10.4.2.2 Notes - Nute v. Hamilton Mutual Insurance Co. | Kessler, Gilmore & Kronman | October 30, 2012

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10.4.2.2 Notes - Nute v. Hamilton Mutual Insurance Co.

by Kessler, Gilmore & Kronman
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NOTE

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1. In the course of his discussion of the topic: To What Extent and in What Manner Can Parties by Private Agreement Affect Court Action, Professor Corbin wrote:

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At this point a distinction that is not at all unfamiliar will be suggested. It is the distinction between rights and remedies, between primary rights and remedial rights. Can it be that parties have full control over their primary contractual rights and duties and no such control over their remedial (or secondary) rights and duties?

This distinction has played a part in the making of our law and it is of some importance in our present discussion. This is true, in spite of the fact that careful analysis will show that the distinction is in degree rather than in kind, and that no exact boundary line can be drawn. When one gets down out of the metaphysical clouds and stands on solid human earth, he must observe that the relation of right and duty has no juristic existence apart from a societal sanction that involves juristic remedy. The maxim that there is no right without a remedy is a truism, because it is the availability of some remedy, direct or indirect, that gives significance to the terms legal right and legal duty. Even admitting all this, however, it is facts and events that will induce societal sanction and juristic remedy; and when we say that one party has a right and another owes a duty, we mean that the requisite facts exist and events have occurred. In very large measure, in the field of contract, individuals can control the existence of these facts and the occurrence of these events. This is what they are doing when they are "making a contract."

One can avoid making a promise; he can make a small promise rather than a large one; he can make a conditional promise instead of an absolute one. In making an arbitration agreement, are the parties merely exercising a control over the operative facts and events, or are they also trying to control the remedies the juristic effect of those facts and events? In the field of free contract, it has often been judicially declared that parties may write their own contracts, and that it is the function of the courts to interpret those contracts and to enforce them as made. But it is not the declared law that parties may also limit and control judicial remedies, procedure, or modes of proof.

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6A Corbin §1432 at 384-386.

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2. Guaranty Trust and Safe Deposit Co. v. Green Cove Springs and Melrose R.R., 139 U.S. 137 (1891), involved proceedings for foreclosure of a railroad mortgage. In the course of his opinion, Justice Brown remarked:

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It is true that there is a . . . provision in the deed of trust to the effect that neither the whole nor any part of the premises mortgaged shall be sold, under proceedings either at law or in equity, for the recovery of the principal or interest of the bonds, it being the intention and agreement of the parties that the mode of sale provided by the mortgage "shall be exclusive of all others." This clause, however, is open to the objection of attempting to provide against a remedy in the ordinary course of judicial proceedings, and oust the jurisdiction of the courts, which, as is settled by the uniform current of authority, cannot be done.

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139 U.S. at 142-143.

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The idea expressed by Justice Brown in the Guaranty Trust case that contractual stipulations as to remedy were invalid as attempts to "oust the jurisdiction of the courts" had a notable career in the context of agreements to arbitrate disputes. The history of judicial attitudes toward arbitration agreements was reviewed by Franks, J., in Kulukundis Shipping Co., S/A v. Amtorg Trading Corp., 126 F.2d 978, 982-985 (2d Cir. 1942) (elaborate footnotes by the court have been omitted):

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In considering these contentions in the light of the precedents, it is necessary to take into account the history of the judicial attitude towards arbitration: The English courts, while giving full effect to agreements to submit controversies to arbitration after they had ripened into arbitrators' awards, would — over a long period beginning at the end of the 17th century — do little or nothing to prevent or make irksome the breach of such agreements when they were still executory. Prior to 1687, such a breach could be made costly: a penal bond given to abide the result of an arbitration had a real bite, since a breach of the bond's condition led to a judgment for the amount of the penalty. It was so held in 1609 in Vynior's Case, 8 Coke Rep. 81b. To be sure, Coke there, in a dictum, citing precedents, dilated on the inherent revocability of the authority given to an arbitrator; such a revocation was not too important, however, if it resulted in a stiff judgment on a penal bond. But the Statute of Fines and Penalties (8 & 9 Wm. III c. 11, s. 8), enacted in 1687, provided that, in an action on any bond given for performance of agreements, while judgment would be entered for the penalty, execution should issue only for the damages actually sustained. Coke's dictum as to revocability, uttered seventy-eight years earlier now took on a new significance, as it was now held that for breach of an undertaking to arbitrate the damages were only nominal. Recognizing the effect of the impact of this statute on executory arbitration agreements, Parliament, eleven years later, enacted a statute, 9 Wm. III c. 15 (1698), designed to remedy the situation by providing that, if an agreement to arbitrate so provided, it could be made a "rule of court" (i.e., a court order), in which event it became irrevocable, and one who revoked It would be subject to punishment for contempt of court; but the submission was revocable until such a rule of court had been obtained. This statute, limited in scope, was narrowly construed and was of little help: The ordinary execu­tory arbitration agreement thus lost all real efficacy since it was not specifically enforceable in equity, and was held not to constitute the basis of a plea in bar in, or a stay of, a suit on the original cause of action. In admiralty, the rulings were much the same.

