UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
May 15, 1974
LITTON RCS, INC., Movant,
PENNSYLVANIA TURNPIKE COMMISSION, Respondent
Huyett, District Judge.
The opinion of the court was delivered by: HUYETT
HUYETT, District Judge.
Litton RCS, Inc. (Litton) moves for confirmation of an arbitrators' award entered in its favor by a panel of the American Arbitration Association. The arbitration proceeding was conducted pursuant to the following arbitration provision contained in a contract between Litton's corporate predecessor Taller & Cooper, Inc. ("T&C") and the Pennsylvania Turnpike Commission ("Commission"):
Any dispute between the parties hereto arising out of and under this agreement shall be submitted by them to the American Arbitration Association for arbitration of said dispute in accordance with its rules and the decision of said Association shall be binding upon all of the parties hereto.
The Commission vigorously opposes confirmation of the award raising questions concerning the jurisdiction of this court, the authority of the arbitrators to enter the award, and the merits of the award.
The contract between T&C and the Commission, dated August 10, 1967, was a research and development agreement in which T&C agreed to use its best efforts to develop a modern weight classification system of toll collection equipment. Pursuant to a notice to proceed, Litton began work on the project on August 11, 1967. With the exception of research and development work on a "solid state" axle counting treadle, the agreement specified completion of all work up to installation of the equipment and personnel training within six months of the notice to proceed. Compensation was established on a cost plus a $20,000 fixed fee basis with T&C estimating total costs of $148,000. The Commission reserved the right to terminate the work required under the agreement at any time upon thirty (30) days prior written notice. It was contemplated by the parties that the toll equipment developed by T&C would be used to replace the Commission's existing equipment.
After an initial billing of $74,594.92 on April 30, 1968, it became evident that the project would not be completed within the agreed upon time and the cost restraints. On March 6, 1969, the Commission gave notice of termination effective April 6, 1969. Litton made further billings for which the Commission refused to make payment. The matter was submitted to arbitration and an award in favor of Litton for $228,897.54 was entered on July 20, 1973.
The Commission has filed a motion to dismiss the action, and a motion to vacate or modify the arbitration award. Three grounds are urged in support of the motion to dismiss.
First, it is argued that only the Common Pleas Courts of the Commonwealth of Pennsylvania have jurisdiction to confirm the arbitrators' award. The contract between the parties does not express any understanding regarding a specific court to confirm the award. The Commission contends, however, that pursuant to the provisions of the Pennsylvania Arbitration Act of April 25, 1927, P.L. 381, § 1 et seq., 5 P.S. § 161 et seq., only the Pennsylvania Common Pleas Courts can confirm an arbitrator's award based on a contract involving a public agency or instrumentality. Section 16 of the Pennsylvania Arbitration Act, 5 P.S. § 176, states as follows:
The provisions of this act shall apply to any written contract to which the Commonwealth of Pennsylvania, or any agency or subdivision thereof, or any municipal corporation or political division of the Commonwealth shall be a party.
Federal and state court cases are relied on by the Commission for the proposition that § 16 of the Pennsylvania Arbitration Act, 5 P.S. § 176, is mandatorily applicable to all contracts to which the Commonwealth or its instrumentalities are a party. See Merritt-Chapman & Scott Corporation v. Pennsylvania Turnpike Commission, 387 F.2d 768 (3 Cir. 1967); Acchione v. Commonwealth, 347 Pa. 562, 32 A.2d 764 (1943). This is so even though applicability of the Act contravenes the express terms of the contract. See Seaboard Surety Co. v. Commonwealth, 345 Pa. 147, 27 A.2d 27 (1942); Philadelphia Housing Authority v. Turner Construction Co., 343 Pa. 512, 23 A.2d 426 (1942). Since the Commission is an instrumentality of the Commonwealth, Act of May 21, 1937, P.L. 774, No. 211, § 4 as amended 36 P.S. § 652d, any contract entered into by the Commission is governed by the Pennsylvania Arbitration Act.
