Opposition Brief — Standard Fruit Co. v. Republic of Nicaragua

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Supreme Gourt, U.2. |

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— FEB 14 1992

No. 91-1154

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1991

STANDARD FRUIT COMPANY,

STANDARD FRUIT AND STEAMSHIP COMPANY,

and CASTLE & COOKE, INC.,

Petitioners,

V.

REPUBLIC OF NICARAGUA,

Respondent.

On Petition for Writ of Certiorari to the United

States Court of Appeals for the Ninth Circuit

RESPONDENT’S BRIEF IN OPPOSITION

TO THE PETITION FOR WRIT OF CERTIORARI

JUDITH C. APPELBAUM

Counsel of Record

DaviD WIPPMAN

KATHLEEN M. MILTON

REICHLER & SOBLE

1747 Pennsylvania Ave., N.W.

Suite 1200

Washington, D.C. 20006

(202) 223-8400

Attorneys for Respondent

PRESS OF BYRON S. ADAMS, WASHINGTON, D.C. (202) 347-8203

COUNTERSTATEMENT OF QUESTIONS PRESENTED

1. Was the Court of Appeals correct in reviewing the

arbitration agreement de novo to determine its valid-

ity and scope?

2. Did the Court of Appeals correctly apply Prima

Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S.

395 (1967), in ruling that the District Court should

have left it to the Arbitrators to adjudicate the ques-

tion whether the Memorandum of Intent signed by

the parties was a binding contract?

TABLE OF CONTENTS

Page

COUNTERSTATEMENT OF QUESTIONS

FUSS ES ETE . sedi nuadensendeesunenieaceseacaeeaaanencenneneneaies i

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STAT ERR EIe ER OCR Renee GRMN ccccnccsssissccncasensnsssscscsons 2

A. PHOCOOGIIEE TRIO W icisesciscsnstvcevsacncesresacnes 2

BD. CERIO GE TRUE vss icecenacaracnscscssacenersins 5

REASONS FOR DENYING THE WRIT ..................... 10

I. The Court of Appeals Correctly Reviewed the

Language of the Arbitration Clause De Novo

to Determine Arbitrability ........... ee 11

II. The Court of Appeals Correctly Held That

Under Prima Paint The District Court Erred

in Failing to Limit Its Role to Determining

Whether the Dispute is Arbitrable .............. 16

CONCLUGIIIN | o:1s0xssseensenssisesneunnnesieeehebeecameniedeuneneibies 30

ill

TABLE OF AUTHORITIES

CASES: Page

Bauhinia Corp. v. China Nat'l Mach. & Equip. Im-

port & Export Corp., 819 F.2d 247 (9th Cir.

a 14 n.8

C.B.S. Employees Fed. Credit Union v. Donaldson,

Lufkin & Jenrette Sec. Corp., 912 F.2d 1563

BE | CID karsnccssacccnacacsnunnscannscensennnncsneensesee 26

David L. Threlkeld & Co., Inc. v. Metallgesellschaft

Ltd. (London), 923 F.2d 245 (2d Cir.), cert.

dismissed, 112 S.Ct. 17 (1991) ................eee0e 16 n.1l

Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213

DE i lidkdubidianscedusnscesss\nntannaweonseeansdsccensnmiensses 17

First Investors Corp. v. Am. Capital Fin. Servs.,

Inc., 823 F.2d 307 (9th Cir. 1987) ................ 14 n.8

First Nat’l Bank of Miami v. Ins. Co. of N. Am.,

SOS FBG SIS CG Civ. UGTA) ..ns...0..ccc000000000005. 13-14

Flender Corp. v. Techna-Quip. Co., Nos. 89-2781,

89-3045, 91-1268 (7th Cir. Jan. 6, 1992) (West-

I MIEN SININIID co sscscawnasccssvscaseensvesecanveces 24

Genesco, Inc. v. T. Kakiuchi & Co., Ltd., 815 F.2d

ll occ vagunaaksnubeasacatanedshuasses 14

Howard Elec. & Mech. Co. v. Frank Briscoe Co.,

754 F.2d 847 (9th Cir. 1985) .................... 16 n.11,20

Interocean Shipping Co. v. Nat'l Shipping and

Trading Corp., 523 F.2d 527 (2d Cir. 1975),

cert. denied, 423 U.S. 1054 (1976) ..............0 15 n.9

I.S. Joseph Co. v. Michigan Sugar Co., 803 F.2d

GIN, RUMIIED cccacnsvercevensscnneteenencessesssecenses 28

Kansas Gas & Elec. Co. v. Westinghouse Elec. Corp.,

Gl F.20 420 (4th Cir. 1065) ..........000000........5. 14

Matterhorn, Inc. v. NCR Corp., 763 F.2d 866 (7th

a hd i sleabiasnsnedgnansets 20

iv

Table of Authorities Continued

Page

McGinnis v. E.F. Hutton and Co., 812 F.2d 1011

(6th Cir.), cert. denied, 484 U.S. 824 (1987) .. 14

Mediterranean Enters., Inc. v. Ssangyong Corp., 708

Fe Re Ge Sars BD cendicchtaiimesenns 14 n.8

Merrill Lynch, Pierce, Fenner, & Smith, Inc. v.

Haydu, 637 F.2d 391 (5th Cir. 1981) ............. 24-25

Mesa Operating Ltd. Partnership v. Louisiana In-

trastate Gas Corp., 797 F.2d 238 (5th Cir.

EIPUITED scdbacinciacsdadubsmpstaiabebeacbinideheupnolnieeiaabesianaeiin 25-26

Miller v. Drexel Burnham Lambert, Inc., 791 F.2d

Ue a E siniacasdinehinseshuiekthaaniwinsitins 26

Mitsubishi Motors Corp. v. Soler Chrysler-Plym-

outh, Inc., 473 U.S. 614 (1985) ................ 15 n.10,17

Moses H. Cone Memorial Hosp. v. Mercury Constr.

Corp., 460 U.S. 1 (1988) ........ 15 n.10,16 n.11,17,19

Muh v. Newberger, Loeb & Co., Inc., 540 F.2d 970

RE es OE cenicsenhydisnoietnnatrntadibcdidsasisnesneesaneie 20

Neal v. Hardee’s Food Sys., Inc., 918 F.2d 34 (5th

Cir. 1990), reh’g denied (Dec. 26, 1990) 14, 16 n.11

Network Publishing Corp. v. Shapiro, 895 F.2d 97

SE I ON siniecsasiserlahiinlcdensielcibsltiaichichaletacacnnansicsions 13

Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., 636

Fe Wk Ge Se BID Ainchecnscsiniircadarvesseccincnens 28

Parris v. Dean Witter Reynolds, Inc., 659 F. Supp.

Se SONGS Ns ED sarencncicncnciechenseisnestomusccuies 26

Pollux Marine Agencies, Inc. v. Louis Dreyfus Corp.,

455 F. Supp. 211 (S.D.N.Y. 1978) ................ 28 n.13

Prima Paint Corp. v. Flood & Conklin Mfg. Co.,

ee See ee CE ike kicerid enh passim

Rhoades v. Powell, 644 F. Supp. 645 (E.D. Cal.

