Petition for Writ of Certiorari — Arthur Murray, Inc. v. Ricciardi (No. 281)

No. 28 } its 2 A _ TIiLeEe |

auG 3 196!

; yw! . Clerk

JAMES RK. BROWNING

on™

IN THE

Supreme Court of the United States

October Term, 1961

IN THE MATTER OF THE APPLICATION

OF

ARTHUR MURRAY, INC.,,

Petitioner-A ppellant,

For an Order Staying Arbitration Proceedings

Instituted by

RICCIARDI,

Appellee.

PETITION FOR WRIT OF CERTIORARI

Harry Krauss,

Attorney for Petitioner,

No. 521 Fifth Avenue,

New York, N. Y.

Loper APPEAL Press, INc., 41 VESEY STREET WOrth 2-0689

INDEX

REESE Si nig Fa aps 6s 0c

OEE EI Rip pray Soe an te, ee

I cg os on sk oe

Constitutional Provision Involved ...............

oc ig, OE SOLE TIES Ue eies Aiean kbs KR sas

menesnms for Gramtiag the Writ ..................

Argument .......... 6c eee eee eee tahoe aw an, 98

Opinion by Judge C. A. Loreto ..................

Opinion of New York Court of Appeals ..........

e

Opinion in the Matter of the Arbitration Between

Exereyele Corporation, Appellant, and James

Maratta, Respondent ................. eee

CASES CITED

Alpert v. Admiration Knitwear Co., 304 N. Y. 1 ..

Application of Minkin, 279 A. D. 226, Affd. 304

i i te anne dhe wae aed obs 4-2-0 xs

Bluefield v. Public Service Comm., 262 U. S. 668 ...

PAGE

to

te

17

12

li IN DEX

Bolhinger v National Cash Register Co., 280 App.

ein SUL Ie RUN e RE NAAR RY ho Aus

Copperweld v. Commission, 324 U. S. 780, 785 ....

Davidson v. New Orleans, 96 U. S. 97, 105 ........

El Hoss Engineering and Transport Co. v. Ameri-

ean Independent Oil Company (No Off. Rep.)

Finsilver, Still & Moss v. Goldberg, Maas & Co., 253

a ee I SE 5S Ea iets aavenes nun eee

Kennard vy. Louisiana, 92 U. S. 480 ..............

Matter of Exereyele Corporation, 9 N. Y. 2nd 329 ..

Matter of Kimoshito and Co. Ltd. (No Off. Rep.) ..

Pennoyer v. Neff, 95 U. S. 714, 733 ..............

Roby v. Colehour, 146 U. S. 153, 159 ............

Schrafran v. Lowenstein, 280 N. Y. 164 ..........

Shirley v. American Silk Mills, 257 A. D. 375. ....

STATUTES CITED

Title 28 U. S. Code, See. 1257(3) and See. 344e....

Constitution of the United States, Amendment V

Constitution of the United States, Amendment XIV

Section 1449 of the Civil Practice Act of New York

PAGE

13

10

OD Ww &

IN THE :

Supreme Court of the United States

Octoser Term, 1961

In the Matter of the Application

of

ARTHUR Murray, Inc.,

Petitioner-A ppellant,

For an Order Staying Arbitration Proceedings

Instituted by

RIccraRDI,

A ppellee.

i,

Vv

PETITION FOR WRIT OF CERTIORARI

To the Honorable, the Chief Justice and Associate

Justices of the United States Supreme Court:

Petitioner herein prays for a Writ of Certiorari to

review the order of the Court of Appeals of the State

of New York, affirming the order of the Appellate Division

of the Supreme Court of the State of New York, First

Department, which in turn affirmed an order of the New

York Supreme Court, County of New York, denying ap-

pellant’s motion for an order staying proposed arbitra-

tion proceedings before the American Arbitration Associa-

tion, pursuant to demand therefor made by the appellee.

Opinions

The Court, at Special Term, of the Supreme Court of

the State of New York, County of New York, in denying

the motion, rendered an opinion, set out in the appendix

herein. The Appellate Division of the Supreme Court,

in affirming the Court below, gave no opinion. The Court

of Appeals of the State of New York affirmed by a

divided Court of 5 to 2. The majority, in affirming, is-

sued a memorandum indicating that the affirmance was

upon the basis of a case recently decided by it, while the

minority wrote an opinion for reversal and the granting

of appellant’s motion. Such opinions are appended here-

with and have not yet been officially reported.

Jurisdiction

The jurisdiction of this Court is invoked under Title

28 U. S. Code, See. 1257(3) and See. 34e.

Question Presented

The order sought to be reviewed was dated and en-

tered in the office of the Clerk of the Court of Appeals of

the State of New York on May 31, 1961. The question

presented thereunder is as follows:

Whether the appellant was deprived of the constitu-

tional guarantees afforded him by the Fifth Amendment

and the Fourteenth Amendment (Sec. 1) in that it may

be deprived of property without due process of law.

Constitutional Provision Involved

Amendment V of the Constitution of the United States,

insofar as applicable to this ease, provides as follows:

‘‘No person shall * * * be deprived of life, lib-

erty, or property, without due process of law * * *.’’

Amendment XIV of the Constitution of the United

States, insofar as applicable to this case, provides as

follows:

‘ee * * nor shall any State deprive any person of

life, liberty or property without due precess of

law * = 7 “

,

Statement °

(Page reference is to transcript of record.)

Reasons for Granting the Writ

As is indicated by the minority opinion in the Court

of Appeals of the State of New York, a judicial inter-

pretation of the language of the contract specifically for-

bids any assignment thereof by appellee and places no

obligation or duty on appellant’s part to permit or con-

sent to an assignment (46). Reading the contract in its

entirety, the agreement to arbitrate any dispute can only

mean a factual dispute which arises with respect to any

matter connected with the contract and a right or obliga-

tion stemming therefrom. Where the contract peremptor-

ily forbids the assignment, there egn be no claim that

there was a consent to arbitrate any factual dispute in

conjunction with the right to assign. The majority of

the Court of Appeals did not dispute the statement of

the minority as to the non-assignabi:.ty of the contract,

but ruled that where there is a provision to arbitrate,

any and all questions of law or fact raised by the demand

for arbitration must be left to the arbitrators, even

though there might be no cause of action at law which

could be based thereon.