Section 9 of the Pennsylvania Arbitration Act, 5 P.S. § 169, provides that "any party to the arbitration may apply to the court having jurisdiction for an order confirming the award, and thereupon the court shall grant such an order. . . ." Section 18 of the Pennsylvania Arbitration Act, 5 P.S. § 178, then defines "courts" as the "common pleas courts of the county having jurisdiction of the parties or the subject matter." Thus, it is reasoned that only the Pennsylvania Common Pleas courts have authority to entertain the motion to confirm the arbitrators' award.
Secondly, it is argued that as a result of the failure to state in the contract that a judgment of a court shall be entered upon the arbitrators' award, a federal court under § 9 of the United States Arbitration Act, 9 U.S.C. § 9 (1970)
lacks power to confirm the award. Varley v. Tarrytown Associates, Inc., 477 F.2d 208 (2d Cir. 1973) so held with respect to a contract arbitration clause that stated: "Any controversy arising under this agreement or breach thereof shall be settled by arbitration pursuant to the rules of American Arbitration Association." See also, Lehigh Structural Steel Co. v. Rust Engineering, 61 App. D.C. 224, 59 F.2d 1038 (1933).
Finally, with respect to the motion to dismiss, the Commission argues that the contract between the parties does not evidence a transaction involving commerce as required by § 2 of the United States Arbitration Act, 9 U.S.C. § 2 (1970).
It is thus contended that this court lacks jurisdiction to confirm the arbitrators' award under that Act.
In its motion to vacate or modify the arbitrators' award the Commission makes essentially three arguments. First, it is contended that the arbitrators lacked jurisdiction to grant an award because exclusive jurisdiction to hear claims against the Commission is cognizable only before the Board of Arbitration of Claims established pursuant to the Board of Arbitration of Claims Act, Act of May 20, 1937, P.L. 728, No. 193, § 1 et seq. as amended, 72 P.S. § 4651-1 et seq.
In support of this position the Commission does not rely on any explicit provision of exclusivity contained in the Board of Arbitration of Claims Act. Rather the Commission bases its argument of exclusivity on the state doctrine of sovereign immunity. It is contended that, under the Act creating the Commission,
the Commission is an instrumentality of the Commonwealth, and "functions as the 'alter ego ' of the Commonwealth in the performance of essential governmental functions and is subject to the same immunity conferred upon the Commonwealth by Article 1, Section 11 of the Pennsylvania Constitution [P.S.]."
Although it is admitted that the Commission has the power to sue and be sued,
that exception to sovereign immunity must be strictly construed to provide a remedy for claims arising from contracts with the Commission enforceable by arbitration only before the Board of Arbitration of Claims.
Maintenance of the Commission's position that the Board of Arbitration of Claims Act provides the exclusive procedure governing arbitration with the Commission necessitates arguing that the Board of Arbitration of Claims Act impliedly repealed § 16 of the Pennsylvania Arbitration Act, 5 P.S. § 176. The two Acts are said to be incompatible in two respects. The Pennsylvania Arbitration Act, by failing to speak to the issue, incorporates rules governing private arbitration into contracts with the Commission. The result is that there exists no explicit statutory rule concerning when arbitration must be demanded under a contract with the Commission. Absent an express provision in the contract to the contrary, when a party to a contract containing provision for arbitration may seek the arbitration of a claim arising under the contract will depend on the scope of the arbitration clause and the breadth in terms of time given to this clause by the parties in their agreement. See United States Fidelity and Guaranty Co. v. Bangor Area Joint School Authority, 355 F. Supp. 913 (E.D. Pa. 1973). The Arbitration of Claims Act, however, provides that any claim against the Commonwealth and its instrumentalities must be brought before the Board of Arbitration of Claims within six months after the claim accrues.
Furthermore, the forums in which arbitration takes place are in conflict under the two Acts. The Pennsylvania Arbitration Act leaves the matter to the parties; the Arbitration of Claims Act establishes a particular body whose members are appointed in a certain manner to hear claims against the Commonwealth and its instrumentalities.
The second contention proffered by the Commission in support of its motion to vacate or modify the arbitrators' award is that, assuming the lack of exclusive jurisdiction before the Board of Arbitration of Claims, the contract between T&C and the Commission is not subject to arbitration because it was a contract for personal services under the Pennsylvania Arbitration Act.