TIE saicsa cs auuisesinicenial ada eieaie ukebansughcaneuumicsmasineonce 26

Table of Authorities Continued

Page

Sauer-Getriebe KG v. White Hydraulics, Inc., 715

F.2d 348 (7th Cir. 1983), cert. denied, 464 U.S. |

DT CE sclsaceeicavns tanasblnn eanieeataanniescctelce 24

Scherk v. Alberto-Culver Co., 417 U.S. 506, reh’g

Gonted, 419 U.S. GBB CIGTE) «...ccccserecssrsovsevoses 15 n.10

Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d

bee. By Se | epEneereemer cere errn 14

Shotto v. Laub, 632 F. Supp. 516 (D.Md. 1986) .... 25

Step-Saver Data Sys., Inc. v. Wyse Technology, 939

ae Oe Ge Ses TE? ssseioiontete acnna 13

Storey v. Shearson Lehman Hutton, Inc., 949 F.2d

Se Cee Rar IPED dicacicsuscneacxsactacssicsesmeannenes 14

Teledyne, Inc. v. Kone Corp., 892 F.2d 1404 (9th

REE SD scisndsisasassvaxcektosechsnna uae 27

Three Valleys Mun. Water Dist. v. E.F. Hutton &

Co., 925 F.2d 1136 (9th Cir. 1991) ...... 26-28 & n.14

Unionmutual Stock Life Ins. Co. v. Beneficial Life

Ins. Co., 774 F.2d 524 (1st Cir. 1985) ........... 25

United States v. City of Twin Falls, 806 F.2d 862

(9th Cir. 1986), cert. denied, 482 U.S. 914

RINE D <cidiicutedccesussanctmenseacieatnisambaaieiaaaeese 13

United States v. Liranzo, 944 F.2d 73 (2d Cir.

WINE: ocsscusavsniossancicoesatsnectiacednabe cides meus 13

United Steelworkers of Am. v. Warrior & Gulf Nav-

igation Co., 363 U.S. 574 (1960) .................. 16 n.11

STATUTES: 5

Federal Arbitration Act, 9 U.S.C. § 1 et seq ....... passim

OTHER AUTHORITIES:

POM: Be. CR. Fe OD secdactkncccisvericnusniascemmecmaniioed 10,11

a CR. BR. BG Gin cccccieemrereenenaeee 16

Article 8(4) of the ICC Rules of Conciliation and

POO vidadvcciticnerso acters en 19 n.12

Table of Authorities Continued

Page

Article 178(3) of the Swiss Private International

BOON BOE iissscssiniracccreceeibent Sckeksvierwsinase iaiaes 19 n.12

Article 1053 of the Code of Civil Procedure of the

POI vncasiccnscccusdectinrtcussabassaensmseiaaan 19 n.12

Judgment of March 16, 1977, Landgericht, Ham-

burg (Germany) (ordinary court of first in-

stance), summarized in III Y.B. Comm. Arb.

BIE ARTED civercnisnbindisstas eee 19 n.12

Judgment of July 15, 1975, Saikosai (Supreme

Court), Japan, 29 Minshu 1061, swmmarized in

Doi, National Report: Japan, IV Y.B. Comm.

APD; LED CUETO) icinticinniniuannneeann 19 n.12

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1991

—_—_—

No. 91-1154

———_—

STANDARD FRUIT COMPANY,

STANDARD FRUIT AND STEAMSHIP COMPANY

and CASTLE & COOKE, INC.,

Petitioners,

V.

REPUBLIC OF NICARAGUA,

Respondent.

On Petition for Writ of Certiorari to the United

States Court of Appeals for the Ninth Circuit

RESPONDENT’S BRIEF IN OPPOSITION

TO THE PETITION FOR WRIT OF CERTIORARI

Respondent, the Republic of Nicaragua (hereafter

“Nicaragua”), urges the Court to deny the petition

for writ of certiorari to review the judgment and opin-

ion of the United States Court of Appeals for the

Ninth Circuit. As fully set forth below, the Court of

Appeals correctly applied Prima Paint Corp. v. Flood

& Conklin Mfg. Co., 388 U.S. 395 (1969), and correctly

reviewed questions relating to arbitrability de novo.

Its decision presents no issues appropriate for review

by this Court.

STATEMENT OF THE CASE

A. Proceedings Below

Nicaragua filed this suit against Petitioners in the

U.S. District Court for the Northern District of Cal-

ifornia on October 21, 1986. Nicaragua alleged that

when the parties signed a “Memorandum of Intent’’

in January 1981, they entered into a binding contract

which required, inter alia, that Petitioners purchase

all export quality Nicaraguan bananas for five years,

and that Petitioners breached this contract when they

terminated their Nicaraguan banana operations 22

months later. Nicaragua further alleged that, in Par-

agraph IV of the Memorandum, the parties entered

into a written agreement requiring that all disputes

arising under the Memorandum be submitted to ar-

bitration in London. Thus, in Count I of its Amended

Complaint, Nicaragua sought an order referring its

dispute with Petitioners to international arbitration in

accordance with Paragraph IV of the Memorandum.

In the alternative, in the remaining counts, Nicaragua

asserted the merits of its claims against Petitioners.

(Count II, for example, alleges breach of contract.)

After the Petitioners’ filing of an Answer and Coun-

terclaims, Nicaragua moved, pursuant to the Federal

Arbitration Act, 9 U.S.C. §1 et seg., for an order

referring the entire case to arbitration in London.

Petitioners moved to dismiss Count II of the Amended

Complaint on the ground that the Memorandum was

an unenforceable agreement to agree, and on the fur-

ther ground, with respect to defendant Standard Fruit

Company, that it was not a signatory to the Memo-

randum.

The District Court (Honorable John P. Vukasin)

heard both motions together. CR 97.' Nicaragua ar-

gued that the question whether the Memorandum con-

stituted a binding contract was one for the arbitrators,

not the court, to resolve. Judge Vukasin disagreed.

Id. at 37-39, 50. He therefore set a preliminary hear-

ing to determine whether a binding contract existed

between the parties? and, if so, whether the arbitra-

tion clause in the Memorandum required arbitration

of the disputes presented. Jd. at 50. He concluded

that Petitioners’ motion to dismiss should be treated

as a summary judgment motion under Rule 56, and

deferred ruling until after the hearing. Jd. at 8-9.

After the hearing, Judge Vukasin adopted the pro-

posed findings of fact and conclusions of law submit-

ted by Petitioners, virtually word for word.’ He denied

Nicaragua’s motion to compel arbitration (and dis-

missed Count I) on the ground that the evidence did

not demonstrate that the Memorandum was a con-

tract, or, alternatively, because Nicaragua did not es-

tablish by a preponderance of the evidence that

Paragraph IV constituted a binding arbitration agree-

1 Citations are to the Appendix to the Petition (“‘App.’’) and

to the record before the Ninth Circuit. (CR refers to the district

court clerk’s record and RT to the reporter’s transcript.)

2The Petition states that Nicaragua requested discovery on

the question whether the Memorandum was a binding contract.

Petition at 6. In fact, Nicaragua consistently opposed any pro-

ceedings on this issue before the court, rather than the arbi-

trators. Only after Judge Vukasin ruled that he would hold a

hearing on this issue did Nicaragua ask for an opportunity to

conduct discovery.

