of Delaware. Though denying that it was
bound by the contract--Advent contends that the agent
who signed the agreement on its behalf lacked authority to
do so and that it had so notified Sandvik--Advent moved to
compel arbitration under an arbitration clause contained in
the agreement. Sandvik objected, contending that the
validity of the arbitration clause depended on the validity of
the agreement and that that question had to be determined
by the District Court. The District Court denied the motion
to compel, reasoning that the existence of the underlying
contract, and thus the arbitration clause with it, was in
dispute.
This appeal presents the anomalous situation where a
party suing on a contract containing an arbitration clause
resists arbitration, and the defendant, who denies the
existence of the contract, moves to compel it. Two issues
are presented. The first question pertains to our
jurisdiction. Sandvik contends that this interlocutory
appeal falls outside the FAA's interlocutory appeal
provisions because the District Court has not reached a
final conclusion on the validity of the arbitration clause. We
conclude that this argument is misplaced for three reasons.
First, the statute's plain language contemplates
interlocutory appeals from orders of the sort entered by the
District Court. Second, other parts of the statute evince
clear Congressional intent that challenges to refusals to
compel arbitration be promptly reviewed by appellate
courts. Third, the issue that the District Court must decide
in determining whether the arbitration clause is valid is
closely bound with the underlying dispute as to whether an
overall contract was entered into by the parties. It is
precisely this sort of appeal that the FAA's interlocutory
appeal provisions were designed to address. We thus have
appellate jurisdiction.
The second question is whether the District Court was
correct in refusing to compel arbitration. Advent argues
that the arbitration clause is severable from the contested
agreement under the doctrine announced by the Supreme
3
Court in Prima Paint Corp. v. Flood & Conklin
Manufacturing. Co., 388 U.S. 395 (1967). Advent agrees
that it is bound by the arbitration clause even though it
claims never to have bound itself to the underlying
contract. Sandvik rejoins that cases establish that when a
party claims not to have even signed a contract, the district
court must first determine whether a valid arbitration
agreement was signed. This is a close question, but we
conclude that Sandvik has the better of the argument. Even
under the severability doctrine, there may be no arbitration
if the agreement to arbitrate is nonexistent. Advent's
concession that the arbitration clause is binding has only a
limited effect, because Advent denies the legal validity of
the act that brought the arbitration clause into effect--i.e.,
the signing of the agreement. As a result, Advent's
recognition of the arbitration clause is essentially an offer
to be bound, and not a manifestation of an underlying
binding contract. We will therefore affirm the District
Court's order denying the motion to compel.
I.
The parties do not dispute the relevant facts as recited in
the District Court's opinion, which we summarize as
follows. Plaintiff Sandvik is a Swedish corporation that has
its primary place of business in Sandviken, Sweden. It
produces specialty industrial goods. Defendant Advent
International Corporation is a Delaware corporation
headquartered in Boston, Massachusetts. It is a private
equity investment firm with offices around the world.
Advent is also general partner in a number of limited
partnerships ("Advent Funds") that perform Advent's
investment operations. The Advent Funds are also
defendants in the case.
In early 1998, Sandvik decided to divest itself of three
subsidiaries, Sandvik Sorting Systems, Inc., CML Handling
Technology S.p.A., and CML K.K. (collectively, "Sandvik
Sorting"), and entered into negotiations with Advent. During
the negotiations, Advent's principal representative was Ralf
Huep, general manager of Advent GmbH, which is based in
Germany, and a director of Advent's British affiliate.
4
In September 1998, Advent, through one of its
investment funds, Global Private Equity III L.P. ("GPE"),
executed a Letter of Intent outlining proposed terms for the
acquisition of Sandvik Sorting. The letter provided that
while Advent conducted its due diligence review of
Sandvik's records, Sandvik would not entertain bids from
other prospective purchasers. Later that year, Advent
proposed a structure for the transaction, suggesting that
Sandvik maintain a minority stake in Sandvik Sorting by
investing in the post-acquisition enterprise. To accomplish
the goal, Advent proposed a new joint venture company
that would purchase Sandvik Sorting from Sandvik.
On February 16, 1999, a Joint Venture Agreement
("JVA") was executed. Huep signed on behalf of the Advent
Funds. He executed the agreement as "an attorney-in-fact
without power-of-attorney." The agreement bound the
parties to form International Sorting Systems Holding B.V.,
to contribute capital to the new company, and to direct the
company to enter into a Share Purchase Agreement that
would provide for the company's purchase of all of
Sandvik's interest in Sandvik Sorting. The JVA also
contained a mandatory arbitration clause, providing that
"[a]ny dispute arising out of or in connection with this
Agreement and/or any agreement arising out of this
Agreement shall, if no amicable settlement can be reached
through negotiations, be finally settled by arbitration in
accordance with the rules of the Netherlands Arbitration
Institute."
On April 30, Advent, in a letter written by Huep, notified
Sandvik that Advent Funds did not intend to honor the
JVA. Huep stated that he signed the JVA without proper
authorization from Advent, and that the agreement was
therefore not binding.1 Sandvik sued, bringing claims for
_________________________________________________________________
1. Appellants placed evidence in the record that represents that the
phrase "attorney-in-fact, without power-of-attorney" is a well-known
concept in German law (where it is rendered as " Vertreter ohne
Vertretungsmacht"). They maintain that signing an agreement in such a
capacity means that the agent has no authority to bind his or her
principal and that any agreement signed by an agent who is "attorney-
in-fact, without power-of-attorney" does not become valid until the
principal ratifies it.