The constitutional guarantees of petitioner were defi-

nitely violated in that it was directed to submit to the

determination cf a non-judicial tribunal, neither author-

ized by law nor contractually agreed upon, and any ad-

verse finding by such body, under which appellant would

be required to make payment of damages, would be a

deprivation of its property without due process of law.

Argument

The law of New York State is firmly established that

a provision against assignment, such as we have before

us, is absolute and uneonditional and imposes no obliga-

tion on the part of appellant. The majority of the Court,

in affirming, did not dispute the interpretation placed

thereon by the minority opinion, but was explicit in rest-

ing its ‘decision upon Matter of Exercycle Corporation,

9 N. Y. 2nd 329, decided March 23, 1961, copy of which

is appended hereto. Special Term, in denying the mo-

tion, did so on the basis that claim was made that con-

sent was withheld arbitrarily and unlawfully, and that

good faith was an element which attached to every con-

tract, and hence presented an issie of fact for the ar-

bitrators. The Court of Appeals was specific in reject-

ing this claim, and resting its decision upon its reason-

ing in the Evrercycle case. In that case, contention was

made that there con!d be no arbitration because the con-

tract was void fur lack of mutuality. The Court of Ap-

peals ruled: -

“In our view, the question whether the contract

lacked mutuality of obligation * * * is to be deter-

mined by the arbitrators, not the Court.”’

The part which we deem pertinent to our case reads as

follows:

‘‘Whether the issue is one involving interpreta-

tion or law or fact or al! three, it is for the arbi-

trators * * *,””

Three Judges dissented from this holding, in two sepa-

rate opinions. In disagreeing, Judge Froessel quoted

Chief Judge Cardozo (later a member of this court) in

Finsilver, Still € Moss v. Goldberg, Maas & Cv., 253 N. Y.

382, 390-391:

‘‘Tf in truth there is no contract at all or none

calling for arbitration, the self-constituted tribunal

is a nullity without power to bind or loose by force

of its decisicns. * * * In the absence of a contract

expressing a consent to arbitrate, an award by an

arbitrator is an act of usurpation."’

We contend that by its decision, the Court of Appeals

for the first time, injected into this case the constitutional

issue of whether, notwithstanding that there is no agree-

mert to arbitrate questions which do not exist in law, one

may be compelled to be bound by the possibly misecon-

ceived noticns of a non-judicial body as to the law. Hither-

to, only questions of fact or mixed questions of law and

fact could be submitted for arbitration, but the factual

question always remained paramount. Now, for the first

time, apparently, the Court divests itself of the determina-

tion of pure law questions, not intertwined with any fact

determination, and remits them to the arbitrators for de-

cision. The agreement to arbitrate did not contemplate

any such disposition.

Section 1449 of the Civil Practice Act of New York ex-

pressly provides:

‘*A contract to arbitrate a controversy thereafter

arising between the parties must be in writing.

Every submission to arbitrate an existing contro-

versy is void, unless it or some note or memoran-

dum thereon be in writing, and sybseribed by the

party to be charged therewith, or by his lawful

agent.’’

We contend that the New York Court of Appeals has

interpreted this statute so as to require arbitration, if

(1) there be a general agreement to arbitrate any contro-

versy, notwithstanding that there is no existing contro-

versy between the parties, and that this is in violation of

due process, It is clear that at common law, no court could

compel arbitration, and that any right or authority which

the court assumes, must grow out of statutory mandate.

Henee, the decision must be read together with the statute,

as an interpretation of its language.

The New York Court of Appeals earlier held in Alpert

Vv. Admiration Kuitwear Co,, 304 N.Y. 1, that if under the

unambiguous terms of agreement calling for arbitration,

there has been no default, the Court may not make an

order compelling a party to proceed to arbitration. Its

vpening sentence reads:

“We are to determine whether in the commercial

transaction which gave rise to this proceeding there

remains between the parties an arbitrable dispute.

That question is one of law.’

We urge that the Court was correct in this statement and

that. insofar as the Bwercycle case undertakes to implicitly

overrule it by directing that all issues of law must be left

to the arbitrators, it not only is erroneous, but prejudicial

to appellant’s constitutional rights. In Schafran v. Low-

enstein, 280 N. Y. 164, the New York Court of Appeals

itself asked:

‘If the plaintiff made no contract to submit, or

signed and exeented no submission to arbitrate how,

by any possibility, can it be bound by an award of

arbitrators who had no jurisdiction?’’

A parallel case was presented in Bolhinger v. National

Cash Register Co., 280 App. Div. 751 (N. Y.), wherein

the contract was held to have placed no restriction on the

right of discharging an employee and yet the employee

sought to arbitrate the question of his discharge. Said

the Court:

‘‘As there was no restriction on the right of ap-

pellant to discharge, there was no violation of any

obligation owed to any employees when such right

was exercised in this case. No obligation having

been violated, there can be no dispute and, conse-

quently, there is nothing to arbitrate.’’

In order to demonstrate the accepted rule, prior to the

decision in the Exercycle, we refer to application of Min-

kin, 279 A. D. 226, Affd. 304 N. Y. 617. The Appellate

Division of the New York Supreme Court there stated :

‘‘Arbitration may be resorted to only to settle

controversies. If no issue of fact or law exists in

relation to a matter sought to be sulimuitted to arbi-

tration, there is, obviously, no coutroversy to. be

settled, and the matter is not one which may be ecom-

prised within an agreement to arbitrate."’

This clearly paraphrases our position. As a matter of

law, there is no basic case. The agreement to arbitrate

contemplated only valid disputes. Its purpose is to sub-

stitute the Board of Arbitrators in place of the judicial

body, when there would be a matter in dispute of which

the judicial body would otherwise have taken cognizance.

It is in this sense that we stated heretofore that the entire

agreement must be read together and that where it is

absolute against the privilege of assignment, no dispute

can arise and hence there was no agreement to arbitrate

the same.

As it stands, appellant is now in the position of being

absolutely bound by any decision of the arbitrators, no

matter how erroneous in law or fact, subject only to the

limitations of Section 1462 of the Civil Practice Act of the

State of New York, which mandates the Court to vacate

the award upon showing of corrupation, fraud or undue

means, or evident partiality or where there is an unreason-

able refusal of postponement of the hearing without suff-

cient cause or a refusal to hear pertinent and material

testimony or where the arbitrators exceeded their powers

or so imperfectly executed them that a definite award was

not made. The courts of New York in innumerable cases

have reached the conclusion stated in Shirley v. American

Silk Mills, 257 A. D. 375.

