Bristol Farmers Market and Auction Company and Closeouts,inc., Appellants, v. Arlen Realty & Development Corp., Appellee, 589 F.2d 1214 (3d Cir. 1978)

Bristol Farmers Market and Auction Co. and Closeouts, Inc.¹  (Bristol) appeal from a district court decision refusing to enjoin arbitration demanded under a lease agreement by the lessee, Arlen Realty & Development Corp. (Arlen). The district court held that the issues Arlen seeks to press in arbitration are properly within the scope of the arbitration clause, are not barred by res judicata, and were not waived by Arlen's failure to assert them in prior legal actions. Thus, the district court granted Arlen's motion to dismiss for failure to state a claim upon which relief can be granted. We affirm.² 

FACTS

Bristol (as lessor) and Arlen (as lessee) entered into an agreement dated April 2, 1970. It provided for the lease of premises in a shopping center for the operation of a discount department store. The term commenced April, 1970 and was to terminate March 31, 1985. On June 17, 1974 the parties executed an Amendment to the Lease and Consent to Subletting Agreement. Bristol consented to the subletting of the premises to Bristol Bazaar,³  but by the terms of the agreement, Arlen remained liable to Bristol for the rental payments.

Litigation commenced between Arlen and Bristol when Arlen and the sublessee, Bristol Bazaar, stopped making rental payments after September 1, 1975.⁴  On October 24, 1975 Bristol sued Arlen in federal court for rent due. Bristol received a judgment for rent owing from September 1, 1975 through March 31, 1976 and prevailed in the appeal to this court.⁵ 

Bristol instituted a second action on June 30, 1976 for rent owing after April 1, 1976. In addition to the rent claim, Bristol contended that Arlen had violated the lease agreement by failing to "stay open" as required by section 102.⁶  Arlen requested that the claim be withdrawn from the rent action and submitted instead to arbitration. Bristol consented. Moreover, Arlen specifically refused to raise its "supermarket defense," declaring its intention to press the issue in arbitration. By this "defense," Arlen claims that Bristol had an obligation under the lease to maintain a supermarket in the shopping center. Bristol prevailed in the second rent action and in the appeal to this court.⁷  The district court declared that the issues were decided in the first rent action and were thus res judicata except the computation of damages.

Bristol brought two additional actions for subsequent rent terms, obtaining a judgment in the district court on the first, which was not appealed, and settling the second before judgment.

On December 9, 1976 Bristol filed a Demand for Arbitration on the issue of whether Arlen breached its obligations by failing to maintain a discount department store in the shopping center. On December 21, 1976 Arlen filed a Demand for Arbitration covering four issues, the last three of which are the subject of this appeal. Subsequently, on January 27, 1977, Arlen filed the same three issues as defense and counterclaim in the arbitration proceeding commenced by Bristol and withdrew its own Demand for Arbitration. Bristol brought this action to enjoin the arbitration of Arlen's counterclaims. The three issues and corresponding claims for relief requested by Arlen in the arbitration proceeding are:

(FIRST ISSUE:) Does the Landlord's failure

to maintain a supermarket

in the immediately adjacent

premises constitute a material

breach of the Lease dated

April 2, 1970?

(CLAIM OR Arlen's duty to pay rent to

RELIEF the Landlord is completely

SOUGHT:) relieved by the Landlord's

failure to maintain a supermarket

operation in premises

adjacent to the demised

premises.

(SECOND ISSUE:) Does the Landlord's failure

to institute or exhaust any

remedies against Bristol Bazaar

constitute a material

breach of the Subletting and

Assumption Agreement and

other documents executed in

connection therewith?

(CLAIM OR Arlen is relieved of any duty

RELIEF to pay rent to the Landlord

SOUGHT:) by reason of the failure of

Landlord to institute and

exhaust its remedies against

Bristol Bazaar, which cannot

assert any alleged limitation

or (sic) liability.

(THIRD ISSUE:) Is Arlen entitled to recover

from the Landlord the difference

between the rental value of the

demised premises with an

operating supermarket adjacent

thereto and the rental value of

the demised premises with a

vacant adjacent supermarket?

(CLAIM OR If Arlen is obligated to pay

RELIEF any rent as damages to the

SOUGHT:) Landlord by reason of the

actions in the Federal Court,

then Arlen is entitled to an

award against the Landlord

for each of the months covered

in any of the judgments

in an amount equal to the

difference between the

rental value of the demised

premises with an operating

supermarket and without an

operating supermarket adjacent

thereto.

