Facts
- From November 1973 through April 1974, Lea Tai Textile Co., Ltd. (Lea Tai), a Hong Kong corporation, and Manning Fabrics, Inc. (Manning), a New York corporation with its principal place of business in St. Pauls, North Carolina, entered a series of contracts for the sale of cotton cloth.
- The parties used exchanged forms: Manning sent purchase orders from its New York office to Lea Tai in Hong Kong, and Lea Tai mailed written confirmations back to Manning.
- In September 1974, Manning sent Lea Tai an order form containing an arbitration clause calling for arbitration of disputes in New York.
- Lea Tai responded with a confirmation containing an arbitration clause calling for arbitration in Hong Kong.
- In September 1974, Lea Tai shipped substantial quantities of cotton cloth to New York (including approximately 400,000 yards of cotton duck and 120,000 yards of cotton sateen).
- Lea Tai claimed Manning wrongfully refused to accept the September 1974 goods due to market conditions.
- Manning asserted it had received defective goods in an August 1974 shipment and had instructed Lea Tai to stop further shipments.
- On October 31, 1974, Manning filed suit against Lea Tai in the Court of Common Pleas in South Carolina.
- Lea Tai then filed a petition in the Southern District of New York under diversity jurisdiction and the Federal Arbitration Act (FAA), seeking (1) an order compelling arbitration in New York and (2) a stay of the South Carolina action.
- Manning opposed, arguing the parties never agreed on arbitration because the forms’ arbitration clauses conflicted.
Issues
- Whether the parties formed an enforceable agreement to arbitrate when Manning’s purchase order required arbitration in New York and Lea Tai’s confirmation required arbitration in Hong Kong.
- Under U.C.C. § 2-207, whether directly conflicting arbitration clauses in exchanged commercial forms become part of the parties’ contract.
- If no arbitration agreement existed, whether the federal court could compel arbitration under the FAA or stay the South Carolina state-court action.
Decision
- The court held that federal law governs the validity of an agreement to arbitrate under the FAA, and it looked to general contract principles, including U.C.C. § 2-207, to decide whether an arbitration term was formed.
- Applying the battle-of-the-forms analysis, the court found the arbitration provisions were in direct conflict (New York versus Hong Kong) and could not be reconciled.
- Because the conflicting arbitration clauses did not show mutual assent to any single arbitration arrangement, the court concluded there was no enforceable agreement to arbitrate.
- The court denied (and dismissed) Lea Tai’s petition to compel arbitration and refused to stay the South Carolina action.
- Having found no agreement to arbitrate, the court did not reach other defenses such as waiver based on participation in the South Carolina litigation.
Legal Principles
- Arbitration under the FAA is contractual; a party may be compelled to arbitrate only if the parties actually agreed to arbitrate.
- In the Second Circuit, federal law governs questions concerning the validity and enforceability of arbitration agreements under the FAA, even where state commercial law supplies contract-formation rules.
- Under U.C.C. § 2-207, parties can form a sales contract through exchanged forms even when their writings contain additional or different terms, but directly conflicting terms may be treated as excluded (so that neither side’s conflicting term becomes part of the contract).
- A general federal preference for arbitration supports enforcement of existing arbitration agreements, but it does not substitute for mutual assent where the parties’ writings point in different directions on arbitration.
Conclusion
Because Manning’s purchase order called for arbitration in New York while Lea Tai’s confirmation called for arbitration in Hong Kong, the court found no meeting of the minds on arbitration under U.C.C. § 2-207 and therefore no enforceable arbitration agreement under the FAA; the petition to compel arbitration and to stay Manning’s South Carolina case was denied.