5
breach of contract, fraud, reckless misrepresentation, and
negligent misrepresentation. The suit, brought in Delaware
state court, was removed to federal court pursuant to 9
U.S.C. S 205, which permits removal from state courts
when the subject matter of the case relates to an
arbitration agreement under the Convention on the
Recognition and Enforcement of Foreign Arbitral Awards
("CREFAA"), to which both Sweden and the United States
are signatories. See CREFAA, opened for signature June 10,
1958, 21 U.S.T. 2517 (entered into force by the United
States, Dec. 29, 1970). Advent Funds then moved to compel
arbitration under the FAA. The District Court refused,
reasoning that it lacked authority to enforce the arbitration
agreement until it determined whether the parties entered
into a binding agreement. Appellants (collectively hereafter
referred to as "Advent") filed a timely notice of appeal.2
There are no questions of fact before us, and our review of
all legal issues is plenary.
II.
This matter arises under Chapter Two of the FAA, which
implements the CREFAA. Article II S 3 of the CREFAA
provides that
[t]he court of a Contracting State, when seized of an
action in a matter in respect to which the parties have
made an agreement within the meaning of this article,
shall, at the request of one of the parties, refer the
parties to arbitration, unless it finds that the said
agreement is null and void, inoperative or incapable of
being performed.
Section 206 of the FAA allows district courts to issue orders
to compel arbitration, see 9 U.S.C. S 206, as does a similar
provision in Chapter One of the FAA, see id.S 4.
_________________________________________________________________
2. Advent also moved for a stay pending arbitration, which the District
Court similarly refused to grant. In addition, the District Court also
denied motions by Advent to dismiss under Fed. R. Civ. P. 12(b)(6), Fed.
R. Civ. P. 9(b), and for forum non conveniens grounds. The court also
deferred ruling on a motion by Huep and Advent GmbH to dismiss for
lack of personal jurisdiction, pending limited discovery on the issue.
These additional matters are not before us.
6
As noted above, and considered in greater detail below,
the District Court concluded that it could not order
arbitration until it determined the validity of the underlying
contract. The FAA provides for interlocutory appeals from a
District Court's refusal to compel arbitration. See 9 U.S.C.
S 16(a) ("An appeal may be taken from . . . an order . . .
denying a petition under section 4 of this title to order
arbitration to proceed, [or] denying an application under
section 206 of this title to compel arbitration."). Here, the
District Court entered an order denying Advent's motion to
compel. On the surface, therefore, this Court appears to
have jurisdiction under 9 U.S.C. S 16, as Advent contends.
Sandvik submits that jurisdiction is lacking. It reasons
that, because the District Court stated that it would have
to make a determination of whether there was an actual
agreement to arbitrate, refusal to order arbitration was not
final for purposes of an interlocutory appeal under 9 U.S.C.
S 16. The FAA, however, does not support Sandvik's
proffered interpretation. The language of S 16 provides for
appeals of orders denying arbitration, and it makes no
distinction between orders denying arbitration and"final
orders" that accomplish the same end.
Moreover, the statute's structure plainly indicates the
appealability of the District Court's order. The statute
provides for a range of appealable orders in arbitration
matters.3 In addition to providing for the appeal of orders
_________________________________________________________________
3. In full, the provision provides:
(a) An appeal may be taken from--
(1) an order--
(A) refusing a stay of any action under sectio n 3 of this title,
(B) denying a petition under section 4 of this title to order
arbitration to proceed,
(C) denying an application under section 206 o f this title to
compel arbitration,
(D) confirming or denying confirmation of an award or partial
award, or
(E) modifying, correcting, or vacating an awar d;
7
that deny an application to compel arbitration, see id.S 16(a)(1)(C), the FAA contains a catch-all provision
regarding any "final decision with respect to an arbitration
that is subject to this title," id. S 16(a)(3). This latter
passage is significant in two respects. One could read this
provision as applying to situations in which the District
Court makes a "final" order directing arbitration. But this is
the same sort of order that Sandvik claims is covered by
S 16(a)(1). If this is the case, and Sandvik's interpretation of
S 16(a)(1) is followed, then the provision providing for
appeals from denials of orders to arbitrate would become
surplusage in light of the more expansive language in
S 16(a)(3). The more natural reading would therefore be to
treat all orders declining to compel arbitration as
reviewable.
Second, even if one were to read the quoted language as
applying only to orders that pertain to arbitrations that
actually occur (and whose commencement are not in
dispute as here),4 the clause reflects that Congress decided
to use the word "final" in one part of the statute, but
declined to do so in the section that declares that orders
denying motions to compel arbitration are indeed
appealable. Furthermore, the statute provides a list of
_________________________________________________________________
(2) an interlocutory order granting, continuing, o r modifying an
injunction against an arbitration that is subject to this title; or
(3) a final decision with respect to an arbitrat ion that is
subject to
this title.