We begin with the fundamental assertion that "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." United Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, 80 S. Ct. 1347, 1353, 4 L. Ed. 2d 1409 (1960). Accord, John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 547, 84 S. Ct. 909, 11 L. Ed. 2d 898 (1964); Hussey Metal Division v. Lectromelt Furnace Division, 471 F.2d 556, 557 (3d Cir. 1972) (decided under Pennsylvania law). Further, the court is limited to ascertaining "whether the party seeking arbitration is making a claim which on its face is governed by the contract. . . . The courts . . . have no business weighing the merits of the grievance." United Steelworkers v. American Manufacturing Co., 363 U.S. 564, 568, 80 S. Ct. 1343, 1346, 4 L. Ed. 2d 1403 (1960). Thus, our role in the first instance is confined to determining whether the issues asserted by Arlen in arbitration are within the ambit of the arbitration clause.

The arbitration provisions are in sections 2001 and 2002 of the lease:

Section 2001:

If any dispute, difference or issue, except as hereinafter set forth shall at any time be raised with respect to any obligation of the parties under this Lease, such dispute, difference or issue shall be submitted to the American Arbitration Association in Philadelphia, Pennsylvania for arbitration by a board of three arbitrators whose determination and/or award shall be final and binding upon the parties hereto . . . and no award from such arbitration shall be appealable, except in the event of fraud.

Section 2002:

No item of rent or additional rent shall be the subject of arbitration unless previously paid, . . .

Bristol reasons that a resolution of the issues in Arlen's favor will have the ultimate effect of relieving Arlen, either by discharge or setoff, from its rental obligations. Hence, Bristol urges us to regard Arlen's submitted issues as involving "item(s) of rent" specifically excluded from arbitration by section 2002.

We note, however, that the three issues Arlen presses allege independent obligations running from Bristol to Arlen. For the breach of these obligations, Arlen seeks monetary damages or excuse from its obligation to pay rent. Bristol would have us read section 2002 to preclude arbitration any time its lessee claims monetary relief. However, such a reading would cause what appears on its face to be a minor exception for "item(s) of rent" virtually to subsume the general arbitration clause. We cannot believe that this reading of the arbitration provisions was the intention of the parties and we refuse to impose that construction on the contract. Therefore, we hold that the issues submitted for arbitration do not involve "item(s) of rent" and as a result are not precluded from arbitration by section 2002 of the lease.

Having decided that the terms of the lease do not specifically exclude the issues from arbitration, we must now determine whether they come within the terms of the general arbitration clause. It provides that "any dispute, difference or issue . . . with respect to any obligation of the parties Under this Lease " shall be submitted to arbitration (emphasis supplied). Bristol contends that the three issues raised by Arlen for arbitration do not arise "under this Lease," hence are not agreed upon subjects of arbitration. As part of our obligation to determine whether the claims are properly referable to arbitration, this court will not order arbitration where "there is no basis for maintaining that the matters . . . arise out of or in connection with the agreement." Necchi v. Necchi Sewing Machine Sales Corp., 348 F.2d 693, 697 (2d Cir. 1965), Cert. denied, 383 U.S. 909, 86 S. Ct. 892, 15 L. Ed. 2d 664 (1966). Further, this court will not order a "frivolous or patently baseless claim" to arbitration. National R.R. Passenger Corp. v. Missouri Pac. R.R., 501 F.2d 423, 427 (8th Cir. 1974). Accord, Hamilton Life Ins. Co. v. Republic National Life Ins. Co., 408 F.2d 606, 609 (2d Cir. 1969).

Arlen's first and third issues submitted for arbitration relate to its supermarket defense. Bristol argues most strenuously that no clause of the lease requires Bristol to maintain a supermarket in the shopping center. The lack of any explicit requirement plus the integration clause⁸  renders, according to Bristol, the supermarket defense a patently frivolous claim which is not subject to arbitration. We cannot agree. United Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582-83, 80 S. Ct. 1347, 1353, 4 L. Ed. 2d 1409 (1960) cautions that "(a)n order to arbitrate . . . should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute. Doubts should be resolved in favor of coverage." Accord, United Engineering and Foundry Employees v. United Engineering and Foundry Co., 389 F.2d 479, 481-2 (3d Cir. 1967).