3 Indeed, his adoption of Petitioners’ language was so complete

that he copied their typographical errors.

ment covering the disputes at issue in the case. Con-

clusions of Law, 44 9-10.*

Nicaragua appealed Judge Vukasin’s denial of its

arbitration motion to the Ninth Circuit. Nicaragua ar-

gued (1) that the validity of the Memorandum of In-

tent was an issue that the district court should not

have reached, because under the “‘separability’’ doc-

trine of Prima Paint, 388 U.S. at 403-07, the court

was to have confined its role to determining the va-

lidity and scope of the arbitration clause; (2) that the

district court’s conclusion that the evidence did not

demonstrate that the Memorandum was a binding con-

tract was clearly erroneous; and (8) that the district

court also erred in concluding that Paragraph IV of

the Memorandum did not constitute a binding agree-

ment to arbitrate the disputes before the court.

On July 1, 1991, the Court of Appeals, in a unan-

imous decision, reversed the judgment of the district

court and remanded the case for an order directing

arbitration. The Court held, first, that under Prima

Paint the district court should have left it to the ar-

bitrators to decide all questions other than the validity

and scope of the arbitration clause. It further held

that Paragraph IV must be construed as an enforce-

able arbitration agreement covering the disputes at

issue in this case. The Court interpreted the language

of Paragraph IV in light of the strong federal policy

in favor of arbitration, especially in the context of an

international dispute, and in light of the requirement

* Judge Vukasin also granted Petitioners’ motion for summary

judgment on Count II. This ruling was reversed by the Court

of Appeals, but Petitioners are not seeking review of that aspect

of the Ninth Circuit’s decision.

that any doubts about the scope of an arbitration

agreement be resolved in favor of arbitration.

Petitioners subsequently filed a petition with the

Ninth Circuit seeking rehearing or rehearing en banc,

which was denied on October 17, 1991. The petition

for a writ of certiorari followed.

B. Statement of Facts

Beginning in 1970, Petitioners controlled the pro-

duction, quality and price of Nicaraguan bananas

through their participation in partnerships with Nic-

araguan landowners. CR 5 at 2; RT at 317. The part-

nerships were contractually obligated to sell their

entire banana output to Petitioners at prices deter-

mined by Petitioners, who then exported the bananas

to the United States and resold them here at higher

prices. CR 6 at 3. However, when a new Nicaraguan

government came to power in 1979, it entered into

negotiations with Petitioners to work out a new con-

tractual relationship that would maintain high pro-

ductivity but produce greater benefits for the banana

workers. RT at 13-14, 21, 76; Exs. A-19A through A-

25A.

After a breakdown in these negotiations in Decem-

ber 1980, Petitioners announced the termination of

their Nicaraguan operations and ceased their purchase

of Nicaraguan bananas. RT at 274-75; CR 99, tab 3

at 46, 48-50. The Nicaraguan government, seeking to

resolve the impasse and reach an agreement under

which Petitioners would continue their operations, sent

three high-level officials to San Francisco to meet with

top executives of Petitioners. RT at 34, 190. Three

days of negotiations ensued. RT at 34, 36; Ex. A-37.

Petitioners presented a list of 18 demands, and agree-

ment on all of them was eventually reached after hard

bargaining. RT at 38-39, 277; Exs. A-32, A-37 at 17-

21.

On January 11, 1981, a document containing the

final agreement on these points—drafted principally

by Castle & Cooke’s General Counsel (RT at 324)—

was signed. The document, captioned ““Memorandum

of Intent,” set forth the agreement reached by the

parties on each of Petitioners’ 18 points. App. at 49a;

RT at 41-50. Among other things, it specified the price

per box of bananas to be sold to Petitioners ($4.30

less specified deductions), the term (five years), the

designation of the goods (all first quality bananas as

determined by Petitioners) and the quantity (all

acreage in the Nicaraguan banana program). The

Memorandum called for the subsequent drafting of

additional implementing contracts to spell out the de-

tails of the banana purchase and technical assistance

aspects of the agreement, and the parties subsequently

exchanged drafts of these agreements. However, many

of the points agreed to by the parties were not subject

to any additional implementing contracts, and the

Memorandum itself set forth all of the essential terms

of the banana purchase agreement between the par-

ties. RT at 298-99.

In addition, the Memorandum contained an arbitra-

tion clause. Paragraph IV provided:

IV. Arbitration:

Any and all disputes arising under the arrange-

ments contemplated hereunder, should same not

be able to be settled amicably settled [sic] by the

parties, will be referred to mutually agreed mech-

anisms or procedures of international arbitration,

such as the rules of the London Arbitration As-

sociation.

The parties agreed to this clause to avoid having dis-

putes decided in the home forum of either party. RT

at 333; CR 99, tab 8 at 17, 55; id., tab 3 at 150.

Although, as it turned out, the ‘“‘London Arbitration

Association” was a misnomer, the fact that the parties

settled on London as a neutral site for the arbitration

is undisputed. RT at 56, 333, 367-68. Thus, shortly

after the Memorandum of Intent was signed,

Petitioners’ General Counsel, Robert Moore, who

drafted the provision, wrote to Nicaragua’s counsel

confirming that ‘what resulted [in San Francisco] was

an agreement providing for arbitration.”” Ex. A-15.

Seeking to correct the misnomer of the arbitral tri-

bunal “in the infancy of the agreement,’ Mr. Moore

proposed that the parties agree to a “substitute ar-

bitration clause” that he enclosed with the letter. Id.

The Nicaraguan signers of the Memorandum testi-

fied that they, too, understood that an arbitration

agreement had been signed, and that it required the

arbitration of any dispute concerning any of the points

covered by the Memorandum.’ RT at 55, 200-01. Like-

wise, Nicaragua’s former U.S. counsel, Norton Ten-

5 Petitioners assert incorrectly that the language of Paragraph

IV was “diluted” by the Nicaraguans during the drafting pro-

cess. Petition at 8. In fact, the key language of the paragraph—

naming the situs as London, and stating that disputes ‘‘will be

referred” to arbitration there—never changed. Moreover, the

paragraph’s coverage of “‘any and all disputes arising under the

arrangements contemplated hereunder” clearly referred to dis-

putes arising under any of the terms of the Memorandum itself,

since “arrangements” is used that way elsewhere in the Mem-

orandum (in the fourth paragraph of the preamble).

nille, who helped Mr. Moore draft the clause (and who

had had no relationship with Nicaragua since 1981),

testified that Paragraph IV was intended to mean that

“any disputes which were going to arise in the course

of business which was to be initiated with the con-

clusion of this memorandum would be subject to ar-

bitration.”” CR 99, tab. 8 at 41-42.

Throughout the Memorandum, the undertakings of

each party were expressed in obligatory language, and

the document refers to itself as ‘‘this agreement.”

App. at 5la (Para. V). The Spanish version, which

was prepared by Petitioners and was signed by all

four officers of Petitioners who signed the English

version, refers to itself as a “‘contract’’ (‘‘contrato’’).

Ex. A-40 at Para. [X. All of the Nicaraguan signers

of the Memorandum testified that they understood it

to be a binding contract when they signed it. RT at

39, 202, 139-40. This included Arturo Cruz, who left

the Nicaraguan government in 1981 and subsequently

(prior to giving testimony in this case) joined the lead-

ership of the armed opposition seeking to overthrow

it. RT at 131-33. Mr. Tennille also testified that the

parties understood the Memorandum of Intent to be

binding. CR 99, tab 8 at 34, 47-49. Even Petitioners’

witnesses testified that the Memorandum of Intent

embodied ‘“‘a meeting of the minds’’ on all essential

elements of the purchase and sale of bananas. RT at

299.