(b) Except as otherwise provided in section 1292(b ) of title 28,
an
appeal may not be taken from an interlocutory order--
(1) granting a stay of any action under section 3 of this title;
(2) directing arbitration to proceed under section 4 of this
title;
(3) compelling arbitration under section 206 of th is title; or
(4) refusing to enjoin an arbitration that is subj ect to this
title.
9 U.S.C. S 16.
4. That is not how this Court interprets the provision. See John Hancock
Mut. Life Ins. Co. v. Olick, 151 F.3d 132, 135-36 (3d Cir. 1998).
8
interlocutory arbitration-related orders that are not
appealable, see id. S 16(b), which pertains solely to
situations in which arbitration is ordered and makes no
mention of factual situations analogous to the current one.
In similar circumstances, our sister circuits have heard
interlocutory appeals of refusals to order arbitration. See
Koveleskie v. SBC Capital Markets, Inc., 167 F.3d 361, 363
(7th Cir. 1999) (holding that, despite the district court's
declaration of a need for discovery before a decision could
be reached on the arbitration issue, there was no doubt
that the requested order was denied, and was thus
appealable); McLaughlin Gormley King Co. v. Terminix Int'l
Co., L.P., 105 F.3d 1192, 1193 (8th Cir. 1997) (reviewing a
district court's refusal to order arbitration prior to discovery
on issue of arbitrability, declaring "an order that favors
litigation over arbitration . . . is immediately appealable
under S 16(a)."). Sandvik's effort to distinguish these cases
is unpersuasive. It argues that the cited cases concerned
the question whether an agreement to arbitrate
encompassed the claims pled in the complaint and not
whether there was any arbitration agreement at all. The
important point arising from those cases, however, has
little to do with determining the nature of the specific
controversy, but is rather that, even if a district court does
not feel itself ready to make a definitive decision on whether
to order arbitration and therefore denies a motion to
compel, an appeal may be heard of its denial order.
Sandvik is unable to refute or distinguish this principle
away.
Sandvik is similarly unable to provide persuasive cases to
the contrary. It cites Chase v. Sidney Frank Importing Co.,
Inc., 133 F.3d 913, No. 97-1407, 1998 WL 3609 (4th Cir.
Jan. 8, 1998), an unpublished opinion in which the court
refused to hear an interlocutory order in a similar case. The
court concluded that the appeal was not ripe for review
because the district court had not determined the
enforceability of the arbitration clause. There, however, the
party resisting arbitration specifically claimed fraud in the
inducement of the arbitration clause. As we discuss in
greater detail below, the Supreme Court has made clear
that a district court may decide whether such fraud
9
occurred prior to compelling arbitration. See Prima Paint
Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04
(1967) ("[I]f the claim is fraud in the inducement of the
arbitration clause itself--an issue which goes to the
`making' of the agreement to arbitrate--the federal court
may proceed to adjudicate it. But the statutory language
does not permit the federal court to consider claims of
fraud in the inducement of the contract generally.")
(footnote omitted). In other words, there was no legal
question for the court of appeals to consider in that matter
because the key issue, whether there was fraud in the
inducement of the arbitration clause, was clearly within the
district court's purview. We conclude that the applicable
precedents more persuasively favor Advent's position that
we have jurisdiction.
Finally, jurisdiction comports with the purposes of the
FAA. Refusing Advent's appeal could circumvent the FAA's
clear purpose of enforcing binding arbitration agreements.
Indeed, the facts of this matter demonstrate the importance
of reading 9 U.S.C. S 16 to reach Advent's appeal. The
question whether there was a binding arbitration clause is
quite possibly inextricably bound with the underlying
merits of the case--that is, the question whether the parties
entered into the underlying contract. Both appear to turn
on the legal effect of Huep's signature on behalf of Advent.
See supra note 1. Were we to refuse to hear Advent's
appeal, Advent faces the possibility of enduring a full trial
on the underlying controversy before it can receive a
definitive ruling on whether it was legally obligated to
participate in such a trial in the first instance. For the
reasons set forth above, we are of the view that the FAA's
text and the precedents interpreting it militate against such
a result.
III.
Having satisfied ourselves of our appellate jurisdiction,
we turn to the merits. This matter is complicated by the
stances the parties have assumed for purposes of this
appeal. Both sides take positions that appear at odds with
their underlying positions in the larger controversy.
Sandvik claims that there can be no arbitration at this
10
stage despite its legal position that the JVA, which calls for
arbitration, is binding. Advent claims that there must be
arbitration despite its underlying position that the JVA is
invalid.
A.
The FAA establishes a strong federal policy in favor of
compelling arbitration over litigation. The Act provides that
if a party petitions to enforce an arbitration agreement,
"[t]he court shall hear the parties, and upon being satisfied
that the making of the agreement for arbitration or the
failure to comply therewith is not in issue, the court shall
make an order directing the parties to proceed to
arbitration in accordance with the terms of the agreement."
9 U.S.C. S 4. The presumption in favor of arbitration carries
"special force" when international commerce is involved, see
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473
U.S. 614, 631 (1985), because the United States is also a
signatory to the Convention on the Recognition and
Enforcement of Foreign Arbitral Awards. The CREFAA
commits the courts of signatory states to refer parties to
arbitration when the parties have agreed to arbitrate
disputes. See CREFAA Art. II. CREFAA is enforced in the
United States under Chapter Two of the FAA.