The contract with T&C is characterized by the Commission as a personal services contract similar to a contract existing between an architect or engineer and a public body. See Stratton v. Allegheny County, 245 Pa. 519, 91 A. 894 (1914).
Finally, the Commission makes a series of arguments which attempt to demonstrate that the arbitrators' award was unlawful. Thus, it is argued that Litton failed to show as a condition precedent to recovery that the contract between T&C and the Commission had been approved by the Department of Highways, that Litton failed to tender all parts of the toll collection equipment as required by the contract, and that Litton in various ways had breached the contract.
Given this welter of conflicting contentions we consider it best to begin our discussion by stating some well established propositions of law touching on the issues before us, and with these in mind a proper analysis can be made of the issues presented to us.
In respect to subject matter jurisdiction, it is clear that the United States Arbitration Act, 9 U.S.C. § 1 et seq., does not provide an independent source of federal jurisdiction. Jett v. Zink, 474 F.2d 149, 156 at n. 12 (5 Cir. 1973), cert. denied, Sterling Oil of Okl. v. Chamberlain, 414 U.S. 854, 94 S. Ct. 153, 38 L. Ed. 2d 104 (1973); Collins Radio Co. v. Ex-Cell-O Corporation, 467 F.2d 995, 996 at n. 1 (8 Cir. 1972); Monte v. Southern Delaware County Authority, 321 F.2d 870, 874 (3 Cir. 1963); Ballantine Books, Inc. v. Capital Distributing Co., 302 F.2d 17, 19 (2 Cir. 1962); Metro Industrial Painting Corp. v. Terminal Construction Co., 287 F.2d 382, 384 (2 Cir. 1961) cert. denied sub. nom., Metro-Goldwyn Pictures Corp. v. Sheldon, 368 U.S. 817, 82 S. Ct. 31, 7 L. Ed. 2d 24 (1961); Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402, 408 (2d Cir. 1959), cert. granted, 362 U.S. 909, 80 S. Ct. 682, 4 L. Ed. 2d 618, petition for cert. dismissed per stipulation, 364 U.S. 801, 81 S. Ct. 27, 5 L. Ed. 2d 37 (1960). Subject matter jurisdiction must exist either as a result of diversity of citizenship between the parties, 28 U.S.C. § 1332 (1970), or as a result of federal question jurisdiction, 28 U.S.C. § 1331 (1970), arising under a statute other that the United States Arbitration Act. Robert Lawrence Co. v. Devonshire Fabrics, Inc., supra. Subject matter jurisdiction exists in this case. The parties are of diverse citizenship and the matter in controversy is well over $10,000 exclusive of interests and costs. No other basis of jurisdiction has been asserted.
When construing an agreement providing for arbitration in which subject matter jurisdiction is based on diversity of citizenship, a federal court must first determine whether state law dealing with arbitration agreements or federal substantive law as provided by the United States Arbitration Act is applicable. The United States Arbitration Act will govern construction of the arbitration agreement when the contract evidences a transaction "involving commerce."
If the contract does not evidence a transaction involving commerce, state law will apply. Bernhardt v. Polygraphic Co., 350 U.S. 198, 76 S. Ct. 273, 100 L. Ed. 199 (1956); Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S. Ct. 1801, 18 L. Ed. 2d 1270 (1967).
It is clear that the contract before us is one evidencing a transaction involving commerce. In Prima Paint Corp. v. Flood & Conklin Mfg. Co., supra, the Supreme Court held that a "Consulting Agreement" was a contract evidencing a transaction involving commerce. Flood & Conklin, recently acquired by Prima Paint, agreed to furnish advice and consultation "in connection with the formulae, manufacturing operations, sales and servicing of Prima Trade Sales accounts." The services were to be performed personally by Flood & Conklin's chairman. Flood & Conklin also agreed not to compete with Prima Paint for sales of paint or paint products in its existing territory or to current customers.