Upon signature of the Memorandum, Petitioners re-

peatedly characterized it as a binding contractual

agreement. In their press release announcing the

Memorandum, they called it a “final agreement.”’ Ex.

A-2. In their next Annual Report, they called it a

‘five-year contract under which the Company will pur-

chase [Nicaragua’s] banana production and concur-

rently recover its investment there.” Ex. A-4. In their

Form 10-K’s filed with the Securities and Exchange

Commission, they called it a “contract,” a “five-year

purchase contract for (Nicaragua’s] banana production

and purchase of the Company’s assets,” a “general

agreement,” and an “agreement.” Ex. A-3 at 2; Ex.

A-5 at 2; Ex. A-6 at 2. In numerous telexes and letters

to third parties, Castle & Cooke's president called it

an “agreement,” a “‘final agreement,” and a “mu-

tually satisfactory agreement” that was reached ‘‘after

extended deliberations and negotiations.” See, ¢.9., Ex.

A-7A; Ex. A-9; Ex. A-10; Ex. A-11.

After the Memorandum was signed, the parties

promptly began to comply with its terms. Within a

week, Petitioners sent their employees back to Nic-

aragua and resumed their banana operations there.

RT at 283-85, 288. In so doing, they incurred signif-

icant costs and risks, including the sacrifice of a po-

tential insurance claim worth approximately $9 million.

Id. at 310-11. For the next 22 months, they bought

all of Nicaragua’s export quality bananas (some seven

million boxes) in accordance with the price and other

terms set forth in the Memorandum of Intent. RT at

288, 185-86. The parties performed other obligations

under the Memorandum as well; for example,

Petitioners began transferring ownership of their

physical assets to the Nicaraguan Government pur-

suant to Paragraph II. Ex. A-47A; Ex. A-48A; RT at

210-11; CR 99, tab 6 at 286-87."

6 Thus, Petitioners’ assertion that many “obstacles” remained

to the consummation of a contractual arrangement is mistaken.

Petition at 9. In reality, the essential terms had been agreed

10

However, on October 25, 1982, without prior warn-

ing, Petitioners permanently terminated their Nicar-

aguan operations. This lawsuit arose from that action.

REASONS FOR DENYING THE WRIT

Neither of the arguments offered in support of the

Petition has merit. The first argument—that the Court

of Appeals violated Rule 52 of the Federal Rules of

Civil Procedure and “‘split” with other circuits by “‘re-

viewing de novo the district court’s factual findings

concerning the existence of a binding arbitration

agreement” (Petition at 14)—rests on an erroneous

characterization of what the Court of Appeals did. The

Court of Appeals’ opinion makes clear that what the

Court reviewed de novo was not any findings of fact

af the district court, but the language of the arbitra-

tion clause in the parties’ Memorandum of Intent to

determine the arbitrability of the dispute. And it is

well settled throughout the circuits that determina-

tions of arbitrability, like the interpretation of any

contractual provision, are subject to de novo review.

Petitioners’ second argument is equally flawed. They

contend that the Court of Appeals erred in holding

that the district court should have confined its role

to consideration of the arbitrability of the dispute and

—

upon (price, term, definition, quantity), and no obstacles to per-

formance existed. For example, Petitioners suggest that a new

“competent national entity’’ remained to be established by the

Nicaraguan government. Petition at 10. But when the Memo-

randum was signed, an appropriate entity, called ‘‘BANANIC,”’

already existed. BANANIC bought the fruit from the partner-

ships and sold it to Petitioners until mid-1981, when another

entity called ‘‘EMBANOC”’ was set up—at which point both it

and BANANIC participated in the sales from the partnerships

to Petitioners. RT at 62-63, 120-21.

11

left to the arbitrators the question whether the Mem-

orandum of Intent was a binding contract between

the parties. But under Prima Paint that is exactly

what the district court was required to do. Under the

severability rule of Prima Paint, an arbitration agree-

ment that covers the disputes at issue must be en-

forced even if the rest of the contract in which it is

embedded may later be held invalid by an arbitration

tribunal. Thus, the Court of Appeals’ application of

Prima Paint in this case was not “misplaced,” Petition

at 23, and there is no issue presented that calls for

review by this Court.

I. THE COURT OF APPEALS CORRECTLY REVIEWED

THE LANGUAGE OF THE ARBITRATION CLAUSE DE

NOVO TO DETERMINE ARBITRABILITY

In their first argument for granting the writ,

Petitioners seek review of something the Court of

Appeals did not do. The Ninth Circuit did not review

de novo any factual findings of the district court.

Rather, the Court of Appeals did exactly what is

within its province to do: it reviewed the language of

an arbitration clause de novo to determine the arbitra-

bility of the dispute presented, and then applied the

well-settled legal presumption in favor of arbitration.

Thus, the Court of Appeals did nothing constituting

a “split with other circuits’ or a violation of Rule 52

of the Federal Rules of Civil Procedure. Accordingly,

Petitioners’ first argument provides no basis for

granting the writ.

Having decided (correctly—see Part II, infra) that

under Prima Paint the only issue properly before the

district court was arbitrability—i.e., the validity and

scope of the arbitration clause—the Court of Appeals

focussed its attention on Paragraph IV of the Mem-

12

orandum, in the section entitled ‘Arbitration Agree-

ment and Scope.” 937 F.2d at 477-79. The Ninth

Gircuit’s opinion makes clear on its face that its con-

sideration of arbitrability was based on its interpre-

tation of the language of Paragraph IV, and not on

any ‘‘appellate fact-finding’”’ (Petition at 15).

At the outset of this section of the opinion, the

Court noted that the issue of arbitrability must be

determined by “contractual interpretation’’—7.e., by

analysis of the language of the arbitration clause. 937

F.2d at 477 (citations omitted). The Court then ana-

lyzed the language of Paragraph IV to determine

whether an enforceable arbitration agreement existed,

and if so whether its scope covered the disputes pre-

sented in this case. It concluded, first, that an en-

forceable agreement existed because the language of

Paragraph IV was ‘“‘not too vague to be given effect,”

particularly when considered in light of the ‘‘pre-

sumption of arbitrability established by the Supreme

Court.”’ Id. at 478. The Court then concluded—again

based on the language of Paragraph IV—that the

phrase ‘‘any and all disputes arising under the ar-

rangements contemplated hereunder’ must be con-

strued to encompass the claims presented in this case,

under the applicable legal standard requiring enforce-

ment of an arbitration clause if the “‘purported agree-

ment ... is susceptible of an interpretation” that

would allow arbitration. Jd. at 479 (citations omitted).

Thus, the Court stated its ultimate holding as follows:

We hold that the language of the clause at issue

here, read in light of the Prima Paint severability

rule and the strong presumption of arbitrability

in international disputes, requires that the arbi-

tration clause be enforced ....

13

Id. at 479-80 (emphasis added).’

Clearly, then, what the Court of Appeals reviewed

de novo was the arbitrability of the dispute, based on

the language of the arbitration clause. That was en-

tirely proper. First, it is beyond dispute that, as the

Ninth Circuit noted, the interpretation of contract lan-

guage is a question of law to be reviewed de novo.