These statutory pronouncements and legal precepts do
not, however, undermine the principle that the "liberal
federal policy favoring arbitration agreements . . . is at
bottom a policy guaranteeing the enforcement of private
contractual arrangements." Mitsubishi, 473 U.S. at 625(citation and quotation omitted). Accordingly, the District
Court concluded that it had to first determine if there was
indeed an arrangement to arbitrate, which it viewed itself
as unable to do without determining whether Huep's
signature actually bound Advent to the JVA that contained
the arbitration agreement. The CREFAA similarly provides
that a court of a signatory state will not refer the parties of
a dispute to arbitration if it finds that the agreement to
arbitrate is "null and void, inoperative or incapable of being
performed." See CREFAA Art. II S 3.
Advent adverts to a similarly established principle in
arguing that the District Court erred--the notion of
11
severability. It submits that the fact that it disputes the
very existence of a binding JVA does not automatically
translate to a disputation of the validity of the JVA's
arbitration clause. The point of departure for this argument
is Prima Paint Corp. v. Flood & Conklin Manufacturing Co.,
388 U.S. 395 (1967). In that case, the plaintiff brought an
action to rescind its contract with the defendant, who
moved to arbitrate the dispute. See id. at 398-99. The
Supreme Court upheld the district court's order staying the
action pending arbitration, ruling that an arbitration clause
was to be enforced even though a party to the contract
sued to rescind the contract on the basis of fraud in the
inducement.
The Court explained that if the arbitration clause itself
was claimed to be fraudulently induced, the court could
decide the matter. See id. at 403-04. "We hold, therefore,
that in passing upon . . . [an] application for a stay while
the parties arbitrate, a federal court may consider only
issues relating to the making and performance of the
agreement to arbitrate." Id. at 404."So, for example, a
challenge based on fraud in the inducement of the whole
contract (including the arbitration clause) is for the
arbitrator, while a challenge based on the lack of mutuality
of the arbitration clause would be for the court."
Matterhorn, Inc. v. NCR Corp., 763 F.2d 866, 868 (7th Cir.
1985) (citation omitted). Importantly, as discussed further
below, Prima Paint's holding addressed the effect of fraud in
the inducement claims. It did not grapple with what is to be
done when a party contends not that the underlying
contract is merely voidable, but rather that no contract ever
existed.
This distinction is an important one, for though
arbitration clauses are severable from their larger
contracts, the question whether the underlying contract
contains a valid arbitration clause still precedes all others
because "arbitration is a matter of contract and a party
cannot be required to submit to arbitration any dispute
which he has not agreed so to submit." AT&T Techs., Inc. v.
Communications Workers of Am., 475 U.S. 643, 648 (1986)
(quoting Steelworkers v. Warrior & Gulf Navigation Co., 363
U.S. 574, 582 (1960)). We must therefore consider how this
12
principle interacts with the severability doctrine announced
by Prima Paint. Neither party disputes that Prima Paint and
its progeny must be reckoned with notwithstanding that
Prima Paint did not involve the CREFAA. See 9 U.S.C. S 208
(providing that Chapter One of the FAA applies to CREFAA
cases to the extent that it is not in conflict with Chapter
Two of the FAA and the provisions of the convention).
Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., Ltd., 636
F.2d 51 (3d Cir. 1980), is the most relevant precedent from
this Court. There the issue was whether the plaintiff had
actually entered into an arbitration agreement and whether
the relevant documents, which contained an arbitration
clause, were intended as contracts. See id. at 53. We held
that, before arbitration could be ordered, the district court
had to be certain that there was an agreement to arbitrate,
a question that in turn implicated the validity of the
underlying contract:
Before a party to a lawsuit can be ordered to arbitrate
and thus be deprived of a day in court, there should be
an express, unequivocal agreement to that effect. If
there is doubt as to whether such an agreement exists,
the matter, upon a proper and timely demand, should
be submitted to a jury. Only when there is no genuine
issue of fact concerning the formation of the agreement
should the court decide as a matter of law that the
parties did or did not enter into such an agreement.
Id. at 54 (footnote omitted). On the facts of the case, the
panel concluded that, because the plaintiff denied intending
to execute a contract and because there was an issue over
whether the person signing the disputed document had
authority to execute the contract, a trial on the existence of
the agreement was necessary before arbitration could
occur. See id. at 55.
B.
Par-Knit Mills appears to support Sandvik's position that
the District Court must first determine whether any
contract was entered into before it can compel arbitration.
Advent disagrees and urges this Court to draw a distinction
between two types of cases: those in which the party
13
resisting arbitration is also suing to enforce the entire
contract, as here, and those in which the party resisting
arbitration also denies the existence of the whole
agreement, as was the case in Par-Knit Mills. Advent agrees
that when the party who resists arbitration also claims that
there was no overall contract, then the district court must
first make a ruling on whether a contract existed before it
may compel arbitration. Advent contends, however, that no
such finding is necessary when, as here, the party resisting
arbitration seeks to enforce the same contract that contains
the arbitration clause. Advent submits that, because the
agreements to arbitrate are severable from the contracts in
which they are embedded, and both parties agree that there
is an agreement to arbitrate, arbitration must be ordered.
