MATTER OF EXERCYCLE CORP. (MARATTA)


9 N.Y.2d 329 (1961)

In the Matter of the Arbitration between Exercycle Corporation, Appellant, and James Maratta, Respondent.

Court of Appeals of the State of New York.

Decided March 23, 1961.


Attorney(s) appearing for the Case

A. Walter Socolow and Max E. Lynne for appellant.

Edward J. Ennis and Clifford Forster for respondent.

Chief Judge DESMOND and Judges BURKE and FOSTER concur with Judge FULD; Judge FROESSEL concurs in result in a separate opinion in which Judge VAN VOORHIS concurs; Judge DYE dissents in an opinion.


FULD, J.

In March of 1955, James Maratta entered into an employment agreement with Exercycle Corporation. It provided that "Exercycle employs Maratta as its Vice-President 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 activities". The employment was to continue "until he voluntarily leaves the employ of Exercycle or dies", with Exercycle 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 agreement shall be settled by arbitration in accordance with the rules of the American Arbitration Association."

Prior to entering into his agreement with Exercycle, Maratta had been associated with several large and successful enterprises and thereafter became an independent direct sales consultant. In early 1955, he was approached by the then president and controlling stockholder of Exercycle 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 activities". He was fearful, however, that, once he had developed Exercycle's sales to the point where his compensation, based on commissions, was substantial, a new management might attempt to deprive him of the fruits of his efforts. For this reason, he insisted 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, revitalized 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 succeeded, but continued in his employment under the 1955 arrangement. Some time later, Mr. Little expressed displeasure with Maratta'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 resignation, he expressed regret at Maratta's "decision to terminate [his] relationship with the Exercycle 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 brought this proceeding 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 [Exercycle] to employ Respondent [Maratta] for a definite term i.e. for Respondent's life and permitting Respondent to terminate his employment and said alleged contract at will". Exercycle also objected to the arbitration on the further ground that, irrespective of its validity, the contract "is no longer in existence" by reason of Maratta'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 affirmed by a three-to-two vote. Both the majority and the minority, to support their respective conclusions, proceeded to construe 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 continue until the respondent `voluntarily leaves the employ of Exercycle or dies' did not as a matter of law 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" since the employee did not agree to work for life or for any other definite period.

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, depending as it does primarily on a reading and construction 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. Once it be ascertained that the parties broadly agreed to arbitrate a dispute "arising out of or in connection with" the agreement, it is for 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.

It has long been this State's policy that, where parties enter into an agreement and, in one of its provisions, promise that any dispute arising out of or in connection with it shall be settled by arbitration, any controversy which arises between them and is within the compass of the provision must go to arbitration. (Civ. Prac. Act, § 1448; see, e.g., Matter of Kelley, 240 N.Y. 74, 79; Matter of Marchant v. Mead-Morrison Mfg. Co., 252 N.Y. 284, 298; Matter of Lipman [Haeuser Shellac Co.], 289 N.Y. 76; Matter of Terminal Auxiliar Maritima [Winkler], 6 N.Y.2d 294.) As the court wrote in Matter of Marchant (252 N. Y., at p. 298), "Parties to a contract may agree, if they will, that any and all controversies growing out of it in any way shall be submitted to arbitration. If they do, the courts of New York will give effect to their intention."

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, renders the agreement voidable (see Matter of Lipman [Haeuser Shellac Co.], 289 N.Y. 76, 79, supra; cf. Matter of Behrens [Feuerring], 296 N.Y. 172, 178; Matter of Wrap-Vertiser Corp. [Plotnick], 3 N.Y.2d 17; Matter of Metro Plan v. Miscione, 257 App. Div. 652, 655); (2) where there is no "bonafide dispute" between the parties, that is, where the asserted claim is frivolous (see Alpert v. Admiration Knitwear Co., 304 N.Y. 1, 6; Matter of General Elec. Co. [United Elec. Radio & Mach. Workers], 300 N.Y. 262; Matter of International Assn. of Machinists [Cutler-Hammer], 297 N.Y. 519; Matter of Wenger & Co. v. Propper Silk Hosiery Mills, 239 N.Y. 199); (3) where the performance which is the subject of the demand for arbitration is prohibited by statute (see Matter of Kramer & Uchitelle [Eddington Fabrics Corp.], 288 N.Y. 467); or (4) where a condition precedent 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; Matter of Lipman [Haeuser Shellac Co.], 289 N.Y. 76, 79, supra; Matter of Cauldwell-Wingate Co. [New York City Housing Auth.], 262 App. Div. 829, motion for leave to appeal denied 287 N.Y. 853.)