937 F.2d at 474 (citing United States v. City of Twin

Falls, 806 F.2d 862, 869 (9th Cir. 1986), cert. denied,

482 U.S. 914 (1987)). Accord United States v. Liranzo,

944 F.2d 73, 77 (2d Cir. 1991); Step-Saver Data Sys.,

Inc. v. Wyse Technology, 939 F.2d 91, 97 &-n.8 (3d

Cir. 1991); Network Publishing Corp. v. Shapiro, 895

F.2d 97, 99 (2d Cir. 1990\‘‘{[A]ppellate courts have

untrammelled power to interpret written documents’”’

(quoting L. Hand, J.) (citation omitted)); Furst Nat’l

Bank of Miami v. Ins. Co. of N. Am., 495 F.2d 519,

522 (5th Cir. 1974) (citing authorities in several cir-

cuits for the ‘virtually unanimous acceptance of the

7 The Court of Appeals also noted that the district court had

considered evidentiary factors that were irrelevant as a matter

of law, and had failed to consider substantial documentary evi-

dence, including the letter written just after execution of the

Memorandum by the principal draftsman of Paragraph IV, Cas-

tle & Cooke Counsel Robert Moore, referring to Paragraph IV

as ‘an agreement providing for arbitration.” 937 F.2d at 479.

See id. at 473. These dicta plainly do not constitute de novo

review of any findings of fact of the district court. Nor did the

Court of Appeals second-guess any determination by the district

court as to the credibility of testimony concerning the validity

or scope of the arbitration clause, as Petitioners argue. Finding

of Fact, 4 57, cited by Petitioners, related to testimony con-

cerning the validity of the Memorandum as a whole—an issue

the Court of Appeals correctly held never should have been

reached by the district court. See Part II infra.

14

proposition that the interpretation of a contract is a

question of law, not fact, and, therefore, not restricted

to review under the ‘clearly erroneous’ rule’’).

It is also well settled that this rule is fully applicable

in the context of the Federal Arbitration Act. Thus,

as the Court of Appeals noted, “[djeterminations of

arbitrability, like the interpretation of any contractual

provision, are subject to de novo review.” 937 F.2d

at 474 (citations omitted). This rule is by no means

unique to the Ninth Circuit®; on contrary, it is widely

accepted. See, e.g., Storey v. Shearson Lehman Hutton,

Inc., 949 F.2d 1039, 1040 (8th Cir. 1991) (decisions

regarding the validity and scope of arbitration clauses

are reviewed de novo); Shearson Lehman Hutton, Inc.

v. Wagoner, 944 F.2d 114, 121 (2d Cir. 1991) (deter-

mination of scope of arbitration agreement reviewed

de novo); Neal v. Hardee’s Food Sys., Inc., 918 F.2d

34, 37 (5th Cir. 1990) (same), reh’g denied (Dec. 26,

1990 Westlaw, Allfeds database); Kansas Gas & Elec.

Co. v. Westinghouse Elec. Corp., 861 F.2d 420, 422-

23 (4th Cir. 1988) (determination of whether arbitra-

tion clause had been “‘triggered’”’ subject to de novo

review); Genesco, Inc. v. T. Kakiuchi & Co., Ltd., 815

F.2d 840, 846 (2d Cir. 1987\determination of scope

reviewed de novo); McGinnis v. E.F. Hutton & Co.,

812 F.2d 1011, 1012-13 (6th Cir.) (same), cert. denied,

484 U.S. 824 (1987). Thus, the Court of Appeals’ re-

view de novo of the validity and scope of Paragraph

®In the Ninth Circuit, the authorities include First Investors

Corp. v. Am. Capital Fin. Servs., Inc., 823 F.2d 307, 309 (9th

Cir. 1987); Bauhinia Corp. v. China Nat’l Mach. & Equip. Im-

port & Export Corp., 819 F.2d 247, 249 (9th Cir. 1987); Med-

iterranean Enters., Inc. v. Ssangyong Corp., 708 F.2d 1458,

1462-63 (9th Cir. 1983).

15

IV of the Memorandum of Intent could hardly be con-

sidered to have created a “‘split with other circuits.”

Petition at 14.°

Nor did the Court of Appeals stray from its proper

role in applying the correct legal principles governing

the interpretation of arbitration agreements under the

Federal Arbitration Act, without regard for the er-

roneous legal standard adopted by the district court.

The district court mistakenly thought the test was

whether Nicaragua had ‘‘establish[ed] by a prepon-

derance of the evidence that the disputes before the

court must be arbitrated.’’ Conclusions of Law, ¢ 10;

see also Findings of Fact, { 68. That is directly con-

trary to the presumption this Court has established

in favor of arbitration, particularly in the context of

an international transaction like this one.” It is also

inconsistent with the proper test of the scope of an

*The only case cited by Petitioners as purportedly represent-

ing such a ‘“‘split’”’ is Interocean Shipping Co. v. National Ship-

ping & Trading Corp., 523 F.2d 527 (2d Cir. 1975), cert. denied,

423 U.S. 1054 (1976). In Interocean, however, the district court

findings that were upheld by the Second Circuit under the clearly

erroneous standard involved not the validity or scope of the

arbitration clause, but the question whether the parties had

reached agreement on anything at all. In that case, the parties

did not sign the charter party at issue; they were still exchang-

ing telexes when the negotiations broke down. Here, by contrast,

it is not disputed that the parties reached agreement on the

Memorandum containing the arbitration clause. Thus, in this

case, where arbitrability issues were presented, it was appro-

priate for the Court of Appeals to review them de novo.

10 See, e.g., Mitsubishi Motors Corp. v. Soler Chrysler-Plym-

outh, Inc., 473 U.S. 614, 625-26 (1985); Moses H. Cone Memorial

Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983); Scherk

». Alberto-Culver Co., 417 U.S. 506, 511, reh’g denied, 419 U.S.

885 (1974).

16

arbitration clause—requiring that arbitration be com-

pelled ‘‘unless it may be said with positive assurance

that the arbitration clause is not susceptible of an

interpretation that covers the asserted dispute,’’ and

that any doubts be resolved in favor of arbitration."

Petitioners do not and cannot dispute that these well-

established legal principles are fully apposite here, and

that the Court of Appeals was entitled—indeed, re-

quired—to apply them, de novo.

In short, the Ninth Circuit performed precisely the

role that it was supposed to perform. It engaged in

its own interpretation of the language of the arbitra-

tion clause, and applied the correct principles of law

under the Federal Arbitration Act. In doing so, it

rendered a decision that is not in conflict with the

decisions of other Courts of Appeals, a departure from

the accepted and usual course of judicial proceedings,

or otherwise appropriate for review by this Court.

Supreme Court Rule 10.

II. THE COURT OF APPEALS CORRECTLY HELD THAT

UNDER PRIMA PAINT THE DISTRICT COURT ERRED

IN FAILING TO LIMIT ITS ROLE TO DETERMINING

WHETHER THE DISPUTE IS ARBITRABLE

As the Court of Appeals below recognized, the only

issue properly before the district court was a narrow

one: did the parties agree in writing to refer to in-

ternational arbitration the disputes presented in this

'\ United Steelworkers of Am. v. Warrior & Gulf Navigation

Co., 363 U.S. 574, 582-83 (1960). See also, e.g., Moses H. Cone,

460 U.S. at 24-25; David L. Threlkeld & Co., Inc. v. Metallge-

sellschaft Ltd. (London), 923 F.2d 245, 250 (2d Cir.), cert. dis-

missed, 112 S.Ct. 17 (1991); Neal v. Hardee’s, 918 F.2d at 37;

Howard Elec. & Mech. Co. v. Frank Briscoe Co., 754 F.2d 847,

850 (9th Cir. 1985).

case? If so, the Federal Arbitration Act required re-

ferral of the case to arbitration, including all issues

relating to the proper interpretation of the Memoran-

dum of Intent. As shown below, the district court’s

contrary holding, that it was required to determine

the validity of the Memorandum of Intent before re-

ferring this case to arbitration (Conclusions of Law,

44 2-3), was simply wrong as a matter of law.

