Caseflicks

Court of Appeals for the Seventh Circuit • 1977

C. Itoh & Co. (America) Inc., a New York Corporation v. The Jordan International Company

552 F.2d 1228 | 1977 U.S. App. LEXIS 13997

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Takeaway

In short, this case holds that efficiency cannot override § 3’s mandatory stay rule, but a party seeking arbitration must first show a written arbitration agreement—and an unassented arbitration clause in a conditional battle-of-the-forms acknowledgment does not become part of a contract formed by performance under UCC § 2-207(3).

Background

Itoh sent Jordan a purchase order for steel coils that did not contain an arbitration clause. Jordan responded with an acknowledgment form stating on its face that its acceptance was expressly conditional on Itoh’s assent to additional or different terms printed on the reverse side. Those terms included a broad arbitration clause. Itoh neither expressly accepted nor objected to that clause. Jordan delivered the steel, and Itoh paid for it.

Itoh then resold the coils to Riverview Steel Corporation. When Riverview claimed that the coils were defective and delivered late, it refused to pay Itoh. Itoh sued both Riverview and Jordan: it alleged that Riverview had wrongfully withheld payment and that Jordan had supplied defective steel late. Jordan moved under § 3 of the Federal Arbitration Act to stay the litigation pending arbitration of its dispute with Itoh.

The district court denied the stay. It concluded that the quality dispute between Itoh and Riverview fell within an exclusion from their arbitration clause and therefore would remain in court. Believing that sound judicial administration favored resolving the entire controversy in one forum, the court declined to stay the action, apparently assuming without deciding that Jordan and Itoh had a written arbitration agreement. Jordan appealed.

Issues

Issue #1

Whether § 3 of the Federal Arbitration Act permits a district court to deny a requested stay because related claims involving another party cannot all be resolved in arbitration.

Holding

No. If the dispute is referable to arbitration under a written agreement and the applicant is not in default, § 3 requires a stay; judicial-efficiency concerns do not create discretion to deny it.

Reasoning

Section 3 uses mandatory language: a court “shall” stay a suit when the issue is referable to arbitration under a written agreement and the party seeking the stay is not in default in pursuing arbitration. The statute therefore does not leave the stay decision to ordinary case-management discretion once those conditions are met.

Under Prima Paint, a court considering a § 3 stay may address only issues concerning the making and performance of the arbitration agreement. Whether related claims should remain in court, or whether a single forum would be more efficient, does not concern the making or performance of that agreement.

Allowing a court to deny arbitration merely because some claims or parties are outside the arbitration agreement would undermine the Federal Arbitration Act’s pro-arbitration policy. A litigant could effectively defeat arbitration by joining a nonarbitrable dispute or a party not bound by the agreement. Thus, the district court’s single-forum rationale was legally erroneous.

Issue #2

Whether Jordan and Itoh had a written agreement to arbitrate after Jordan sent an acknowledgment expressly conditional on Itoh’s assent to additional terms, and the parties subsequently performed without Itoh’s express assent.

Holding

No. Their conduct formed a contract under UCC § 2-207(3), but that contract excluded Jordan’s disputed arbitration clause and therefore did not satisfy the Federal Arbitration Act’s requirement of a written arbitration agreement.

Reasoning

Jordan could not rely on UCC § 2-201, the Statute of Frauds provision, to make the arbitration clause binding merely because Itoh did not object to the acknowledgment. Section 2-201 can remove a Statute of Frauds defense to enforcement of an oral agreement, but it does not establish that an agreement—or a particular added term—was actually made. This battle-of-the-forms dispute is governed by § 2-207, not § 2-201.

Under § 2-207(1), an expression of acceptance may ordinarily create a contract despite additional terms. But Jordan’s acknowledgment unmistakably stated that its acceptance was “expressly conditional” on Itoh’s assent to the additional or different terms. Because Itoh never expressly assented, the exchanged writings did not themselves form a contract; Jordan’s form functioned as a counteroffer.

The parties nevertheless created a sales contract through performance under § 2-207(3): Jordan delivered the steel and Itoh paid for it. The Code rejects the former common-law approach under which Itoh’s performance would automatically accept every term in Jordan’s counteroffer.

A contract created by conduct under § 2-207(3) contains the terms on which the parties’ writings agree, supplemented only by applicable UCC gap-fillers. The parties did not agree in writing on arbitration, and arbitration is not a Code-supplied gap-filler. Jordan’s arbitration clause therefore dropped out of the contract.

This result does not unfairly burden Jordan. A seller that makes acceptance expressly conditional may refuse to perform until it obtains the buyer’s assent. But if the seller elects to deliver without obtaining assent, it accepts the risk that a contract formed by conduct will omit its disputed additional terms. Because no written arbitration term became part of the parties’ contract, Jordan was not entitled to a § 3 stay.