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KG v. White Hydraulics Inc.

decided: August 22, 1983.


Appeal from the United States District Court for the Northern District of Indiana, Lafayette Division. No. 81 C 56 -- Allen Sharp, Judge.

Cummings, Chief Judge, Bauer and Coffey, Circuit Judges.

Author: Cummings

CUMMINGS, Chief Judge.

We consider in this appeal whether an agreement in an international, commercial contract to arbitrate "any and all" contractual disputes governs disputes regarding whether the contract is invalid for lack of consideration, unconscionability, and vagueness and whether one party waives its right to arbitration by filing suit to enjoin the other party from breaching that contract pending arbitration.

On June 29, 1979, defendant White Hydraulics, Inc. ("White"), an Indiana corporation, contracted to give Sauer-Getriebe KG ("Sauer"), a West German limited partnership, the exclusive right in a territory encompassing some 47 countries, including East and West Germany but excluding the United States, to sell motors manufactured by White. White also agreed to convey to Sauer upon the occurrence of certain events the trade secrets, patent rights, and any other rights necessary for the manufacture of those motors and to furnish Sauer all the technical "know-how" about the motors necessary for Sauer to market them. In exchange, Sauer agreed to pay a certain royalty on each motor sold and stated that its "intent" was to purchase 50,000 motors from White during the years 1979 through 1985. Both parties agreed that "any and all disputes arising out of and in connection with" the contract would be settled by arbitration.

In August 1981, Sauer commenced this diversity action. It alleged that on July 21, 1981, White had repudiated the contract by informing Sauer that it was negotiating for the sale of its assets, including the manufacturing rights promised Sauer under the contract, to a third party. In its complaint, Sauer represented that it intended to exercise its right to arbitrate the contract dispute and sought preliminary and permanent injunctions barring White from transferring any manufacturing rights "until such time as the respective rights of the parties under the agreement are determined" by arbitration.

In its answer, White admitted having executed the alleged contract and having informed Sauer of the third-party negotiations. White claimed, however, that Sauer had waived its right to arbitrate by filing suit. White also counterclaimed for a declaratory judgment that the contract was unenforceable for vagueness and want of consideration, that its terms were unconscionable and inequitable, and that the contract was illegal under Section 1 of the Sherman Act (15 U.S.C. ยง 1 et seq.). Sauer thereafter filed a supplemental complaint in which it claimed that on August 31, 1983, it had requested White to transfer to it all manufacturing rights in the motors. Sauer further alleged that as of that date all of the events prerequisite to that transfer had occurred, but that White had refused to comply with its request.

The parties agreed to a bench trial. At the conclusion, Judge Sharp denied Sauer injunctive relief on the grounds that White had not repudiated the contract and that Sauer was not entitled to the manufacturing rights. Judge Sharp also enjoined Sauer from pursuing the arbitration proceeding it had begun on the ground that its request for arbitration before the International Commerce Commission ("ICC") had been filed in the wrong city -- Paris, instead of London. Judge Sharp granted Sauer leave to refile its request in London but held that his findings would be binding in any subsequent arbitration proceeding. Finally, although Judge Sharp found the contract "vague and ambiguous" in certain respects, he dismissed White's counterclaim because he found "insufficient evidence to establish the invalidity of the contract." White has appealed and Sauer has cross-appealed. For the reasons that follow, we affirm the dismissal of White's counterclaim but vacate the remainder of the judgment and direct the district court to enjoin White from repudiating the contract and from transferring any of Sauer's contractual rights to a third party until the arbitration requested by Sauer is completed and this lawsuit (including any appeals) is terminated.

Arbitration Waiver

White makes two attacks on Sauer's right to arbitrate this dispute. First, 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 agreement to buy and sell motors are separate. Sauer's promise to arbitrate was given in exchange for White's promise to arbitrate and each promise was sufficient consideration for the other. See Hellenic Lines, Ltd. v. Louis Dreyfus Corp., 372 F.2d 753, 758 (2d Cir. 1967). Moreover, there is nothing that requires that courts rather than arbitrators decide the validity of contracts, see, e.g., In Re Oil Spill By The "Amoco Cadiz," 659 F.2d 789, 794-795 (7th Cir. 1981) (fraud in the inducement), nor is there anything to suggest that when Sauer and White executed their contract they intended to limit in any way the kinds of disputes to be settled by arbitration. The language of the arbitration clause in the contract could not be broader. It expressly provides that

Any and all disputes arising out of and in connection with this Agreement shall be finally settled by arbitration under the rules of Conciliation and Arbitration of the International Chamber of Commerce by three arbitrators appointed in accordance with the Rules. The arbitration shall take place in London, United Kingdom of Great Britain.

This provision covers Sauer's claim that White repudiated the contract as well as White's claim that the contract is invalid. It is too late for White to argue that arbitrators appointed under ICC rules lack the competence to adjudicate the validity of its contract. Had White thought so when it entered the contract, it would not have agreed to arbitrate "any and all claims" before them.

Second, White argues that by filing this lawsuit, Sauer waived its right to arbitrate. We disagree. Sauer's right to seek injunctive relief in court and its right to arbitrate are not incompatible -- Sauer need not have abandoned one to pursue the other -- and White cannot in good faith claim that it was misled by Sauer's filing this suit into believing that Sauer intended to forego arbitration. See Erving v. Virginia Squires Basketball Club, 468 F.2d 1064 (2d Cir. 1972). Sauer alleged in its complaint that it intended to submit a request for arbitration of its claims and Article 8, Section 5 of the internal rules of the ICC court of arbitration expressly authorizes parties to seek the interim relief Sauer sought in its complaint:

Before the file is transmitted to the arbitrator, and in exceptional circumstances even thereafter, the parties shall be at liberty to apply to any competent judicial authority for interim or conservatory measures, and they shall not by so doing be held to infringe the agreement ...

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