The Federal Arbitration Act establishes a federal

substantive law of arbitration that carefully restricts

the courts’ discretion over agreements to arbitrate.

The overriding purpose of the Act is to further the

strong federal policy in favor of arbitration. Thus

“Congress’ clear intent, in the Arbitration Act, [was]

to move the parties to an arbitrable dispute out of

court and into arbitration as quickly and easily as

possible.” Moses H. Cone, 460 U.S. at 22. See also

Mitsubishi, 473 U.S. at 625-26 (" ‘(t]he preeminent

concern of Congress in passing the Act was to enforce

private agreements into which parties had entered,’

4 concern which ‘requires that we rigorously enforce

agreements to arbitrate’ ’’) (citation omitted).

The Act thus limits the purview of the courts to

“the making of the arbitration agreement” itself. 9

U.S.C. § 4. If the parties have agreed in writing to

arbitrate their disputes, and there has been a failure

by one party to honor that agreement, “‘the Act leaves

no place for the exercise of discretion by a district

court, but instead mandates that district courts shall

direct the parties to proceed to arbitration on issues

as to which an arbitration agreement has_ been

signed.’’ Dean Witter Reynolds, Inc. v. Byrd, 470 USS.

213, 218 (1985) (emphasis in original).

18

Thus, as this Court has held, all challenges to the

validity or enforceability of the entire contract, as

opposed to the arbitration clause within it, are for the

arbitrators, not the courts, to resolve. Prima Paint,

388 U.S. at 402-04.

Petitioners urge this Court to review the decision

below on the theory that the Ninth Circuit has

“stretched” this Court’s holding in Prima Paint. In

fact, however, the Court of Appeals scrupulously fol-

lowed the dictates of Prima Paint by refusing to per-

mit the district court to substitute its judgment as to

the validity of the Memorandum of Intent for that of

the arbitrators. In so holding, the Ninth Circuit fol-

lowed Prima Paint (and the consistent decisions of

other Circuits on this issue) to the letter.

Petitioners’ argument, by contrast, is nothing less

than a sub rosa request for this Court to reverse

Prima Paint. Without saying so expressly, Petitioners

have simply taken the position of the dissent in Prima

Paint, and urged this Court to adopt that position,

contrary to settled precedent, the federal policy fa-

voring arbitration, and the language of the Federal

Arbitration Act. But there is simply no good reason

for this Court to reverse its prior holdings.

In Prima Paint, the issue was whether a claim of

invalidity of the contract as a whole should be resolved

by the arbitrators or by the court. The party opposing

arbitration argued that there had been fraud in the

inducement of the contract as a whole, and that, since

the contract was invalid, the arbitration clause con-

tained within the contract was also necessarily invalid.

The Supreme Court rejected that argument. It held

that Section 4 of the Federal Arbitration Act did not

permit the court to consider the validity of the entire

19

contract; it could only hear evidence relating to fraud

in the inducement of the arbitration clause, since that

alone related to the making of an agreement to ar-

bitrate. 388 U.S. at 403-04. This principle was reaf-

firmed in Moses H. Cone, 460 U.S. at 24-25.

The decision in Prima Paint is universally recog-

nized as establishing that arbitration provisions con-

stitute ‘‘severable’” contracts independent of the

contracts in which they appear, and that while courts

may consider challenges directed to the arbitration

clause, they may not consider any challenges directed

to the contract as a whole.'* As Judge Posner ex-

plained for a unanimous panel of the Seventh Circuit:

‘2 The severability doctrine is accepted not only in the United

States, but in virtually all of the major industrialized countries

as well. For example, Article 178(3) of the Swiss Private In-

ternational Law Act provides that “the validity of an arbitration

agreement cannot be contested on the ground that the main

contract may not be valid.” Similarly, Article 1053 of the Code

of Civil Procedure of the Netherlands provides that “‘an arbi-

tration agreement shall be considered and decided upon as a

separate agreement. The arbitration tribunal shall have the power

to decide on the validity of the contract of which the arbitration

agreement forms part or to which the arbitration agreement is

related.”’ See also, e.g., Judgment of March 16, 1977, Land-

gericht, Hamburg (Germany) (ordinary court of first instance),

summarized in III Y.B. Comm. Arb. 274 (1978); Judgment of

July 15, 1975, Saikosai (Supreme Court), Japan, 29 Minshu 1061,

summarized in Doi, National Report: Japan, IV Y.B. Comm.

Arb. 115, 122 (1979). Moreover, because the severability pre-

sumption is so widespread, the major arbitration institutions have

incorporated it into their rules. See, e.g., Article 8(4) of the ICC

Rules of Conciliation and Arbitration (‘“‘The arbitrator shall not

cease to have jurisdiction by reason of any claim that the con-

tract is null and void or allegation that it is non-existent provided

that he upholds the agreement to arbitrate’’).

20

1. If a court had to resolve a challenge to

the validity of the entire contract before the

arbitration could begin, the arbitrator, though

the parties’ designated arbiter of disputes un-

der the contract, would have much less scope

for decision than a judicial arbiter of contract

disputes.

2. An arbitration clause will often be “‘sev-

erable’ from the contract in which it is

embedded, in the sense that it may be valid

even if the rest of the contract is invalid. If

the agreement of one party to arbitrate dis-

putes is fully supported by the other party’s

agreement to do likewise, there is no need

to look elsewhere in the contract for consid-

eration for the agreement to arbitrate; so ob-

jections to other parts of the contract, based

on fraud or unconscionability or mistake or

whatever, need not spill over to the arbitra-

tion clause.

Matterhorn, Inc. v. NCR Corp., 763 F.2d 866, 868-69

(7th Cir. 1985) (citations omitted). See also, e.g., How-

ard Elec., 754 F.2d at 850 (‘The merits of the claim

and any defenses are for the arbitrator to evaluate,

not the courts’); Muh v. Newberger, Loeb & Co., Inc.,

540 F.2d 970, 972 (9th Cir. 1976) (if parties have

agreed to arbitrate, “‘the entire controversy must be

referred to the arbitrator, including the validity of the

contract’’).

Notwithstanding the severability doctrine, the dis-

trict court in this case ruled that it had to decide

whether the Memorandum of Intent was a binding

contract before it could refer this case to arbitration.

But that is exactly the position rejected by the

21

Supreme Court in Prima Paint. Accordingly, the

Ninth Circuit correctly reversed the district court, and

held that, in keeping with Prima Paint, Petitioners’

challenge to the validity of the Memorandum of Intent

had to be referred to the arbitrators.

Petitioners argue, first, that the Ninth Circuit erred

in applying the Prima Paint rule to this case because

the language of the arbitration clause and oi the

Memorandum of Intent as a whole is, in Petitioners’

view, ‘“‘highly ambiguous.’”’ However, Petitioners’ sug-

gestion that the Prima Paint rule applies only if the

arbitration clause at issue is ‘‘on its face, clearly and

unequivocally intended as binding’’ (Petition at 24)

turns on its head settled law governing the interpre-

tation of arbitration agreements. As the Ninth Circuit

correctly held below, and as this Court has held on

many occasions, the federal policies favoring arbitra-

tion mandate that arbitration provisions must be gen-

erously construed. See supra at 15-16. Applying this

presumption of arbitrability, the Ninth Circuit cor-

rectly concluded that Paragraph IV of the Memoran-

dum of Intent, which provided that all disputes under

the Memorandum ‘‘will be referred to arbitration,”

constituted an enforceable arbitration agreement.