‘*An arbitration award whieh a party may regard

as unfavorable or of which he disapproves may not

be impeached because of mistake or error of the

arbitrators as to the law or facts in the absence of

fraud, corruption or other misconduct. * * * Were

the rule otherwise the judgment of the Court would

be substituted in place of the award of arbitrators

chosen by the parties and it would make an award

the commencement, not the end, of litigation, Bur-

chell v. Marsh oS U. S. 344, 349.”’

Thus, in a large sense, the determination of the arbi-

trators, no matter how unjust, is not subject to judicial

review. Is this due process in a case where the parties

have not agreed to arbitrate? Can a party be bound, in

the absence of an explicit agreement on his part consenting

thereto? This Court in Pennoyer v. Neff, 95 U. S. 714,

733, in deciding due process, said:

‘“‘To give such proceedings any validity, there

must be a tribunal, competent by its constitution—

that is by the law of its creation—to pass upon the

subject matter of the suit * * *.

This Court was ing of a judicial tribunal estab-

lished by the Pm of the State. It needs no force-

ful argument to persuade one that a Board of Arbitrators

ix not such a duly constituted tribunal.

If there is any guestion as to this, we refer to Burton

v. Platter, 53 Fed. 901, 904, wherein the Court cites Chan-

cellor Kent (2 Kent Comm. '13) as follows:

“The better and larger definition of cue process

of law is that it means law in its regular administra-

tion through Courts of jusice.’’

This Court had opportunity to discuss due process in

Davidson v. New Orleans, 96 U.S. 97, 104:

ce 8 * It is not possible to hold that a party

has, without due process of law, been deprived of

his property; when as regards the issue affecting

it, he has, by the laws of the state. a fair trial in

a court of justice, according to the mudes of pro-

ceeding applicable to such a case.””

In that case, the Court was considering the legality of a

summary sale for unpaid taxes due to the State, after

10

the appellant had failed to avail himself of the rights

given him by statute to test its validity by proper action.

If ours were a case wherein there could be a total

review by the Court, our position would unquestionably

not be as strong, but where we are deprived of all such

rights and finality attaches to the findings of the arbitra-

tors, due process is not present.

We ask the Court to review this case also because it

presents an ideal factual siiuation for determination of

the question, which seems to be plaguing both the Fed-

eral Courts as well as the State Courts. Thus, on April

10, 1961, the U. S. Cireuit Court of Appeals, for the

Second Circuit in El Hoss Engineering and Transport

Co. v. American Independent Oil Company (No Off. Rep.)

stated the position that:

‘‘The question is one of intention, to be ascer-

tained by the same tests that are applied to con-

tracts generally. Courts are not at liberty to shirk

the process of construction under the empire of

a belief that arbitration is beneficent, any more

than they may shirk it if their belief happens to

be the contrary. No one is under a duty to re-

sort to these conventional tribunals, however help-

ful their processes, except to the extent that he

has signifie:! his willingness.’’

This followed the conclusion by the Court that

‘‘We read the entire contract as demonstrating

a clear intent on the part of both parties not to

arbitrate any dispute with reference to whether

there was a full performance of these threshold

conditions.’’

11

And the U. S. Court of Appeals, Seeond District, com-

posed of different Judges, decided on March 16, 1961 in

the Matter of Kimoshito and Co. Ltd. (No Off. Rep.)

that under a clause providing for arbitration of any dis-

pute ‘‘arising out of or relating to’’ a contract, a claim

of fraudulent inducement would be arbitrable. New York

cases are cited in support of the position. While there

is no discussion of the (Constitutional question, as to

whether the party claiming fraud does not have the pre-

liminary right to demand that. the Court first determine

whether or not he freely contracted to arbitrate, the ques-

tion is inherent in the case. Thus, the decision hy this

Court on the subject would serve as a guide for both

Federal and State Courts and would lay to rest. this

perplexing matter.

The question is, therefore, concretely presented as to

whether any law which is interpreted as requiring sub-

mission to the final judgment of a non-judicial tribunal,

even though the contract does not provide tor it and the

party does not consent to it, is repugnant to the Four

teenth Amendment. To summarize, appellent merely

agreed upon arbitration of a ‘‘dispute.’’ This does not

mean a Clainy which is fictitious or invalid in law. AD! it

means is that the dispute must be real and faeinal, and

if claimant is to be credited, those facts would) sustain

a judgment in law. The New York Court) of Appeals

has now said that even though there be ne claim at law,

the arbitrators are at liberty to disregard the existing law

or to fashion and apply it according to their whim, and,

this, notwithstanding that there is no bona tide dispute

in law.

Having interpreted these powers to he within the au-

thority of the state statute, such interpretation, we

contend, is clearly unconstitutional, and may be reviewed

by the Court.

12

In Kennard v. Louisiana, 92 U. S. 480, this Court held

that there was no deprivation of due process, inasmuch

as what was done was ‘‘in the due course of legal pro-

ceedings, according to rules and forms which have been

established for the protection of private rights.’’ It is

because we are being deprived of the privilege of a

hearing in legal proceedings, according to established

rules and forms, that we now make complaint.

Notwithstanding that it was impossible, (prior to dis-

cussion in our care) to anticipate the ruling of the New

York Court of Appeals, it should be noted that appellant

made claim throughout that it was not required by the

contract or otherwise to go before a non-judicial tribunal

and be bound by its decision, and that heice the claim

was clearly presented to the Courts.

This Court said in Roby v. Colchour, 146 U.S. 153, 159:

‘‘Our jurisdiction being invoked upon the ground

that a right or immunity, specially set up or claimed

under the Constitution or authority of the United

States, has been denied by the judgment sought to

he reviewed, it must appear from the record of

the case either that the right. so set up = and

claimed, was expressly denied, or that such was the

necessary effect in law of the judement."*

In Bluefield v. Pablo Service Comm... 262 U. S. 668,

6sSY, this Court held that a judgment of the highest Court

vf a state which upheld an order of the state commission

tixing rates may be reviewed by this Court, and that a

Pubhe Utility Corporation is entitled. under the due

process clause of the Fourteenth Amendment, to the in-

dependent Judgment of the Court as tu both the law and

facts.