The lack of an explicit clause requiring Bristol to maintain a supermarket in the shopping center is not fatal to Arlen's attempts to arbitrate issues one and three. Section 1104(a) (1) prohibits Arlen from using the demised premises for a supermarket, food market, grocery store or meat market.⁹  By its terms, the clause places no explicit obligations on Bristol; it only prohibits Arlen from certain activities. However, it is susceptible of the interpretation that the parties intended a corresponding obligation on Bristol to maintain a supermarket in the shopping center. The clause does not merely give Bristol a first option to establish a supermarket; rather, it is absolute in prohibiting Arlen from any food store undertaking. It is the duty of the arbitrator, not the court, to weigh the merits of a claim once the court determines that the claim is within the arbitration clause. Gavlik Construction Co. v. H. F. Campbell Co., 526 F.2d 777, 789 (3d Cir. 1975). We hold that as to the supermarket claims as embodied in Arlen's issues one and three, section 1104(a) (1) is a sufficient basis for determining that they arise under the lease agreement.¹⁰ 

Arlen's second issue which Bristol seeks to enjoin from arbitration asserts that Bristol committed a material breach of the lease by failing to exhaust its remedies against the sublessee, Bristol Bazaar, before proceeding against Arlen. On June 17, 1974 Bristol and Arlen executed an Amendment to Lease and Consent to Subletting Agreement. Section 3 directs that Bristol receive rental payments directly from Bristol Bazaar but retain its rights against Arlen.¹¹  We cannot say with "positive assurance" that the arbitration clause does not cover this dispute. United Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, 80 S. Ct. 1347, 4 L. Ed. 2d 1409 (1960). Section 3 addresses the issue of payment among the three parties to the agreement, but does not state whether Bristol must proceed initially against Bristol Bazaar for the rent due. Since the dispute in Arlen's second issue submitted for arbitration arises under the lease, we hold that it presents a case for resolution on the merits by the arbitrator.

Bristol also contends that the issues raised by Arlen are barred from arbitration by res judicata. Bristol had instituted three prior rent actions against Arlen and obtained judgments in each. In this suit, Bristol asserts that a necessary predicate to the district court's holdings in the rental cases was that Bristol had complied in all respects with the terms of the lease. Thus, Bristol claims that Arlen's issues alleging breaches of the lease were determined by the district court in the prior rent actions.

Bristol cites Clemens v. Central R.R., 399 F.2d 825 (3d Cir. 1968), Cert. denied, 393 U.S. 1023, 89 S. Ct. 633, 21 L. Ed. 2d 567 (1969), as controlling. There, involuntarily retired railroad employees sought a mandatory injunction requiring the railroad to arbitrate whether the employees were entitled to severance pay. A prior case between the same parties had held that they were not. This court ruled that the prior judgment was res judicata between the parties and could not be raised in arbitration. Bristol also cites Galt v. Libbey-Owens-Ford Glass Co., 376 F.2d 711, 715 (7th Cir. 1967), in which the court noted in dicta that a judgment in a legal proceeding would be res judicata in any subsequent arbitration.

Neither case is helpful to Bristol. The three prior rent actions only decided that rent was due and owing to Bristol. The supermarket defense and the duty of Bristol to exhaust its remedies against Bristol Bazaar before proceeding against Arlen were not before the court.¹²  Since the issues Arlen seeks to assert in arbitration have not been previously decided in a judicial action, Clemons and Galt are not authority for Bristol's claim that the issues are barred from arbitration by the doctrine of res judicata.

Bristol also contends that the issues Arlen seeks to assert in arbitration are compulsory counterclaims under Rule 13 of the Federal Rules of Civil Procedure. The district court felt that the issues would have been compulsory counterclaims; Arlen does not appear to contest that assertion. A compulsory counterclaim not raised in the first action is barred in subsequent litigation. Southern Construction Co. v. Pickard, 371 U.S. 57, 60, 83 S. Ct. 108, 9 L. Ed. 2d 31 (1962); Cleckner v. Republic Van and Storage Co., 556 F.2d 766, 769 n.3 (5th Cir. 1977). It does not follow, however, that the claim is also barred from consideration in subsequent Arbitration proceedings.

The strong public policy in favor of arbitration supports this conclusion.¹³  In Local 11, IBEW v. G. P. Thompson Electric, Inc., 363 F.2d 181 (9th Cir. 1966), the union filed grievances for arbitration which the employer asserted were compulsory counterclaims to a pending legal action. The employer claimed that the union had lost the right to arbitrate the grievances by failing to raise them in the judicial action. The Ninth Circuit held that the issues, though compulsory counterclaims under Rule 13, were not barred in the arbitration proceeding: "If one of the disputing parties could, by filing a complaint alleging a grievance outside the scope of the agreement for arbitration, force his opponent to by-pass arbitration and assert counterclaims as to controversies otherwise arbitrable, the desired intent and purpose of arbitration agreements could be effectively frustrated." Id. at 185. Cf. California Trucking Association v. Corcoran, 74 F.R.D. 534, 545-6 (N.D. Cal. 1977) (employer should not be allowed to circumvent arbitration of issues which the employer has agreed to arbitrate by the mere filing of a suit). Though Thompson involved arbitration under a collective bargaining agreement, its reasoning is equally applicable here.