Reading Paragraph IV de novo, the Court of Appeals

found that it was neither too ambiguous nor too va-

gue. Having reached that conclusion, the Ninth Cir-

cuit had no legal basis for considering or resolving

any ambiguities in the Memorandum as a whole. To

the contrary, under the Prima Paint doctrine, and

under Section 4 of the Act, the Court of Appeals had

no choice but to refer Petitioners’ attacks upon the

Memorandum as a whole to arbitration.

22

Petitioners’ second basis for attacking the Ninth

Circuit’s opinion is in reality an attack on Prima Paint

itself. Petitioners contend that the Ninth Circuit erred

in refusing to permit the district court to decide

Petitioners’ claim that the Memorandum of Intent as

a whole was unenforceable because the parties did not

intend to be bound by its terms when they signed it.

According to Petitioners, the district court was re-

quired to determine the validity of the Memorandum,

because in Petitioners’ view, if the Memorandum was

not a contract, then “there was no mutual promise

to arbitrate because there was no mutual promise at

all.’’ Petition at 25.

But this is precisely the argument the majority in

Prima Paint rejected. In asserting its fraud claim,

Prima argued—just as Petitioners argue here—that

there could be no agreement to arbitrate because

“there was never a meeting of the minds between the

parties” on the underlying contract. 388 U.S. at 408

(Black, J., dissenting). The question presented was thus

whether it is for the court or the arbitrators to decide

“the legal question of whether any legal contract exists

upon which to base an arbitration.’’ Jd. (emphasis

added). The dissenters—like Petitioners here—would

have held that because ‘“‘there is absolutely no con-

tract’”’ there was “‘nothing to be arbitrated.”’ Jd. at

412. The majority in Prima Paint refused to accept

this argument, and held that all challenges to the

validity of the contract as a whole are for the arbi-

trators to decide.

Petitioners’ suggestion that Prima Paint applies

when the underlying agreement is alleged to be void

for lack of consideration, unconscionability, or vague-

ness, but does not apply when the ground for chal-

23

lenging the validity of the contract is that the parties

did not intend to be bound by it, simply cannot with-

stand analysis. The gravamen of the dissent in Prima

Paint was precisely that the fraud alleged in that case,

if proven, would vitiate the consent of Prima to the

entire contract, and render all of its terms null and

void. As the dissenting Justices put it, ‘“Prima would

not have agreed to the covenant not to compete or

to the arbitration clause but for F & C’s fraudulent

promise that it would be financially able to perform

consulting services.” Prima Paint, 388 U.S. at 424

(Black, J., dissenting): Accordingly, it is futile to argue

that in Prima Paint “the parties intended their con-

tract to be binding at the time they signed it.” Petition

at 24. As the dissenters in Prima Paint pointed out,

if Prima’s allegations of fraud were true, then Prima’s

assent to the contract that was signed was meaning-

less.

The majority in Prima Paint did not dispute the

dissent’s analysis of the potential effect of Prima’s

claims. But it did find that the Federal Arbitration

Act nonetheless required referral to arbitration of all

challenges to the agreement as a whole. Thus, there

is no principled basis for distinguishing between this

case and Prima Paint. In each case, the party op-

posing arbitration argued that its consent to the

agreement as a whole, and therefore its consent to

the arbitration clause at issue, was invalid. In each

case, the party opposing arbitration argued that it was

for the court to decide “‘whether any legal contract

exists.’”” Prima Paint, 388 U.S. at 408 (Black, J., dis-

senting). This Court properly rejected that argument

in Prima Paint, and the Ninth Circuit properly re-

jected it in this case.

24

Other courts to consider the issue in circumstances

analogous to the present case have reached the same

conclusion. For example, in Sauer-Getriebe KG v.

White Hydraulics, Inc., 715 F.2d 348, 350 (7th Cir.

1983), cert. denied, 464 U.S. 1070 (1984), the Seventh

Circuit held that “there is nothing that requires that

courts rather than arbitrators decide the validity of

contracts....”’ It therefore rejected an argument

much like that made by Petitioners here:

White claims that before this dispute may be

submitted to arbitration, a court must decide

that the contract containing the arbitration

clause is valid and enforceable. White argues

that if there is no contract to buy and sell

motors there is no agreement to arbitrate.

The conclusion does not follow its premise.

The agreement to arbitrate and the agree-

ment to buy and sell motors are separate.

Sauer’s promise to arbitrate was given in ex-

change for White’s promise to arbitrate and

each promise was sufficient consideration for

the other.

Id. (citation omitted). See also Flender Corp. v. Techna-

Quip Co., Nos. 89-2781, 89-3045, 91-1268 (7th Cir.

Jan. 6, 1992\Westlaw, Allfeds database) (claim that

agreement containing arbitration clause had termi-

nated prior to dispute was for arbitrator to decide,

since ‘‘the [severability] principle is applicable even

when the underlying dispute involves the validity of

the entire contract’’).

The Fifth Circuit reached a similar conclusion in

Merrill Lynch, Pierce, Fenner, & Smith, Inc. v. Haydu,

637 F.2d 391 (5th Cir. 1981). There, the plaintiff asked

25

the court to rule on her argument that the contract

requiring arbitration was obtained “under circumstan- :

ces of coercion, confusion, undue influence, and du-

ress.’ 637 F.2d at 398 n.11. The Court of Appeals

held that such claims were for the arbitrator to decide,

‘since they go to the formation of the entire contract

rather than to the issue of misrepresentation in the

signing of the arbitration agreement.” Jd. at 398. Ac-

cord Shotto v. Laub, 632 F. Supp. 516, 520-21 (D. Md.

1986) (arbitrator, not court, should decide plaintiffs’

claim that the agreements at issue were not in ex-

istence at the time the claims arose).

The First Circuit, too, has rejected the argument

that an arbitration clause should not be enforced prior

to resolution of the defendant’s claim that the entire

contract was nonexistent or unenforceable:

The teaching of Prima Paint is that a federal

court must not remove from the arbitrators

consideration of a substantive challenge to a

contract unless there has been an indepen-

dent challenge to the making of the arbitra-

tion clause itself.

Unionmutual Stock Life Ins. Co. of America v. Ben-

eficial Life Ins. Co., 774 F.2d 524, 529 (1st Cir. 1985).

Similarly, in Mesa Operating Ltd. Partnership v.

Louisiana Intrastate Gas Corp., 797 F.2d 238, 244

(5th Cir. 1986), the defendant opposed arbitration on

the ground that the failure tc obtain certain necessary

state approvals ‘‘made the contract between LIG and

Mesa void as never having been entered into.” The

Fifth Circuit rejected this argument, noting that be-

cause “LIG has not argued that the agreement to

arbitrate is invalid separately from the entire contract

26

... the arbitration provision remains separate and

enforceable under Prima Paint.”’ Id. See also C.B.S.

Employees Fed. Credit Union v. Donaldson, Lufkin &

Jenrette Sec. Corp., 912 F.2d 1568, 1567 (6th Cir.