It has been well said that "the legal mind must assign some reason In order to decide anything with spiritual quiet." And so, by way of rationalization it became fashionable in the middle of the 18th century to say that such agreements were against public policy because they "oust the jurisdiction" of the courts. But that was a quaint explanation, Inasmuch as an award, under an arbitration agreement, enforced both at law and in equity, was no less an ouster; and the same was true of releases and covenant not to sue, which were given full effect. Moreover, the agreement to arbitrate was not illegal, since suit could be maintained for its breach. Here was a clear instance of what Holmes called a "right" to break a contract and to substitute payment of damages for non-performance; as, in this type of case, the damages were only nominal, the "right" was indeed meaningful. An effort has been made to justify this judicial hostility to the executory arbitration agreement on the ground that arbitrations, if unsupervised by the courts, are undesirable, and that legislation was needed to make possible such supervision. But if that was the reason for unfriendliness to such executory agreements, then the courts should also have refused to aid arbitrations when they ripened into awards. And what the English courts, especially the equity courts, did in other contexts, shows that, if they had had the will, they could have devised means of protecting parties to arbitrations. Instead, they restrictively interpreted successive statutes intended to give effect to executory arbitrations. No similar hostility was displayed by the Scotch courts. Lord Campbell explained the English attitude as due to the desire of the judges, at a time when their salaries came largely from fees, to avoid loss of income. Indignation has been voiced at this suggestion; perhaps it is unjustified. Perhaps the true explanation is the hypnotic power of the phrase, "oust the jurisdiction." Give a bad dogma a good name and its bite may become as bad as its bark.

In 1855, in Scott v. Avery, 5 H.C.L. 811, the tide seemed to have turned. There it was held that if a policy made an award of damages by arbitrators a condition precedent to a suit on the policy, a failure to submit to arbitration would preclude such a suit, even if the policy left to the arbitrators the consideration of all the elements of liability. But, despite later legislation, the hostility of the English courts to executory arbitrations resumed somewhat after Scott v. Avery, and seems never to have been entirely dissipated.

That English attitude was largely taken over in the 19th century by most courts in this country. Indeed, in general, they would not go as far as Scott v. Avery, supra, and continued to use the "ouster of jurisdiction" concept: An executory agreement to arbitrate would not be given specific performance or furnish the basis of a stay of proceedings on the original cause of action. Nor would it be given effect as a plea in bar, except in limited instances, i.e., in the case of an agreement expressly or impliedly making it a condition precedent to litigation that there be an award determining some preliminary questions of subsidiary fact upon which any liability was to be contingent. Hamilton v. Liverpool, 1890, etc., Ins. Co., 136 U.S. 242, 255, 10 S. Ct. 945, 34 L. Ed. 419. In the case of broader executory agreements, no more than nominal damages would be given for a breach.

Generally speaking, then, the courts of this country were unfriendly to executory arbitration agreements. The lower federal courts, feeling bound to comply with the precedents, nevertheless became critical of this judicial hostility. There were intimations in the Supreme Court that perhaps the old view might be abandoned, but in the cases hinting at that newer attitude the issue was not raised. Effective state arbitration statutes were enacted beginning with the New York statute of 1920.

The United States Arbitration Act of 1925 was sustained as constitutional, in its application to cases arising in admiralty. Marine Transit Corp. v. Dreyfus, 1932, 284 U.S. 263, 52 S. Ct. 166, 76 L. Ed. 516. The purpose of that Act was deliberately to alter the judicial atmosphere previously existing. The report of the House Committee stated, in part:

Arbitration agreements are purely matters of contract, and the effect of the bill is simply to make the contracting party live up to his agreement. He can no longer refuse to perform his contract when it becomes disadvantageous to him. An arbitration agreement is placed upon the same footing as other contracts, where it belongs. . . . The need for the law arises from an anachronism of our American law. Some centuries ago, because of the jealousy of the English courts for their own jurisdiction, they refused to enforce specific agreements to arbitrate upon the ground that the courts were thereby ousted from their jurisdiction. This jealousy survived for so long a period that the principle became firmly embedded in the English common law and was adopted with it by the American courts. The courts have felt that the precedent was too strongly fixed to be overturned without legislative enactment, although they have frequently criticized the rule and recognized its illogical nature and the injustice which results from it. The bill declares simply that such agreements for arbitration shall be enforced, and provides a procedure in the Federal courts for their enforcement. . . . It is particularly appropriate that the action should be taken at this time when there is so much agitation against the costliness and delays of litigation. These matters can be largely eliminated by agreements for arbitration, if arbitration agreements are made valid and enforceable.

In the light of the clear intention of Congress, it is our obligation to shake off the old judicial hostility to arbitration.

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June 02, 2014

10.4.2.2 Notes - Nute v. Hamilton Mutual Insurance Co.

10.4.2.2 Notes - Nute v. Hamilton Mutual Insurance Co.

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