13

And finally in Copperweld vo Commission, 324 U.S.

780, 780, this Court made it explicit

‘*But, if violation of the Federal Constitution by

the decision of the State Court is, in any case,

involved, we have jurisdiction to review the deeci-

sion on certiorari. (28 U.S. C. 344 (¢)"

This case therefore bears great importance not only to

this appellant aloue, whose fundamental rights have been

infringed upon, but it also affords the opportunity for

clearing the atmosphere for innumerable cases that are

currently being presented to both the Federal and State

Courts, particularly in the area of New York State.

-

Wuererork, it is respectfully requested that this Hon-

orable Court issue a writ of certiorari herein to the New

York State Court of Appeals.

Respectfully submitted,

Harry Kracss,

Attorney fur Petitioner,

Office & P. 0. Address,

521 Fifth Avenue,

Borough of Manhattan,

City of New York.

14

Opinion by Judge C. A. Loreto

Matter of Arthur Murray, Inc. (Ricciardi)—The peti-

tioner seeks to stay arbitration. The petitioner franchised

the respondent to operate nine dance studios under the

naame of ‘‘Arthur Murray Dance Studios.’ The fran-

chise agreement contained an arbitration clause which pro-

vided that any controversy or claim arising out of or re-

lating to the agreement would be subject to arbitration in

the City of New York. The demand for arbitration states:

‘‘(laim is made for the sum of $241,650.00 representing

damages sustained by claimant, Joseph H. Ricciardi, by

reason of the wilful, arbitrary, and capricious actions of

Arthur Murray, Ine., in and [sic] lawfully refusing to

consent to the sale and assignment of claimant's interests

in his studios operated under the aforementioned agree-

ments. Claim is made for the sum of approximately

$10,000.00 representing escrow funds withheld by Arthur

Murray, Inc."". The petitioner opposes arbitration upon

the ground that the agreement also contains the following

provision: ‘626. The Licensee shall not sell, transfer, as-

sign, sub-license, mortgage or pledge the whole or any

part of this agreement or any rights or privileges aecru-

ing hereunder, to any person, firm, or corporation, with-

out the written consent of the Lieensor first had and ob-

tained. * ° *’* With respeet to the claim for $10,000

escrowed funds held by the respondent, the petitioner

concedes that it is a proper item for arbitration and makes

no objection thereto.

However, with respect to the first item, which repre-

sents duimages, petitioner maintains it) had = the abso-

lute right to withhold consent as indicated in paragraph

26 set forth above and that therefore there is no arbitrable

issue. This contention cannot be sustained for every con-

tract implies good faith and fair dealing between the

15

parties to it (Simon v. Elgen, 213 N.Y. 589). The charge

is made that the refusal to consent was the result of will-

ful and deliberate acts of bad faith and malicious inter-

ference by the petitioner with prospective purchasers.

Whether this is so is a matter for the arbitrators to pass

upon under the arbitration clause of the agreement, which

is broad enough to encompass the claim arising out of

said agreement. ‘‘All acts of the parties snsequent to

the making of the contract which raise issnes of fact or

law are exclusively within the jurisdiction of the arbitra-

tion’? (Matter of Compagne Franeaise des Petroles, 305

N.Y. 588, at 589; Matter of Lipman [Hauser Shellae Co.]

289 N. Y. 76).

The petitioner also raises the question as to whether

the proceeding may be instituted by the petitioner without

his wife, who was a party to the agreement. In the af-

fidavit the respondent alleges that the wife will be joined

asa party. This being so, the respondent will be granted

twenty days within which to effectuate sneh joinder. The

motion to stay arbitration is denied. Settle order.

Opinion of New York Court of Appeals

We dissent and vote for modification.

Petitioner seeks to stay arbitration of a dispute al-

legedly arising out of nine identical franchise agreements.

The clear, definite and appropriate language employed by

the parties in these agreements and the:r failure to

provide that consent might not be unreasonably withheld,

as well as the special nature of the agreements, conferred

upon petitioner the right to withhold its consent to their

assignment (Allhusen v. Caristo Constr. Curp., 303 N. Y.

446; Sillman v. Twentieth Century For, 3 N. Y. 2d 395;

16

Boskowitz v. Cohen, 197 App. Div. 776; Ogden v. River-

view Holding Corp., 134 Mise. 149, affd. 226 App. Div.

882; Glauberman v. University Place Apts., Inc., 66 N. Y.

S. 2d 335, affd. 272 App. Div. 758, mot. for lv. dismd. 297

N. Y. 587; Nassau Hotel Co. v. Barnett € Barse Corp., 212

N. Y. 568, affg. 162 App. Div. 381; see also Weisner v.

791 Park Ave. Corp., 6 N. Y. 2d 426). The rule of good

faith (Simon v. Etgen, 213 N. Y. 589) has no application

here whatever.

Accordingly, so much of the dispute as relates to dam-

ages allegedly accruing by reason oi the arbitrary with-

holding of consent to the assignments is not arbitrable

(Alpert v. Admiration Knitwear Co., 304 N. Y. 1, 3;

Matter of General Elec. Co. [Elec., Etc., Workers], 300

N. Y. 262; Matter of Sarle [Sperry Gyroscope], 4 A. D.

2d 638, 641-642, affd. 4 N. Y. 2d 917; Matter of Exercycle

Corp. [Maratta], 9 N. Y. 2d 329, 334).

The orders of the court below should be modified by

granting petitioner’s application to stay arbitration inso-

far as it relates to the claim for damages allegedly aris-

ing out of its refusal to consent to the assignment by

respondent of the franchise agreements; and except as

so modified affirmed, with costs.

Order affirmed, with costs, upon the authority of Mat-

ter of Exercycle Corp. (Maratta), 9 N. Y. 2d 329.

No opinion.

All concur except Froessel, J., who dissents in an opin-

ion in which Van Voorhis, J., concurs.

17

Opinion in the Matter of the Arbitration Between

Exercycle Corporation, Appellant, and

James Maratta, Respondent

Fup, Judge.