We do not find the reading proffered by Advent to be
persuasive. Rather, we conclude that the doctrine of
severability presumes an underlying, existent, agreement.
Such an agreement exists, under the Prima Paint doctrine,
even if one of the parties seeks to rescind it on the basis of
fraud in the inducement. Par-Knit Mills makes clear,
however, that it does not if no contract ever existed. This
distinction was drawn in detail by Three Valleys Municipal
Water District v. E.F. Hutton & Co., Inc., 925 F.2d 1136 (9th
Cir. 1991), which carries several similarities to the current
dispute. As here, the plaintiff resisted the arbitration
sought by the defendant when the underlying issue was
whether the contract containing the arbitration clause was
invalid because it had been signed by an unauthorized
individual. See id. at 1138. Unlike Sandvik, however, the
plaintiff in Three Valleys was also the party claiming the
contract's invalidity. For purposes of our analysis, as
discussed in greater detail below, we conclude that this is
a distinction with little difference.
In ruling for the plaintiff, the Ninth Circuit accepted that
the Prima Paint doctrine extends to grounds for contract
rescission other than fraud in the inducement, such as
frustration of purpose, duress, unconscionability, and the
like. See id. at 1140. Nonetheless, the court refused to
order arbitration before the district court could rule on the
question whether a valid binding contract had been entered
into at all. "[W]e read Prima Paint as limited to challenges
14
seeking to avoid or rescind a contract--not to challenges
going to the very existence of a contract that a party claims
never to have agreed to." Id. The court then made a
significant legal distinction. "Under this view, Prima Paint
applies to `voidable' contracts--those `where one party was
an infant, or where the contract was induced by fraud,
mistake, or duress, or where breach of a warranty or other
promise justifies the aggrieved party in putting an end to
the contract.' " Id. (quoting Restatement (Second) of
Contracts S 7 cmt. b (1981)); see also In re Pollux Marine
Agencies, Inc., 455 F. Supp. 211, 219 (S.D.N.Y. 1978). The
court then went on to cite a number of cases that it deemed
consistent with its interpretation of the Prima Paint
doctrine, including this Court's opinion in Par-Knit Mills.5
_________________________________________________________________
5. As Three Valleys recited:
Ample case law supports this holding. See, e.g. , Camping Constr.
Co.
v. District Council of Iron Workers, Local 378, 915 F.2d 1333, 1340
(9th Cir.1990) ("The court must determine whether a contract ever
existed; unless that issue is decided in favor of the party seeking
arbitration, there is no basis for submitting any question to an
arbitrator."); National R.R. Passenger Corp. v. Boston & Maine
Corp.,
850 F.2d 756, 761 (D.C.Cir.1988) ("if there was never an agreement
to arbitrate, there is no authority to require a party to submit to
arbitration"); I.S. Joseph Co.[Inc., v. Mich. Sugar Co], 803 F.2d
[396,]
400 [(8th Cir. 1986] ("the enforceability of an arbitration clause
is a
question for the court when one party denies the existence of a
contract with the other"); Cancanon v. Smith Barney, Harris, Upham
& Co., 805 F.2d 998 (11th Cir.1986) (defense of fraud in the factum
is not arbitrable). In fact, there are at least four cases, under
the
Federal Arbitration Act, where a court has held that the question
of
whether a particular individual has authority to bind a party must
be determined by the court, not by an arbitrator. See Par-Knit
Mills,
Inc. v. Stockbridge Fabrics Co., 636 F.2d 51 (3d Cir.1980); N & D
Fashions, Inc. v. DHJ Indus., Inc., 548 F.2d 722 (8th Cir.1976);
Smith Wilson Co. v. Trading & Dev. Establishment, 744 F.Supp. 14(D.D.C.1990); Ferreri v. First Options, Inc., 623 F.Supp. 427(E.D.Pa.1985).
Id. at 1141; see also Chastain v. Robinson-Humphrey Co., Inc., 957 F.2d
851, 855 (11th Cir. 1992) ("Prima Paint has never been extended to
require arbitrators to adjudicate a party's contention, supported by
substantial evidence, that a contract never existed at all." (citing Three
Valleys)).
15
We find this analysis persuasive. Because under both the
CREFAA and the FAA a court must decide whether an
agreement to arbitrate exists before it may order
arbitration, the District Court was correct in determining
that it must decide whether Huep's signature bound Advent
before it could order arbitration. This is a necessary
prerequisite to the court's fulfilling its role of determining
whether the dispute is one for an arbitrator to decide under
the terms of the arbitration agreement. See AT&T Techs. v.
Communications Workers of Am., 475 U.S. 643, 651 (1986).
Mindful of the doctrine announced in Prima Paint , which
did not consider a situation in which the existence of the
underlying contract was at issue, we draw a distinction
between contracts that are asserted to be "void" or non-
existent, as is contended here, and those that are merely
"voidable," as was the contract at issue in Prima Paint, for
purposes of evaluating whether the making of an
arbitration agreement is in dispute.6
C.