In finding that the contract evidenced a transaction involving commerce, the Court went beyond the four corners of the contract and considered an affidavit filed in the District Court by Prima Paint's president. It was evident that the consulting agreement was part of a plan to secure Flood & Conklin's assistance in arranging the transfer of manufacturing and selling operations from New Jersey to Maryland.
Furthermore, as stated by the concurring opinion in Metro Industrial Painting Corp. v. Terminal Construction Co., 287 F.2d 382, 387 (2 Cir. 1961), cert. denied sub nom., Metro-Goldwyn Pictures Corp. v. Sheldon, 368 U.S. 817, 82 S. Ct. 31, 7 L. Ed. 2d 24 (1961):
The significant question, therefore, [in determining whether a contract evidences a transaction involving commerce] is not whether, in carrying out the terms of the contract, the parties did cross state lines, but whether, at the time they entered into it and accepted the arbitration clause, they contemplated substantial interstate activity.
See also, Monte v. Southern Delaware County Authority, 212 F. Supp 604, 610 (E.D. Pa.) aff'd as to this point, 321 F.2d 870 (3 Cir. 1963).
The following factors relating to the contract between the parties clearly evidence a transaction involving commerce:
1. "The Commission owns and operates the Pennsylvania Turnpike System . . . a continuous roadway from the Ohio State line to the New Jersey State line . . . and in connection therewith operates a closed system of toll collection equipment. . . ."
2. "The Commission desires to cause to be developed . . . a prototype of the most modern weight classification system of toll collection equipment . . . for the purpose of replacing its present toll equipment . . ."
3. "Developer agrees [if a specified condition occurs] . . . it will manufacture and produce . . . the new toll collection equipment at a cost to the Commission to be determined . . . and, thereafter, will provide the Commission, at a reasonable cost, with all necessary components to keep the equipment in full and efficient operating condition."
4. Article VI (pp. 6-7) provides a detailed agreement concerning the production and manufacture of toll equipment based upon the prototype.
5. Article VII (pp. 7-8) is a binding agreement that Developer will service and maintain in Pennsylvania the equipment which it elsewhere has agreed to manufacture in New York or New Jersey.
6. Article IX (pp. 8-9) contemplates sales of the toll equipment based on the prototype to other third parties, anywhere in the United States or the world, and allows the Commission a percentage right.
7. Article I, Subparagraph E (Appendix P-5) provides for installation by Litton personnel of prototype equipment in Pennsylvania for operational testing. Such testing in fact took place.
The United States Arbitration Act, therefore, supplies the law applicable to the issues before us. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., supra.
Having determined that we have subject matter jurisdiction and that the United States Arbitration Act supplies the substantive law applicable, we must next consider the challenges to the arbitrators' authority to adjudicate the dispute and this court's authority to confirm the arbitrators' award. It is necessary to consider these matters since § 2 of the United States Arbitration Act, 9 U.S.C. § 2, provides that agreements to arbitrate are "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." (emphasis supplied).
And as the Supreme Court held in Bernhardt v. Polygraphic Co., supra the provisions of §§ 1 and 2 of the Act are equally applicable to the remaining sections of the Act including § 9 dealing with confirmation of the award. Thus, grounds for revocation of the contract to arbitrate under § 2 of the Act would also provide grounds for revocation of the contract to confirm the award under § 9 of the Act.
The challenges made by the Commission concerning (1) the arbitrability of the dispute before the privately chosen arbitrators as opposed to the Board of Arbitration of Claims, (2) the arbitrability of a dispute involving a contract for personal services, and (3) the confirmation of an arbitration award by a court other than a common pleas court, while often couched in jurisdictional terms, essentially argue the lack of authority in the Commission to contract in the manner in which it has contracted.
If, for example, state law prohibits a public instrumentality from agreeing to have an arbitrator's award confirmed in a court other than a common pleas court, the defense that the Commission has acted ultra vires may be available to it under the United States Arbitration Act if such a defense would constitute "grounds as exist at law or in equity for the revocation of any contract." Accord, American Airlines, Inc. v. Louisville & Jefferson C.A.B., 269 F.2d 811, 816 (6 Cir. 1959). The essential inquiry therefore becomes whether the claimed lack of authority in the Commission to contract as it did constitutes grounds for revocation under the United States Arbitration Act.