Applying these principles to the case before us, there can be no doubt that Maratta and Exercycle made a contract 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 carried out, until January, 1960, a period of almost five years. It may hardly be said, therefore, that the making of the present agreement is in issue under section 1450 of the Civil Practice Act.

Nor is the agreement which was entered into "void and unenforceable" within the meaning of Matter of Kramer (288 N.Y. 467, supra), as Exercycle 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 "controlling public policy barred delivery" at the contract price (288 N. Y., at p. 472). The present case is patently dissimilar. In Matter of Kramer, public policy 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 unenforcible 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 prohibits the performance of a promise to employ one "until he voluntarily [quits] or dies", enforcement of performance by the arbitrators in this case is not rendered unlawful or legally impermissible.

Maratta's claim is not frivolous or insubstantial (cf., e.g., General Elec. Co. [Elec. Workers], 300 N.Y. 262, supra) and there is no suggestion of fraud (cf., e.g., Matter of Lipman [Haeuser Shellac Co.], 289 N.Y. 76, 79, supra) or an unfulfilled condition precedent to arbitration. (Cf., e.g., Matter of Board of Educ. [Heckler Elec. Co.], 7 N.Y.2d 476, 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, supra; Matter of Paloma Frocks [Shamokin Sportswear Corp.], 3 N.Y.2d 572, 574; Matter of Lipman [Haeuser Shellac Co.], 289 N.Y. 76, 80, 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 settled by arbitrators, Exercycle cannot urge, in opposition to arbitration, that a court of law would not enforce the agreement. If the issue involved was solely 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 different result. Whether the issue is one involving interpretation or law or fact or all three, it is for the arbitrators 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 National Cash Register Co. [Wilson], 8 N.Y.2d 377, 383; Matter of Wenger & Co. v. Propper Silk Hosiery Mills, 239 N.Y. 199, 203, supra; Fudickar v. Guardian Mut. Life Ins. Co., 62 N.Y. 392, 399, supra.) So this court said in the Fudickar case (62 N. Y., at p. 399):

"The arbitrator is a judge appointed by the parties; 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 fact 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 enforce Maratta's claim, but rather whether, as part of their agreement, the parties mutually promised to resolve all controversies "arising out of or in connection with" their agreement by arbitration. If the arbitrators could rationally and legitimately make an award in favor of Maratta, a court is not justified in staying the arbitration even if the claim would not be enforcible at law. In point of fact, we have declined to enjoin an 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; cf. Matter of Grayson-Robinson Stores [Iris Constr. Corp.], 8 N.Y.2d 133.) To paraphrase what this court wrote in the Staklinski case (6 N Y 2d, at pp. 163-164), 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 resigned 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, supra; Matter of Lipman [Haeuser Shellac Co.], 289 N.Y. 76, supra.)

The order of the Appellate Division should be affirmed, with costs.

FROESSEL, J. (concurring).

I 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 illusoriness — which in essence means an absence of consideration — the purported contract would be invalid and unenforcible, as petitioner contends (Schlegel Mfg. Co. v. Cooper's Glue Factory, 231 N.Y. 459; Bintz v. City of Hornell, 268 App. Div. 742, 747, affd. 295 N.Y. 628; 1 Corbin, Contracts, §§ 152, 145). In that case, as Professor Corbin puts it, no "contract 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 succinctly stated in Matter of Kramer & Uchitelle (Eddington Fabrics Corp.) (288 N.Y. 467, 471) as follows: "Arbitration clauses in contracts such as those under consideration are directed solely to the remedy — not to the validity or existence of the contract itself. Thus, proceedings to enforce arbitration under article 84 of the Civil Practice Act presuppose the existence of a valid and enforceable contract at the time the remedy is sought. (Matter of Berkovitz v. Arbib & Houlberg, Inc., 230 N.Y. 261, 271; 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, Inc. v. Goldberg, Maas & Co., 253 N.Y. 382.)" (Emphasis supplied.)