Allowing the District Court to pass on the question
whether the arbitration agreement is valid when the party
asserting the right to arbitrate denies the broader
agreement comports with contract law principles. As
discussed above, arbitration is a matter of contract, and no
arbitration may be compelled in the absence of an
agreement to arbitrate. See AT&T Techs., Inc. , 475 U.S. at
648. Advent has agreed that it is bound to arbitrate, but
the validity of such an agreement cannot arise out of a
broader contract if no broader contract ever existed. This is,
however, precisely Advent's position. Because Advent
submits that there is no underlying agreement, if
arbitration is to be compelled, one has to look elsewhere for
a binding agreement between the parties to go to
arbitration. Cf. Par-Knit Mills, 636 F.2d at 55 ("An
_________________________________________________________________
6. Advent does make the argument that the JVA should be viewed as
"voidable" because Advent possessed the power to avoid the agreement
through refusal to ratify. But this is a merits argument regarding the
fundamental issue of whether the parties formed a binding arbitration
agreement.
16
unequivocal denial that the agreement had been made,
accompanied by supporting affidavits . . . in most cases
should be sufficient to require a jury determination on
whether there had in fact been a meeting of the minds.")
(quotation and citation omitted).
Advent contends that, because it does not challenge the
arbitration clause, we need look no further for an
agreement to arbitrate. It contends that the arbitration
clause can be separated from the main agreement under
the Prima Paint doctrine. But Advent's fundamental
position, that Huep lacked the authority to bind the
company, is at odds with this claim. The validity of the
arbitration clause as a contract, which the District Court
must determine prior to ordering arbitration, derives from
Huep's authority to bind Advent. Therefore, there does not
appear to be any independent source of the validity of the
arbitration clause once the underlying contract is taken off
the table. If Huep's signature is not binding, there is no
arbitration clause.
To be sure, Advent argues strenuously that the District
Court could not consider the narrow form of this issue--
that is, did Huep bind Advent to the arbitration clause in
isolation from the JVA as a whole--because Advent did not
contest arbitrability. The FAA speaks, however, of the
court's need to be satisfied that there is no issue of whether
the arbitration agreement was made. See 9 U.S.C. S 4.
Moreover, the issue is contested. By claiming that Huep's
signature, which was to the JVA as a whole and not a
specific clause, is non-binding, Advent is the one that has
placed the existence of the arbitration clause in dispute.
To hold otherwise would be to assume the existence of a
contract without consideration. If Advent did not bind itself
to the JVA through Huep's signature, as it contends, when
did it promise to go to arbitration? What is its consideration
for Sandvik's promise to do the same? Advent has not
directed us to any place outside of the JVA for answers.
This observation is not at odds with the Prima Paint
severability doctrine. There is no doubt that agreements to
arbitrate can be deemed to be valid contracts severable
from a larger contract if these agreements are recognized as
meeting the conditions of contract formation. See Sauer-
17
Getriebe KG v. White Hydraulics, 715 F.2d 348, 350 (7th
Cir. 1983) ("The agreement to arbitrate and the agreement
to buy and sell . . . are separate. [Plaintiff 's] promise to
arbitrate was given in exchange for [defendant's] promise to
arbitrate and each promise was sufficient consideration for
the other."). It is also true that when arbitration clauses are
embedded within a larger contract, there is no need to
search for mutuality in the arbitration clause specifically if
there is consideration beyond the promise to arbitrate. See
Harris v. Green Tree Fin. Corp., 183 F.3d 173, 180-81 (3d
Cir. 1999). But Advent claims to have never elected to be
bound by the document that memorializes the agreement to
arbitrate. Moreover, it denies that the act evincing a
promise to be bound, Huep's signature, was legally binding.
But it is Huep's signature that would have bound Advent to
the arbitration clause. In short, Advent seeks not to sever
the arbitration clause but rather to make the acts of its
agent simultaneously binding and non-binding.
In effect, therefore, Advent seeks to concede a
consequence of Sandvik's fundamental position in the
controversy without accepting the bitter with the sweet. A
hypothetical illustrates the problematic nature of Advent's
position. Suppose A sues B to perform a sales contract that
covers multiple anticipated transactions between the
parties, and B defends on the grounds that it never signed
the agreement. Suppose further that one particular sale in
the agreement, when considered in isolation from all the
other transactions covered by the contract, is very favorable
to B. Barring some independent manifestation of assent
from the parties, no court would allow B to assert that it
never signed the contract while requesting enforcement of
the one favorable sale. In a sense, however, that is what
Advent would have the District Court do in this matter. Cf.
In re Pollux Marine Agencies, Inc., 455 F. Supp. 211, 219
(S.D.N.Y. 1978).
Because the legal status of the arbitration clause is
unresolved, Advent's desire to arbitrate, separate from the
contract, appears as a desire, floating in the legal ether
untethered by either reciprocal promises or other sufficient
consideration. Only a ruling on the effect of Huep's
signature can ground Advent's wishes in the firmament.
18
Otherwise, Advent's desire to go to arbitration is little more
than an offer to resolve the underlying dispute in a forum
other than the District Court. For there to be a binding
contract, it is not enough that Advent and Sandvik each
agree at independent points in time that arbitration would
occur; there must be a contract to do so. It is not enough
to ask that the District Court "assume" that such an
agreement exists; the language of the FAA affirmatively
requires the court to be "satisfied" that the arbitration
agreement's existence is not at issue. See 9 U.S.C. S 4.