The contract between T&C and the Commission provided for arbitration before the American Arbitration Association. It is now contended that this method of arbitration was unlawful under state law. No specific provision of state law is cited for this contention. Rather, the state doctrine of sovereign immunity is relied on for the proposition that any waiver of sovereign immunity must be strictly construed, and, as strictly construed, only arbitration before the Board of Arbitration of Claims is permissible. Any implication contained in the Pennsylvania Arbitration Act that private arbitration involving a public instrumentality is tolerable cannot stand.
We do not consider it necessary to determine whether application of Pennsylvania's doctrine of sovereign immunity and the existence of a state Board of Arbitration of Claims negates the allowance of private arbitration involving a public instrumentality such as the Commission.
We hold as a matter of federal substantive law under the United States Arbitration Act that before a state may limit the conditions under which a public instrumentality, otherwise possessing the power to arbitrate, may contract to arbitrate it must do so in a clear and express manner. Implications arising from state doctrines of common law sovereign immunity will not overrule the strong federal policy contained in § 1 of the U.S. Arbitration Act that contracts to arbitrate are valid, irrevocable and enforceable.
The provisions of the Arbitration of Claims Act do not provide the clear and express limitation on private arbitration required under the United States Arbitration Act. That the Board of Arbitration of Claims has the power "to hear and determine all claims against the Commonwealth arising from contracts . . . entered into with the Commonwealth" does not indicate that the Board has the sole power to hear such claims. The Commission's reliance on the state law doctrine of sovereign immunity belies any argument that the Board of Arbitration of Claims Act clearly and expressly precludes private arbitration.
The remaining issues concern the Commission's authority to enter into agreements providing for (1) the arbitration of an alleged contract for personal services
and (2) the confirmation of an award in a court other than a court of common pleas. Both these arguments raise the same issues: (1) whether the provisions of the Pennsylvania Arbitration Act constitute clear and express limitations on the power of a public instrumentality to contract in a manner contrary to that Act and (2) if so, whether under the United States Arbitration Act the lack of such authority to contract provides a ground which exists "at law or equity for the revocation of any contract."
As we have noted § 16 of the Pennsylvania Arbitration Act, 5 P.S. § 176, makes the Act mandatory in all written contracts providing for arbitration to which the Commonwealth or any of its agencies is a party. Section 1 of the Act, 5 P.S. § 161, excepts from its provisions contracts for personal services. Section 9, 5 P.S. § 169, requires confirmation of awards in "the court having jurisdiction." Finally, section 18, 5 P.S. § 178, defines courts as the courts of common pleas.
In Merritt-Chapman & Scott Corp. v. Pennsylvania Turnpike Commission, 387 F.2d 768 (3 Cir. 1967) the court construed an earlier decision of the Third Circuit, Monte v. Southern Delaware County Authority, 321 F.2d 870 (1963), as holding that § 18 of the Pennsylvania Arbitration Act, 5 P.S. § 178, deprived a federal court of power to confirm an arbitration award when the parties in their contract provided for arbitration pursuant to Pennsylvania law. The Merritt-Chapman court also noted that the Pennsylvania Supreme Court had held on several occasions that § 16 of the Pennsylvania Arbitration Act, 5 P.S. § 176, automatically has the effect of drawing into the agreement the Pennsylvania Act even when the parties are silent with regard to the Act's applicability. See Philadelphia Housing Authority v. Turner Construction Co., 343 Pa. 512, 518, 23 A.2d 426, 429 (1942); Seaboard Surety Co. v. Commonwealth, 345 Pa. 147, 151, 27 A.2d 27, 29 (1942); Acchione v. Commonwealth, 347 Pa. 562, 565, 32 A.2d 764, 765 (1943).
The Monte court felt bound by the provisions of the Pennsylvania Arbitration Act even though the parties in their contract made only general reference to the applicability of state law to the contract. Furthermore, it is clear that the court's reliance on the contract's reference to state law was considered as simply supportive of its view that the state arbitration act applied to a contract for arbitration involving a state public agency. In light of these authorities, we are compelled to hold that the provisions of the Pennsylvania Arbitration Act constitute an express limitation on the authority of the Commission to contract in a manner contrary to the Act.