Moreover, the policy behind compelling the defendant to raise his compulsory counterclaim or have it barred from subsequent litigation is "to enable the court to settle all related claims in one action, thereby avoiding a wasteful multiplicity of litigation on claims arising from a single transaction or occurrence." 6 C. Wright & A. Miller, Federal Practice and Procedure § 1409, at 37 (1971). Where the claim which would be barred if raised in a judicial action is instead pressed as a basis for arbitration, the goal of avoiding multiple litigation is still achieved.¹⁴  In fact, judicial economy will be enhanced since court time need not be expended in proving the counterclaim. Thus, we hold that neither the doctrine of res judicata nor the rules of compulsory counterclaims prevents the arbitration of the issues pressed by Arlen.

Arbitration of the three issues submitted by Arlen will not be enjoined. They arise under the lease as contemplated by the arbitration clause and are not precluded by the specific exclusion for "item(s) of rent." Further, the issues are not barred from arbitration by res judicata and related doctrines. The decision of the district court will be affirmed.

GARTH, Circuit Judge, dissenting:

I agree with the conclusions reached by the majority in all respects save one. In Part B. of its opinion, the majority holds that the First and Third issues as to which Arlen has demanded arbitration (See Maj. Op. at 1218) are arbitrable matters under section 2001 of the lease (the arbitration provision). In so holding, the majority, in my opinion, has strained the arbitration clause far beyond the contemplation and agreement of the parties to the lease.

Issues One and Three involve what has come to be known as "the supermarket defense." Arlen contends that Bristol, as landlord, was obligated under the lease to maintain a supermarket on premises adjacent to Arlen's, and that its failure to do so constituted a material breach of the lease.¹  Under the terms of the arbitration clause (See Maj. Op. at 1218), this matter is arbitrable if it concerns

any dispute, difference or issue, . . . with respect to any obligation of the parties under this Lease, . . .

Hence, only if the issue involves an Obligation of a party under this lease may the arbitrator's jurisdiction be invoked.

The majority acknowledges that nowhere in the lease is there any express requirement or obligation that Bristol maintain a supermarket in the shopping center.²  It notes, however, that section 1104(a) (1) of the lease (See Maj. Op. at 1218-1219 n.9) prohibits the tenant, Arlen, from using its premises for the operation of a supermarket. Although the majority recognizes that this provision of the lease, "by its terms," relates solely to the Obligations of Arlen as the tenant as distinct from any Obligations of Bristol as the landlord,³  it nonetheless concludes that section 1104(a) (1) "is susceptible of the interpretation that the parties intended a corresponding obligation on Bristol to maintain a supermarket."⁴  I cannot agree with this analysis, because it is the court's responsibility to determine "whether the party seeking arbitration is making a claim which on its face is one governed by the agreement."⁵ 

Whether a controversy is arbitrable is a question which the court must determine "on the basis of the contract entered into by the parties."⁶  In cases analogous to the present one, this Court and the Court of Appeals for the Second Circuit have held that the courts must decide whether each issue submitted to arbitration is within the terms of the arbitration clause. In International Brotherhood of Teamsters, Local 249 v. Western Pennsylvania Motor Carriers Association, 574 F.2d 783 (3d Cir. 1978), the contract between the parties limited the jurisdiction of a labor-management committee to disputes involving "inadvertent or bona fide errors." This Court held that whether such errors had occurred was a threshold issue for judicial determination. The Court then interpreted the contractual term "errors" to exclude from arbitration all claims based on economic impracticality or on longstanding industry practice, and therefore held that the dispute was Not arbitrable. The Court's conclusion that it must determine in each case whether the contractual predicate for arbitration has been satisfied is apposite to the present case:⁷ 

Since the jurisdiction of the arbitrator is contractually granted by the parties, the question as to whether a particular dispute is arbitrable necessarily depends on "whether the parties agreed to submit the dispute to arbitration." Ludwig Honold Manufacturing Co. v. Fletcher, (405 F.2d 1123), Supra, 405 F.2d at 1125 n.2. See Gateway Coal Co. v. United Mine Workers, 414 U.S. 368, 374, 94 S. Ct. 629, 38 L. Ed. 2d 583 (1974). Thus a reviewing court must in the first instance examine the jurisdictional predicate (I. e., the contract provision) which purports to require the submission of a dispute to arbitration. The court does so to ascertain whether the parties intended that the controversy be included within the scope of the arbitration clause.