In contrast, Sandvik's fundamental position is not
similarly at war with itself. Sandvik maintains that the
underlying contract is valid, but asserts that the validity of
the arbitration clause must first be found by the District
Court before the matter can be referred to the arbitrators.
This argument does not require Sandvik to make any
evidentiary proffers that are opposed to its underlying
position in the controversy. As stated above, the FAA
requires the District Court to affirmatively conclude that an
agreement to arbitrate exists. Therefore, Sandvik need not
deny the arbitration clause; rather, Advent's denial of the
underlying agreement and its failure to demonstrate how
the arbitration agreement exists if Huep lacked authority to
bind Advent places the clause's validity in dispute.
D.
This Court's jurisprudence supports distinguishing
between void and voidable contracts.7 First, as discussed
above, this distinction reconciles our ruling in Par-Knit
Mills, which impliedly makes the void/voidable distinction,
with the Prima Paint severability doctrine. Second, we have
recognized the distinction between contracts that are
voidable due to fraud in the inducement, the claim at play
in Prima Paint, and those that are simply void. We
explained in another context:
As stated by the Court of Appeals for the Ninth Circuit,
the distinction between fraud in the inducement and
_________________________________________________________________
7. Of course a "void" contract is no contract at all. See Restatement
(Second) of Contracts S 7 cmt. a (1981).
19
fraud in the execution is that, "[t]he former induces a
party to assent to something he otherwise would not
have; the latter induces a party to believe the nature of
his act is something entirely different than it actually
is." [Southwest Adm'rs, Inc. v.] Rozay's Transfer, 791
F.2d [769,] 774 [(9th Cir. 1986)] (citing 12 Walter H.E.
Jaeger, Williston on Contracts S 1488, at 332 (3d ed.
1970)). The court went on to explain that, " `[f]raud in
the execution' arises when a party executes an
agreement `with neither knowledge nor reasonable
opportunity to obtain knowledge of its character or its
essential terms.' ... Fraud in the execution results in
the agreement being void ab initio, whereas fraud in
the inducement makes the transaction merely
voidable." Id. (quoting U.C.C. S 3-305(2)(c)) (other
citations omitted).
Connors v. Fawn Mining Corp., 30 F.3d 483, 490 (3d Cir.
1994); see also Associated Hardware Supply Co. v. Big
Wheel Distrib. Co., 355 F.2d 114, 120 (3d Cir. 1966) ("[T]he
fraud alleged here is fraud in the inducement. It does not
render the transaction void, but only voidable.
Traditionally, a person so defrauded has recourse against
the fraudulent party through either of two courses of
action. He may rescind the transaction--tendering back
what he has received and suing for what he has parted with
--or he may affirm the transaction and maintain an action
in deceit.") (citation omitted).8 Nothing in Prima Paint is to
the contrary.9
_________________________________________________________________
8. The distinction between fraud in the inducement and fraud in the
factum or execution of the contract has been discussed in the arbitration
context in other courts of appeals. Compare Concanon v. Smith Barney,
Harris, Upham & Co., 805 F.2d 998, 999-1000 (11th Cir. 1986) (per
curiam) (no arbitration when fraud in the execution of the contract is
alleged), with C.B.S. Employees Fed. Credit Union v. Donaldson, Lufkin &
Jenrette Sec. Corp., 912 F.2d 1563, 1567 (6th Cir. 1990) (rejecting fraud
in factum/inducement distinction). Here, of course, the relevant
allegation is not about fraud, but rather about never having entered into
any contract whatsoever.
9. The dissenting opinion in Prima Paint does imply that the majority in
that case rejected the void/voidable distinction."The Court here holds
that the United States Arbitration Act . . . compels a party to a contract
20
Our holding also comports with the text of the CREFAA,
which, as discussed above, allows a court of a signatory
nation to refrain from referring parties to arbitration if it
finds that the agreement to arbitrate is "null and void,
inoperative or incapable of being performed." CREFAA Art.
II S 3.
E.
We also do not find persuasive Advent's proffered
alternative rule that would draw a distinction between
cases in which the party resisting arbitration is suing to
enforce the underlying agreement and those in which it
denies the entire agreement.10 Advent relies largely on
Teledyne, Inc. v. Kone Corp., 892 F.2d 1404 (9th Cir. 1990).
In that case two parties to a distributorship agreement,
Teledyne and Kone, signed a negotiated document clearly
labeled "DRAFT (to be finalized by KONE legal department),"
which contained an arbitration clause. After a breakdown
in relations ensued, Teledyne sued. Teledyne brought
several claims, among them the contention that Kone had
denied that the signed draft was an enforceable contract.
_________________________________________________________________
containing a written arbitration provision to carry out his `arbitration
agreement' even though a court might, after a fair trial, hold the entire
contract--including the arbitration agreement-- void because of fraud in
the inducement." Prima Paint, 388 U.S. at 407 (Black, J., dissenting)
(emphasis added). In our view, this dissent offers no persuasive reasons
for abandoning the view we have taken. First, of course, the statement
is in a dissent, while the case's holding dealt strictly with fraud in the
inducement of the larger contract and made no broader pronouncements
regarding "void" agreements. Second, the wording of the quoted passage
indicates that though the Prima Paint dissent employed the term "void,"
it actually meant "voidable" in the sense used by the Restatement and
our precedent quoted above, as fraud in the inducement is a grounds for
voiding a previously valid contract and not forfinding that no contract
had ever been made.