In March of 1955, James Maratta entered into an em-

ployment agreement with Exercycle Corporation. It pro-

vided that ‘‘Exercycle employs Maratta as it Vice-Presi-

dent in charge of sales”? and that he hereby ‘‘shall have

general charge and supervision of the selling activities

for Exercycle.’’ And, the agreement went on to recite,

‘‘Maratta accepts the employment and agrees to devote

his best efforts and full time to Exercycle’s sales activi-

ties’’. The employment was to continue ‘‘until he volun-

tarily leaves the employ of Exercycle or dies’’, with Ex-

ercycle retaining the right to terminate the contract, if

sales fell below specified levels. The agreement further

stated that

‘‘Any dispute arising out of or in connection with

this agreersent shall be settled by arbitration in ae-

eordance with the rules of the American Arbitration

Association.”’ |

Prior to entering into his agreement with Exercyele,

Maratta had been asscciated with several large and = sue-

cessful enterprises and thereafter became an independent

direct sales consultant. In early 1955, he was approached

by the then president and controlling stockhoider of Exer-

cycle and asked to join that company as a direct sales

specialist in improving its business and sales which were

then at a low ebb. After a period of negotiation and study,

Maratta agreed to give up his work as an independent

consultant and, in the words of the contract, ‘‘to devote

his best efforts and full time to Exercycle’s sales activi-

18

ties’’, He was fearful, however, that, once he had de-

veloped Exercycle’s sales to the point where his compen-

sation, based on commissions, was substantial, a new

Management might attempt to deprive him of the fruits

of his efforts. For this reason, he ingjsted upon and was

given a life employment contract.

Maratta worked for the corporation for some four years

and, apparently, the fact that he devoted all of his time,

his efforts and his imagination to the enterprise, revital-

ized the company and improved its business. In 1959,

differences arose between Maratta and the corporation—

control of which had been acquired by a Mr. Little—and

Maratta resigned as president, to which office he had suc-

ceeded, but continued in his employment under the 1955

arrangement. Some time later, Mr. Little expressed dis-

pleasure with Marata’s contract and the latter having

come to believe that the new management was interfering

with his supervision of sales, advised Mr. Little, by letter

dated January 12, 1960, that he had ‘‘started’’ to seek

employment elsewhere. Three days later, an officer of

Exercycle responded. Treating the letter as one of resigna-

tion, he expressed regret at Maratta’s ‘‘decision to ter-

minate [his] relationship with the Exercyele Corporation’’.

Relying upon the broad arbitration provision in the

contract namely, to arbitrate any dispute ‘‘arising out of

or in connection with’’ the agreement, Maratta sought

arbitration. Exercycle thereupon brourlt this proceed-

ing for a stay on the ground that the alleged contract of

employment ‘‘is void and unenforceable in that * * *°

[it] is lacking in mutuality by obligating Petitioner [Ex-

ercycle] to employ Respondent [Maratta| for a definite

term i. e. for Respondent’s life aud permitting Respond-

dent to terminate his employment and said alleged con-

tract at will’’. Exercycle aisc objected to the arbitration

19

on the further ground that, irrespective of its validity,

the contract ‘‘is no longer in existence’’ by reason of Mar-

atta’s having terminated the contract and resigned as an

employee.

The court at Special Term denied the motion for a stay

and the Appellate Division a%irmed by a_ three-to-two

vote. Both the majority and the minority, to support

their respective conclusions, proceeded to eonstrue the

contract. It was the majority’s view that the contract

was one to employ the respondent for life and that the

provision ‘‘that the employment was to continne until

the respondent ‘vc:untarily leaves the employ of Ex-

ercycle or dies’ did not as a matter of Jaw make the

contract illusory or just an agreement terminable at will.’’

On the other hand, it was the dissenters’ opinion that the

contract was ‘‘illusory’’ sinee thé employee did not

agree to work for life or for any other definite period.

[1] We, too, agree that there should be arbitration, but

we reach our conclusion by a route quite different from

that taken by the courts below. In our view, the question.

whether the contract lacked mutuality’ of obligation, de-

pending as it does primarily on a reading and construc-

tion of the agreement, and involving, as is obvious from

the disagreement amongst the judges of this court and

the courts below, substantial difficulties of interpretation,

is to be determined by the arbitrators, not the court. Onee

it be ascertained that the parties broadly agreed to arhi-

trate a dispute ‘‘arising out of or in connection with’? the

agreement, it is fur the arbitrators to decide what the

agreement means and to enforce it according to the rules

of law which they deem appropriate in the circumstances.

[2] It has long been this State's policy that, where

parties enter into an agreement and, in one of its provi-

sions, promise that any dispute arising out of or in con-

20

uection with it shall be settled by arbitration, any con-

troversy which arises between them and is within the

compass of the provision must go to arbitration. Civil

Practice Act, § 1448; see, e. g., Matter of Kelley, 240 N. Y.

74, 79, 147 N. E. 363, 364; Marchant v. Mead-Morrison

Mfg. Co., 252 N. Y. 284, 298, 169 N. E. 386, 390; Matter

of Lipman [Haeuser Shellae Co.], 289 N. Y. 76, 43 N. E.

2d S17, 142 A. L. R. 1088; Matter of Terminal Auxiliar

Maritima [Winkler], 6 N. Y. 2d 294, 189 N. Y. S. 2d 655.

As the court wrote in Matter of Marchant (252 N. Y.

at page 298, 169 N. E. at page 391), ‘‘Parties to a con-

tract may agree, if they will, that any and all controversies

growing out of it in any way shall be submitted to arbi-

tratiou. If they do, the courts of New York will give effect

to their intention.’’

[3] As exceptions to this general policy, however, we

have held that a court will enjoin arbitration (1) where

fraud or duress, practiced against one of the parties, ren-

ders the agreement voidable (see Matter of Lipman

{Haeuser Shellae Co.], 289 N. Y. 76, 79, 43 N. E. 2d 817, —

supra; ef. Matter of Behrens [Feuerring|, 296 N. Y. 172,

178, 71 N. E. 2d 454, 456; Matter of Wrap-Vertiser Corp.

{Plotnick], 3 N. Y. 2d 17, 163 N. Y. S. 2d 639; Matter of

Metro Plan v. Miscione, 257 App. Div. 652, 655, 15 N. Y.