1990) (‘The Prima Paint doctrine is not limited, how-

ever, to rescission based on fraudulent inducement,

but extends to all challenges to the making of a con-

tract’’\(quoting Rhoades v. Powell, 644 F. Supp. 645,

653 (E.D. Cal. 1986)); Miller v. Drexel Burnham Lam-

bert, Inc., 791 F.2d 850, 854 (11th Cir. 1986)

(‘‘{a]llegations of unconscionability in the contract as

a whole”’ are for the arbitrators to resolve); Parris

v. Dean Witter Reynolds, Inc., 659 F. Supp. 928, 930

(N.D. Ga. 1987) (if ‘“‘plaintiff challenges the making

of the entire contract as opposed to the arbitration

clause itself, the determination of whether the con-

tract, and therefore the arbitration agreement, is valid

is for the arbitrator’’)(citation omitted).

Petitioners’ suggestion that the circuit courts have

split on this issue is simply incorrect. All of the cases

relied on by Petitioners to support its notion that

courts rather than arbitrators must decide the

“threshold issue’’ of the validity of contracts contain-

ing arbitration clauses deal with a separate and dis-

tinct issue: the question of whether the parties ever

assented at all to the agreement or document con-

taining the arbitration provision at issue. For example,

in Three Valleys Municipal Water District v. EF.

Hutton & Co., 925 F.2d 1186, 1142 (9th Cir. 1991),

which Petitioners quote out of context, a split panel

of the Ninth Circuit held that when a party denies

that it ever entered into the agreement containing the

arbitration clause at issue, the district court must re-

solve that question before referring the dispute to

27

arbitration. The issue arose in Three Valleys because

plaintiffs alleged that the individual who signed the

client agreements at issue lacked the authority to do

so. In such a case, the question is not whether the

document the parties executed is binding, but whether

the parties ever executed anything at all.

Thus, in another Ninth Circuit decision, Teledyne,

Inc. v. Kone Corp., 892 F.2d 1404, 1410 (9th Cir.

1990), the Ninth Circuit rejected an argument identical

to that of Petitioners here:

The federal courts ... requir[e] that cases be

submitted to arbitration unless there is a chal-

lenge to the arbitration provision which is sepa-

rate and distinct from any challenge to the

underlying contract. ‘The teaching of Prima

Paint is that a federal court must not remove

from the arbitrators consideration of a substantive

challenge to a contract unless there has been an

independent challenge to the making of the ar-

bitration clause itself.”

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 (citations omitted\emphasis in the origi-

nal), quoted in Three Valleys, 925 F.2d at 1146 (Hall,

J., dissenting). As the Ninth Circuit put it in this case,

“where the parties admit to signing a document that

contains an arbitration provision, as here and in Te-

ledyne, all questions regarding breach of the agree-

28

ment must be referred to arbitration.’’ 937 F.2d at

477.

The other cases relied on by Petitioners are much

like Three Valleys. In Par-Knit Mills, Inc. v. Stock-

bridge Fabrics Co., 686 F.2d 51 (8d Cir. 1980),

appellants argued that the individual executing the

contracts at issue lacked the authority to bind the

corporation. Similarly, in J.S. Joseph Co. v. Michigan

Sugar Co., 803 F.2d 396 (8th Cir. 1986), the question

was whether a party that agreed to arbitrate with

another party could be forced into arbitration with an

assignee of that other party.'* This case would be

comparable to those cases only if Petitioners could

deny that they had entered into the Memorandum of

Intent at all.'* Since Petitioners admit to having en-

tered into the Memorandum of Intent, and since the

Memorandum on its face contains an arbitration clause

that is severable from the Memorandum itself, the

‘3 Petitioners also cite Pollux Marine Agencies, Inc. v. Louis

Dreyfus Corp., 455 F. Supp. 211, 219 (S.D.N.Y. 1978). In that

case, the court concluded that it had to consider the parties’

challenge to the validity of the charter agreement at issue only

because the language of the arbitration clause itself ‘“‘necessarily

implie{d] that the existence of the charter is not a question for

arbitration.’’ As the Ninth Circuit noted below, there is no basis

for reading the arbitration clause at issue in this case as ex-

cluding challenges to the validity of the Memorandum of Intent

from the consideration of the arbitrators.

‘In fact, that is exactly what Standard Fruit Company does

contend. It argues that it did not sign the Memorandum of

Intent, and that neither Standard Fruit & Steamship nor Castle

& Cooke signed on its behalf. Accordingly, the Ninth Circuit,

in keeping with Three Valleys, held that this question, as distinct

from Petitioners’ overall challenge to the Memorandum of In-

tent, must be decided by the district court. 987 F.2d at 480-81.

29

Court of Appeals was entirely correct and fully con-

sistent with the decisions of this Court and others in

directing that the parties’ dispute be referred to ar-

bitration.'5

Petitioners’ final argument is that the decision of

the Court of Appeals is inconsistent with federal pol-

icy, because it will discourage ‘“‘pre-contractual dis-

cussions about the possibility of arbitration... .”

Petition at 27. In fact, of course, the Ninth Circuit’s

decision, which simply follows Prima Paint, will have

no such effect. To avoid arbitration under the Ninth

Circuit’s decision, a party need only refrain from sign-

ing an arbitration agreement.

Petitioners in this case signed an arbitration agree-

ment, which they now wish to avoid. But federal pol-

icy requires that they be held to the terms of the

arbitration provision they signed. As this Court cor-

rectly held in Prima Paint, the overriding purpose of

the Federal Arbitration Act is to further the strong

federal policy in favor of arbitration. The Ninth Cir-

cuit’s decision to send this case to arbitration clearly

'° Petitioners’ hypothetical, a preliminary agreement that ex-

pressly states that all of its terms are non-binding, is easily

answered. As the Ninth Circuit expressly stated below, courts

reviewing documents such as the Memorandum of Intent ‘‘must

first make a threshold finding that the document at least pur-

ports to be” a contract. 937 F.2d at 476 (citations omitted). So

long as the Memorandum is susceptible of such an interpretation,

and so long as the arbitration clause in it may be interpreted

broadly enough to cover claims relating to the validity of the

Memorandum as a whole, such claims must be referred to ar-

bitration. If the document at issue cannot be construed as an

agreement, as in Petitioners’ hypothetical, then under the Ninth

Circuit’s ruling, disputes relating to that document need not be

Sent to arbitration.

30

furthers that federal policy. By contrast, if this Court

were to adopt Petitioners’ proposed revisions to ex-

isting law, it would encourage parties to resort to

litigation whenever they wished to avoid arbitration,

and permit them to do so simply by alleging that they

did not intend to be bound by the arbitration provision

they signed. Such a rule would plainly subvert Con-

gress’ clearly expressed desire to hold parties to their

agreements to arbitrate, and to have parties sent to

arbitration without the costs and delays of collateral

litigation.

CONCLUSION

The decision of the Court of Appeals was correct

and raises no issues that merit review by this Court.

Accordingly, the petition for a writ of certiorari should

be denied.

Dated: February 14, 1992 Respectfully submitted,

JUDITH C. APPELBAUM

Counsel of Record

DAVID WIPPMAN

KATHLEEN M. MILTON

REICHLER & SOBLE

1747 Pennsylvania Ave., N.W.

Washington, D.C. 20006

(202) 223-8400

Attorneys for Respondent