In Matter of Lipman (Haeuser Shellac Co.) (289 N.Y. 76) we acknowledged that the issue of "whether the contract never came into existence" is for the court (id., at p. 79); and in Matter of Sarle (Sperry Gyroscope Co.) (4 A.D.2d 638, affd. 4 N.Y.2d 917) the distinction between questions of "performance under the contract" and "the contract itself" was stressed (4 A D 2d, at p. 640), the former being for the arbitrators and the latter for the court (see, also, Matter of Wrap-Vertiser Corp. [Plotnick], 3 N.Y.2d 17, 20, 22).

The logic of this rule is forcefully stated in Matter of Finsilver, Still & Moss v. Goldberg, Maas & Co. (253 N.Y. 382) where Chief Judge CARDOZO, writing for a unanimous court, said (pp. 390-391): "If 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 decision. * * * In the absence of a contract expressing a consent to arbitrate, 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 Matter of Gruen v. Carter (173 Misc. 765, 766, affd. 259 App. Div. 712, motion for rearg. den. 259 App. Div. 813), "It is not for the arbitrators to decide upon the validity of the very agreement upon which their own status as arbitrators is predicated"; or, as Judge BURKE well put it in Matter of Wrap-Vertiser Corp. (Plotnick) (3 N.Y.2d 17, 22, supra), "`Obviously, parties cannot agree, in an invalid contract, to arbitrate the validity of the contract.'"*

The majority in this case, without purporting to overrule these well-established principles and their underlying logic, state the applicable rule to be that, "where parties enter into an agreement and, in one of its provisions, promise that any dispute arising out of or in connection with it shall be settled by arbitration, any controversy which arises between them and is within the compass of the provision, must go to arbitration". This statement of the allegedly established law in this State contains its own refutation. If it has not been determined whether "an 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 existence 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.

Conceivably, the only rationale which can justify the position of the majority is that the arbitration clause is an agreement separate and apart from the main agreement, supported by its own consideration. But 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 jurisdiction the promise to arbitrate is considered to be but a clause or part of the over-all contract, for they state there is "an agreement", and "one of its provisions" (emphasis supplied) contains a "promise" to arbitrate. Consequently, if the over-all contract is lacking in consideration — i.e., illusory or lacking in mutuality — or is otherwise invalid, it is unenforcible, and the right to arbitrate, which is a part of it and contingent thereon, falls. Unless we determine this preliminarily 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 mutuality of obligation" depends "primarily on a reading and construction of the agreement" and involves "substantial difficulties of interpretation", a basis for arbitration has been established. It is rather our function to resolve these questions 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.

DYE, J. (dissenting).

In dealing with controversies concerning the enforcibility of arbitration, the initial question is whether the underlying 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 arising thereunder by arbitration. If not, then we do not enforce arbitration since its vitality depends, in the first instance, on the existence of a valid contract (Civ. Prac. Act, art. 84, § 1450). Whether the term "contract" refers to the entire agreement in which the provision for arbitration 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 been made (cf. 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; Matter of Finsilver, Still & Moss v. Goldberg, Maas & Co., 253 N.Y. 382; Matter of Levinsohn Corp. [Joint Bd. of Cloak Makers' Union], 299 N.Y. 454; 38 Cornell L. Q. 391; 6 Corbin, Contracts, § 1444).

Here, there is a real dispute between the parties concerning 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 scrutiny of a court of law is indeed dubious. It lacks mutuality and is illusory. It provides that the employment of Maratta shall continue until he voluntarily leaves the employ of Exercycle or dies. Maratta is thus privileged in language which includes no restrictive conditions to quit his employment without obligation to respond in damages. Exercycle's promise is to retain Maratta for as long as he wishes to continue, provided only that he maintain sales above a specified 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 liberty to leave voluntarily at any time.

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 arbitration clause, are likewise unenforcible.

The order of the Appellate Division should be reversed and the motion to stay arbitration should be granted, with costs.

Order affirmed.

FootNotes


* The majority did not disagree with this premise in the Wrap-Vertiser case. Judge VAN VOORHIS there stated: "Even if he had rescinded or asked for rescission, such an issue would have had to have been decided in court before it could be known that an agreement existed supplying a foundation for the jurisdiction of the arbitrators" (p. 20; italics supplied).

Comment

1000 Characters Remaining

Leagle.com reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

User Comments

Listed below are the cases that are cited in this Featured Case. Click the citation to see the full text of the cited case. Citations are also linked in the body of the Featured Case.

Cited Cases

  • No Cases Found

Listed below are those cases in which this Featured Case is cited. Click on the case name to see the full text of the citing case.

Citing Cases