10. Advent concedes some exceptions to its rule, such as when the
contract in issue was never signed. See Appellant's Reply Br. at 6 n.4.
Advent does not explain, however, what distinguishes unsigned contracts
from contracts signed by agents who lack the authority to bind their
principals.
21
The district court dismissed the complaint because of the
draft agreement's arbitration clause. See id. at 1406. On
appeal, Teledyne argued, much as Sandvik does here, that
Kone could not enforce the arbitration provision when it
denied the existence of the entire contract in which it
resides. The court rejected the claim based on the same
severability grounds that Advent urges upon us."Kone has
argued that the 1986 Draft was never finalized. It has
attacked the contract as a whole without making an
`independent challenge' to the arbitration provision. It has
thus not waived its right to have an arbitrator determine
whether the 1986 Draft was finalized." Id. at 1410.
The Teledyne court expressed the view that the position
maintained by Sandvik in the current dispute raises the
potential for absurd results. It reasoned that if a district
court were to find the underlying contract valid, it would
then find the arbitration clause valid, which would mean
that the matter would not belong in federal court at all. See
id. We conclude that this characterization is too facile.
There is no "absurdity" in allowing the district court to rule
on the threshold question whether the arbitration clause is
binding when one of the parties has implicitly denied it ever
consented to arbitrate, even if the answer bears on the
question whether the larger contract existed. If the court
declares that such a contract existed or otherwisefinds
that the arbitration clause is binding, arbitration would
then be ordered on all issues arising within the scope of the
arbitration clause, and the District Court would not grant
Sandvik any further relief. It is true that the arbitrators in
such a case could possibly be placed in a position of
arbitrating a dispute in which an American court has
already implicitly declared one party to be incorrect.11 The
issues that arise from such a circumstance are not,
however, before this Court. In any event, the District Court
would neither be granting Sandvik relief nor ruling whether
Advent breached a contract, but rather making a narrow
legal ruling on the existence and scope of an agreement to
arbitrate. It may be true that this ruling implicates the legal
_________________________________________________________________
11. Of course there would not be any prejudice to Advent's ability to
assert to the arbitrators its right to avoid the contract under defenses
such as fraud in the inducement or the like.
22
effect of Huep's signature, and that this is a prerequisite to
Sandvik's obtaining concrete relief on the larger contract.
Given the scope of such a ruling, however, it is not a
sufficient condition for Sandvik to prevail on its contract
claims.
Insofar as Sandvik's position leads to an "absurdity," it is
no greater than the one urged by Advent, for there is also
something odd about referring this matter to arbitrators
without a definitive conclusion on the issue whether an
agreement to arbitrate actually existed. Were we to order
the District Court to compel arbitration and were the
arbitrators ultimately to decide that Huep's signature did
not bind Advent, they will have effectively decided that they
had no authority to arbitrate the dispute. Such a ruling
would, however, allow the arbitrators to determine their
own jurisdiction, something that is not permitted in the
federal jurisprudence of arbitration, for the question
whether a dispute is to be arbitrated belongs to the courts
unless the parties agree otherwise. See First Options of
Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995) ("Courts
should not assume that the parties agreed to arbitrate
arbitrability unless there is clea[r] and unmistakabl[e]
evidence that they did so.") (citation and quotation omitted,
alteration in the original); AT&T Techs., Inc. v.
Communications Workers, 475 U.S. 643, 651 (1986) ("It was
for the court, not the arbitrator, to decide in thefirst
instance whether the dispute was to be resolved through
arbitration."). Such an approach would impair the District
Court's ability to determine whether the dispute that is
urged for arbitration falls within the scope of the contract's
arbitration clause.
Finally we note that our ruling does not preclude
contracting parties from taking steps to ensure that
disputes of the nature before us today are arbitrated. In
this matter, one of the Advent Funds and Sandvik entered
into a pre-contractual Letter of Intent that provided that
Sandvik would refrain from entertaining bids from other
prospective purchasers while Advent conducted due
diligence review of Sandvik's records. This agreement did
not contemplate arbitration in the event that a dispute
arose over whether the final sales agreement was actually
23
consummated, but we see no reason why parties may not
elect to bind themselves to such agreements. Our ruling
today does not foreclose future negotiating parties from
electing to enter pre-agreements to arbitrate disputes
arising out of efforts to negotiate future contracts. Cf.
Virginia Carolina Tools v. Int'l Tool Supply, Inc. , 984 F.2d
113, 117 (4th Cir. 1993) ("[P]arties may of course provide by
contract for arbitration even of arbitrability issues.") (citing
AT&T Techs., 475 U.S. at 649). We hold only that when the
very existence of such an agreement is disputed, a district
court is correct to refuse to compel arbitration until it
resolves the threshold question of whether the arbitration
agreement exists.
The order of the District Court denying the motion to
compel arbitration will be affirmed.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
24