Finally, with respect to whether such lack of authority under state law to contract is cognizable under the United States Arbitration Act, it is significant that the Monte court explicitly held that federal substantive law as provided in the United States Arbitration Act governed the issue before the court. Application of state law did not conflict with federal substantive law since federal law provides for incorporation of state law governing enforceability of contracts. It is only when state law contravenes the express provisions of the United States Arbitration Act that state law must fall. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., supra.
This conclusion is merely a recognition of the limited, though clear, purpose of Congress in enacting the United States Arbitration Act. Congress intended to make agreements to arbitrate as enforceable as any other contract and to disabuse courts of the notion that agreements to arbitrate constitute an "ousting" of a court's jurisdiction. As one commentator has stated:
It seems clear that it was the purpose and intent of the Congress to make arbitration agreements as enforceable as other contracts, but not more so. To immunize an agreement from judicial challenge on the ground of fraud in the inducement would be to evaluate it over other forms of contract -- a situation inconsistent with the saving clause [of § 2 of the Act]. Moseley Electronic Facilities, 374 U.S. 167, [83 S. Ct. 1815, 10 L. Ed. 2d 818] (1963).
11 Williston on Contracts § 1420A at 723 n. 16 (3rd by Jaeger 1968). Thus, we conclude that the Pennsylvania Arbitration Act is a clear and express limitation on the authority of the Commission to contract in a manner contrary to that Act and that such lack of authority is cognizable under the United States Arbitration Act to avoid enforcement of a contract for personal services
or of an agreement to have an arbitration award confirmed in a court other than a common pleas court. See American Airlines, Inc. v. Louisville & Jefferson C.A.B., 269 F.2d 811 (6 Cir. 1959).
One final matter must be discussed. Litton has implied in its briefs that any holding by this court that only the common pleas courts can entertain a motion to confirm an arbitrator's award arising out of a contract with the Commission would contravene Litton's constitutional right to have a federal court hear the motion to confirm the award when federal diversity jurisdiction exists over the controversy. Indeed, language by the courts in the Monte and Merritt-Chapman cases intimate that there may be some impediment to holding that a state may provide authority to obtain confirmation of arbitration awards only in state courts.
We consider the Supreme Court's decision in The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 92 S. Ct. 1907, 32 L. Ed. 2d 513 (1970) to have substantially dissipated any notion that agreements to obtain arbitration or to confirm an arbitration award in a particular forum constitutes an impairment of a court's jurisdiction. In The Bremen the Court enforced a forum-selection clause to have disputes arising out of a contract between the parties enforced in the London Court of Justice. The agreement was enforced even though there clearly existed admiralty jurisdiction in the federal courts. In speaking to the question of the federal court's jurisdiction the Court stated:
The argument that such clauses [forum selection] are improper because they tend to "oust" a court of jurisdiction is hardly more than a vestigial legal fiction. It appears to rest at core on historical judicial resistance to any attempt to reduce the power and business of a particular court and has little place in an era when all courts are overloaded and when businesses once essentially local now operate in world markets. It reflects something of a provincial attitude regarding the fairness of other tribunals.
407 U.S. supra at 12.
It is, of course, true that in the case sub judice the agreement is silent on what court is to hear a motion to confirm the award. The significance of The Bremen, however, is that it makes clear that the issues before us involve matters of contract law and do not imply any unlawful or unconstitutional action by the state to restrict federal jurisdiction. The provisions of the Pennsylvania Arbitration Act are mandatory only with respect, of course, to state agencies and municipalities and then only when the parties agree to provide for arbitration of disputes. There is no attempt by the state to restrict private parties' bargaining power in such a way as to limit federal court jurisdiction. See Insurance Co. v. Morse, 87 U.S. 445, 20 Wall. (87 U.S.) 445, 22 L. Ed. 365 (1874).
The motion to confirm the arbitrators' award will be denied.