S. 2d 35, 37); .2) where there is no ‘‘bonafide dispute’’

between the parties, that is, where the asserted claim is

frivolous (see Alpert v. Acdmiration Knitwear Co., 304

N. Y. 1, 6, 105 N. E. 2d 561, 563; Matter of General Elec.

Co. [United Elec. Radio & Mach. Workers], 300 N. Y.

262, 90 N. E. 2d 181; Matter of Interaational Ass’n of

Machinists [« .ler-Hammer], 297 N Y. 519, 74 N. E. 2d

464; Wenger & Co. v. Propper Silk Hosiery Mills, 239

N. Y¥. 199, 146 N. E. 203); (3) where the performance

which is the subject of the demand for arbitration is pro-

hibited by statute (see Matter of Kramer & Uchitelle

{Eddington Fabrics Corp.|, 288 N. Y. 467, 43 N. E. 2d

ea

493, 141 A. L. R. 1497); or (4) where a condition prece-

dent to arbitration under the contract or an applicable

statute has not been fulfilled. See matter of Board of

Educ. [Heckler Elec. Co.] 7 N. Y. 2d 476, 199 N. Y. 8S. 2d

649; Matter of Lipman | Haeuser Shellae Co.| 2so N.Y,

76, 79, 43 N. E. 2d $17, 818, supra; Matter of Cauldwell-

Wingate Co. [New York City Housing Auth.}, 262 App.

Div. 829, 28 N. Y. S. 2d 763, motion for leave to appeal

denied 287 N. Y. 853, 38 N. E. 2d 389.

Applying these principles to the case before us, there

ean be no doubt that Maratta and Exerevele made a eon-

tract in which they promised each other to arbitrate any

differences which might arise out of or in connection with

it. In fact the agreement, entered into in March of 1955,

was continued in force, its terms and provisions complied

with and earried out, until January, 1960, a period of

almost five vears. It may hardiv be said, therefore, that

the making of the present agreement is in issue under

section 14090 of the Civil Practice Act.

Nor is the agreement which wes entered into ‘tvoid and

unenforceable’? within the meaning of Matter of) Kramer

& Uchitelle (288 N.Y. 467, 48 N. EB. 2d 495, supra), as

Exercyele contends. In that case, performance of an

agreement had been rendered illegal by Federal price

control regulations, and we stayed arbitration of the

claim, based on a failure to deliver the goods contracted

for, on the ground that *tcontrolling pubhe pohey barred

delivery’ at the contract price (258 N.Y. at page 472, 45

N. BE. 2d at page 495). The present case is patently dis-

similar. In Matter of Kramer, public poliey as embodied

in a Federal statute forbade the performance which was

the subject of dispute and that policy and statute were as

binding on the arbitrators as on the courts. No statute

or public policy, as reflected in a legislative act, is here

involved to render the employment contract unentorceable

22

and, absent one or the other, it has long been firmly

established that arbitrators may disregard the strict and

traditional rules of law. (See Fudickar v. Guardian Mut.

Life Ins. Co., 62 N. Y. 392, 399-400; Sturges, Commercial

Arbitration and Awards [1930], pp. 793-798.) In other

words, since there is no statute or public policy which pro-

hibits the performance of a promise to employ one ‘‘until

he voluntarily [quits] or dies’’, enforcement of perform-

ance by the arbitrators in this case is not rendered unlaw-

ful or legally impermissible.

Maratta’s claim is not frivolous or insubstantial (cf.

e.g., General Elec. Co. [Elec. Workers], 300 N. Y. 262, 90

N. E. 2d 181, supra) and there is no suggestion of fraud

(cf. e. g., Matter of Lipman [Haeuser Shellac Co.], 289

N. Y. 76, 79, 43 N. E. 2d 817, 818, supra) or an unfulfilled

condition precedent to arbitration. Cf., e. g., Matter of

Board of Educ. {Heckler Elec. Co.], 7 N. Y. 2d 476, 199

N. Y. S. 2d 649, supra. Under these circumstances,

where there is a broad provision for arbitration, such as

we have here, arbitration may be had as to all issues

arising under the contract. (See Matter of Terminal

Auxiliar Maritima [Winkler], 6 N. Y. 2d 294, 298, 189

N. Y. S. 2d 655, 658, supra; Matter of Paloma Frocks

{Shamokin Sportswear Corp.], 3 N. Y. 2d 572, 574, 170

N. Y. S. 2d 509, 65 A. L. R. 2d 1317; Matter of Lipman

{Haeuser Shellae Co.], 289 N. Y. 76, 80, 43 N. E. 2d 817,

819, supra; Fudickar v. Guardian Mut. Life Ins. Co., 62

N. Y. 392, 399-400, supra.)

Exercycle’s claim is that no court of law would enforce

the promise which it made to employ Maratta for life.

Obviously, however, once having agreed to eschew recourse

to courts of law and have its disputes with Maratta set-

tled by arbitrators, Exercycle cannot urge, in opposition

to arbitration, that a court of law would not enforce the

agreement. (Italics ours.) If the issue involved was solely

23

one of construction or interpretation, it would, without

a doubt, be for the arbitrators to decide. The mere fact

that its determination involves a mixed question of the

agreement’s meaning and of law should not lead to a dif-

ferent result. Whether the issue is one involving inter-

pretation or law or fact or all three, it is for the arbitra-

tors and, as long as they remain within their jurisdiction

and do not reach an irrational result, they may fashion

the law to fit the facts before them. See Matter of Na-

tional Cash Register Co. [Wilson], 8 N. Y. 2d 877, 383,

208 N. Y. S. 2d 951, 955; Wenger & Co. vo Propper Silk

Hosiery Mills, 229 N. Y. 199, 203, 146 N. E. 203, 204, supra;

Fudickar v. Guacdian Mut. Life Ins. Co., 62 N.Y. 592, 399,

supra. So this court said in the Fudickar case (62 N.Y.

at page 399):

‘*The arbitrator is a judge appointed by the par-

ties; he is by their consent invested with judicial

functions in the particular case; he is to determine

the right as between the parties in respect to the

matter submitted, and all questions of facet or law

upon Which the right depends are * * " deemed to be

referred to him for decision. The court possesses

no general supervisory power over awards, and if

arbitrators keep within their jurisdiction their

award will not be set aside because they have erred

in Judgment either upon the facts or the law.’’

In short, the issue before us is not whether a court of

law would eniorée Miratta’s claim, but rather whether,

as part of their agreement, the parties mutually promised

to resolve all controversies arising out of or in connec-

tion with” their agreement by arbitration. If the arbi-

trators could rationally and legitimately make an award

in favor of Maratta, a court is not justified in staying

the arbitration even if the elaim would not be entorcible

at law. In point of fact, we have declined to enjoin an

|

24

arbitration even where an arbitrator has been asked to do

what a court of law would clearly not do. See Matter of

Staklinski [Pyramid Elec. Co.], 6 N. Y. 2d 159, 188 N. Y.

S. 2d 541; cf. Matter of Grayson-Robinson Stores [Iris

Constr. Corp.], 8 N. Y. 2d 133, 202 N. Y. S. 2d 303. To

paraphrase what this court wrote in the Staklinski case,

6 N. Y. 2d at pages 163-164, 188 N. Y. S. 2d at pages 542-

543, since the parties agreed to arbitration, it is beside the

point to consider whether or not in a case such as the

present a court of law would enforce the employer’s

promise to employ Maratta for life.

Since Exercycle’s further claim that Maratta had re-

signed and thereby brought his employment to an end

turns on the construction of the letter written by him and

on an appraisal of his conduct, the issue of termination

must also be decided by the arbitrators. See Matter of

Terminal Auxiliar Maritima [Winkler], 6 N. Y. 2d 294,

298, 189 N. Y. S. 655, 658, supra; Matter of Lipman

{Haeuser Shellac Co.]. 289 N. Y. 76, 43 N. KE. 2d 817,

supra.

The order of the Appellate Division should be affirmed,

with costs.

FRoEsseEL, Judge (concurring).

1 am in agreement with the majority that there should

be an affirmance here. I do not agree, however, with their

reasoning that it was error for the Appellate Division to

pass on the question of the alleged lack of mutuality of

the contract or its illusory nature. The notice of motion

for a stay was made upon the ground that the contract

‘‘is void and unenforceable on its face’’. Should there in

fact be an absence of mutuality of obligation, or ilusori-

ness—which in essence means an absence of consideration

—the purported contract would be invalid and unenfore-

ible, as petitioner contends (Schlegel Mtg. Co. v. Cooper’s

29

Glue Factory, 231 N. Y. 459, 132 N. E. 2d 148, 24 A. L. R.

1348; Bintz v. City of Hornell, 268 App. Div. 742, 747,

03 N. Y. S. 2d 803, 808, affirmed 295 N. Y. 628, 64 N. E.

2d 654; 1 Corbin, Contracts, <§ 152, 145). In that case, as

Professor Corbin puts it, no ‘tcontraect was made’? (p.

499)—it never came into existence. Determination of

that issue, under well-established principles, is a threshold

matter for determination by the court.

The rule is succinetly stated in Matter of Kramer &

Uchitelle (Eddington Fabrics Corp.), 288 N. Y. 467, 471,

43 N. KE. 2d 498, 495, as follows: ‘Arbitration clauses in

contracts such as those under consideration are direeted

solely to the remedy—not to the validity or existence of

the contract itself. Thus, proceedings to enforce arbitra-

tion under article 84 of the Civil Practice Aet presuppose

the existence of a valid and enforceable contract at. the

time the remedy is sought. (Matter of Berkovitz v. Arbib

& Houlberg, Ine., 280 N.Y. 261, 271, 130 N. EB. 2s; Mulji

v. Cheong Yue Steamship Co., Ltd. [1926], A. C. 497.)

Seasonable challenge may be made to the court to the

existence of such a contract by one who stays out of the

arbitration and * * * the issue is properly determinable

by the court as matter of law, Matter of Finsilver, Still

& Moss, Ine, v. Goldberg, Maas & Co., 253 N.Y. 382, 171

N. BE. 579, 69 A. L. R. 809." (Emphasis supplied.)

In Matter of Lipman (Haeuser Shellae (o.), 289 N.Y,

76, 43 N. E. 2d 817, 142 A. L. R. 108s, we acknowledged

that the issue of ‘‘whether the contract never came into

existence’’ is for the court (id. at page 79, 43 N. EL 2d

at page 819); and in Matter of Sarle (Sperry Gyroscope

Co.), 4 A. D. 2d 658, 168 N.Y. S. 2d 228, 230, aflirnied 4

N.Y. 2d 917, 174 N.Y. S. 2d 665, the distinetion between

questions of ** performance under the contract’? and ‘the

“ontract itself’? was stressed (4 A.D. 2d at page 640, 168

N.Y. S. 2d at page 250), the former being for the arbitra-

tors and the latter for the court (see, also, Matter of

‘

26

Wrap-Vertiser Corp. [Plotnick], 3 N. Y. 2d 17, 20, 22,

163 N. Y. S. 2d 639, 641, 642).

The logie of this rule is forcefully stated in Finsilver,

Still & Moss v. Goldberg, Maas & Co., 253 N. Y. 382, at

pages 390-391, 171 N. E. 579, at page 582, where Chief

Judge Cardozo, writing for a unanimous court, said: ‘If

in truth there is no contract at all or none calling for

arbitration, the self-constituted tribunal is a nullity, with-

out power to bind or loose by force of its decision. * * °

In the absence of a contract expressing a consent to arbi-

trate, an award by an arbitrator is an act of usurpation.’’

(Emphasis supplied.)

Simply put, the legal existence of the arbitral tribunal

depends on contract. It is from that agreement between

the parties that their very being, or Jurisdiction and power

to act, derives. Unless such contract, when seasonably ,

challenged, is declared valid and enforcible, therefore, the

arbitral tribunal can never legally come into being. As

the court stated in Gruen v. Carter, 173 Mise. 765, 766,

18 N. Y. S. 2d 990, 991, 992, affrmed 259 App. Div. 712,

18 N. Y. S. 2d 1023,.motion for reargument denied 259

App. Div. 813, 20 N.Y. S. 2d 397), ‘‘It is not for the

arbitrators to decide upon the validity of the very agree-

ment upon which their own status as arbitretors is predi-

eated’*; or, as Judge Burke well put it in Matter of

Wrap-Vertiser (Plotnick) (3 N. Y. 2d 17, 22, 163 N.Y. S.

Yd 659, 643, supra), "Obviously, parties cannet agree, in

an invalid contract, to arbitrate the validity of the con-

tynct’.””*

* The majority did not disagree with this premise in the Wrap-

Vertiser case. Judge Van Voorhis there stated: “sven tf he had re-

scinded or asked fer rescission, such an issue would have had to have

feen decided in court before it could be known that an agreemeni ex-

isted supplying a foundation for the jurisdiction of the arbitrators”

(3 N. ¥. 2d at page 20, 1635 N. Y¥. S. 2d at page 641; italics sup-

plied).

27

The majority in this case, without purporting to over-

rule these well-established principles and their underlying

logie, state the applicable rule to he that, Cuchere parties

enter into an agreement and. in ore of its provisions,

promise that any dispute arising out oof orm connection

with it shall be settled by orhitration. any controversy

which arises hetween them and is uithin the Coan pass ot

the provision, must qo to arbitration’. This statement of

the allegedly established Jaw in this State contains its own

refutation. If it has not been determined whether ‘tan

agreement!’ was entered into, what basis is there for the

existence of the arbitrators and their jurisdiction in’ the

matter? Again, if mutuality of obligation is lacking,

there is no-agreement—or, as Chief Judge Cardozo stated

in Finsilver, supra, ‘*no contract at all’'- and the exis:

tence of such an agreement when seasonably challenged

must be determined preliminarily by a court of law. in

order to legally constitute the arbitral tribunal, and afford

them jurisdiction over the controversy between the parties

arising out of the agreement.

Conecivably, the only rationale which can justity. the

position of the majority is that the arbitration elanse is an

agreement separate and apart from the main agreement,

supported by its own consideration. Bato the majority

does not proceed on that basis. They recognize as our

decisions from Finsilver through Matter of Sarle, supra,

clearly demonstrate that in this jurisdietion the promise

to arbitrate is considered to be but a clanse or part of the

over-all contract, for they state there is ‘tan agreement’,

and ‘tone of ifs prorisions”” (emphasis supplied) contains

a ‘*promise™’ to arbitrate. Consequently, if the over-all

contract is lacking in consideration—}. e., illusory or laek-

ing In mutuality or is otherwise imvalid. it os aaenforeible,

and the right to arbitrate, which is a part of it and contin-

gent thereon, falls. Uuless we determine this preliminarily

28

as a matter of law, the jurisdiction of the arbitrators has

not been established. If there be no contract, they are a

‘‘self-constituted’’ ‘‘nullity’’.

It is no answer, as the majority state, that, since ‘‘the

question whether the contract lacked mufuality of obliga-

tion’’ depends ‘‘primarily on a reading and construction

of the agreement’’ and invokes ‘‘substantial difficulties of

interpretation’’, a basis for arbitration has been estab-

lished. It is rather our function to resolve these ques-

tions since they bear on the validity, enforcibility and

existence of the contract, upon which the right to arbitrate

and the jurisdiction of the arbitrators in turn depend. If

no agreement conferring that right and jurisdiction exists,

there is nothing for the arbitrators to read and construe;

and the happenstance that the question may be difficult

does not permit us to pass the problem on to the arbitral

tribunal—which as yet has no legal being.

Inasmuch as I am in agreement with the majority of the

Appellate Division that the contract here at issue is not

lacking in mutuality of obligation, the arbitrators may be

properly constituted and adjudicate the controversies

between the parties arising out of the agreement, and on

that basis I would affirm.

(Van Voor18 concurs.)

Dvr, Judge (dissenting).

In dealing with controversies concerning the enforcibil-

itv of arbitration, the initial question is whether the under-

lving contract is valid and enforcible. If it is, then we

may pass to the question of whether the contract, by its

terms, makes provision for the settlement of disputes aris-

ing thereunder by arbitration. If not, then we do not

29

enforce arbitration since its vitality depends, in the first

instance, on the existence of a valid contract (Civ. Prae.

Act, art. 84, § 1450). Whether the term ‘teontract’? refers

to the entire agreement in which the provision for arbitra-

tion is contained, or it refers, by a loose construction of

that term, solely to the clause permitting arbitration is at

the heart of this controversy.

While there is a school of thought favoring the view that

the power of the court is limited to a determination of

whether or not an agreement to arbitrate has heen made

(ef. 36 Yale L. J. 866; Note, 24 N. Y. U. L. Q. Rev. 429,

our decisions, until now, have uniformly held that) an

arbitration clause fails if a contract was never made

(Matter of Wrap-Vertiser Corp. [Plotnick], 3. N.Y. 2d

17, 163 N. Y. S. 2d 639; Finsilver, Still & Moss v. Gold-

berg, Maas & Co., 253 N.Y. 382, 171 N. FE. 2d 579; Matter

of Levinsohn Corp. [Joint Bd. of Cloak Makers’ Union],

209 N. Y¥. 404, 87 N. EB. 2d 510; 38 Cornell L. Q. 391; 6

Corbin, Contracts, § 1444).

Here, there is a real dispute between the parties, con-

cerning the existence of a contract. This, under the

authorities, is for the court to determine before proceeding

to the question of arbitration. On its face, the ability of

this contract to survive the serutiny of a court of law is

indeed dubious. Tt lacks mutuality and is illusory. It

provides that the employment of Maratta shall continue

until he voluntarily leaves the employ of Exerevele or dies.

Maratta is thus privileged in language which ineludes

no restrictive conditions to quit his employment without

obligation to respond in damages. Exereyvele’s promise is

to retain Maratta for as long as he wishes to coutinue,

provided only that he maintain sales above ao speeified

minimum. Maratta promised to devote his full time and

best efforts to the business. He promised nothing with

respect to continuation of employment, for he was at lb-

erty to leave voluntarily at any time.

30

When Maratta’s promise to put forth his best efforts

on a full-time basis is read together with the option to

quit at any time, it becomes an unenforcible promise—

and amounts to no more than a mere gratuitous statement,

furnishing the company with nothing more than a hope

that it will come about and as such is an illusion of a

promise. So viewed, the entire agreement is unenforcible

for lack of mutuality of obligation. It follows then that

all the provisions contained therein, including the arbitra-

tion clause, are likewise unenforcible.

The order of the Appellate Division should be reversed

and the motion to stay arbitration should be granted, with

costs. .

Desmonp, C. J., and Burke and Foster, JJ., concur with

Fup, J.