The Court of Appeals for the Second Circuit has adopted a similar view in Necchi S.p.A. v. Necchi Sewing Machine Sales Corp., 348 F.2d 693 (2d Cir. 1965), Cert. denied, 383 U.S. 909, 86 S. Ct. 892, 15 L. Ed. 2d 664 (1966), a case on which the majority has relied in its opinion. In that case, the court acknowledged that " 'the federal policy' " is to " 'construe liberally arbitration clauses.' "⁸  Notwithstanding this policy, the court held that claims which "(were) not founded on any provision of the . . . agreement" were not arbitrable.⁹  The distributorship agreement in Necchi provided for arbitration of "matters, disputes or disagreements arising out of or in connection with" the agreement between the parties. The distributor demanded arbitration of its claims that Necchi had failed to meet various obligations under their contract. The court in an opinion by Judge (now Justice) Marshall held that claims which were not founded upon express provisions of the contract were not arbitrable. The Court concluded that

It is undoubtedly true that many of the matters referred to in items 1, 2, 3, 6, 7 and 9 (the claims held not to be arbitrable) would not have arisen if the exclusive distributorship arrangement had never existed between the Sales Corp. and Necchi. But this is not sufficient to render them arbitrable within the specific meaning of the arbitration clause of the 1961 agreement, which requires that the matter arise out of or in connection with that argeement (sic) rather than the working relationship between the parties.¹⁰ 

In applying the principles set out in Teamsters and Necchi to the present case, the starting point for our analysis must be the terms of the arbitration compact. Section 2001 of the lease triggers arbitration "if any dispute, difference or issue . . . shall at any time be raised with respect to any obligation of the parties under this Lease . . .." Under Teamsters then, the threshold question which this Court must determine is whether the lease could reasonably be construed by the arbitrator to impose on Bristol the "obligation" to maintain a supermarket in the shopping center. The majority opinion, as it must, relies completely on section 1104(a) (1) of the lease in deciding this question in favor of Arlen. The majority acknowledges that, on its face, this provision creates obligations only for the Tenant, Arlen. Significantly, it also acknowledges that "(b)y its terms, . . . (it) places no explicit obligations on Bristol."¹¹  Indeed, section 1104(a) (1) is entitled "Restrictions on Tenant" and makes no reference whatsoever to the duties of the landlord. Nonetheless, the majority concludes that the arbitrator could infer from the restriction on the tenant that the landlord had promised to maintain a supermarket.

This conclusion may result, in part, from a misapprehension of the terms of the arbitration agreement. On three occasions (See Maj. Op. at 1219, 1220, 1221), the majority concludes that an issue is arbitrable under section 2001 if it "Arises under the lease agreement." (Emphasis supplied). However, section 2001 was drawn more narrowly than the majority implies. It does not provide for arbitration of all disputes "arising under" or "in connection with" the lease. It confines arbitration to those disputes which concern an "obligation . . . under this Lease." If the intentions of the parties to this agreement are to be honored, this Court must scrutinize Arlen's claim to determine whether it is founded upon an obligation of Bristol under the lease. This the majority has not done.

To me, it is evident that, no matter how the lease is construed, a restriction on Arlen cannot create an obligation for Bristol. I observe that Article XXV (See Maj. Op. at 1218 n.8) limits the obligations of the parties to those which have been set out in the writing. Because section 1104(a) (1) is limited "by its terms" to the obligations of the Tenant, any "corresponding obligation on the landlord" would necessarily be based on an oral understanding external to the written instrument. However, Article XXV expressly negates the effect of any such "oral statement or representation." Hence, section 1104(a) (1) read together with Article XXV cannot support arbitral jurisdiction in this case.

The majority suggests, however, that section 1104(a) (1) should be interpreted by the arbitrator and not by this Court. I am in accord with this conclusion. But we are not dealing here with mere interpretation of a substantive provision of a contract as, for instance, we would be if the issue were whether a small convenience store constituted a "supermarket" within the meaning of section 1104(a) (1). By contrast, the dispute between Bristol and Arlen concerns the existence of an obligation to maintain a supermarket, and the arbitration clause requires us to determine whether Arlen's claim is founded on any obligation of the landlord under the lease. International Brotherhood of Teamsters, Local 249 v. Western Pennsylvania Motor Carriers Association, 574 F.2d 783 (3d Cir. 1978). To my mind, our task has been rendered relatively simple by the parties. We can look only to what the parties have agreed to in the lease. We cannot look beyond the confines of the lease, because Article XXV precludes us from doing so. Looking only to the written instrument, it is impossible for any interpretation to be derived which would impose an obligation express or implied on Bristol to maintain a supermarket. This being so, it follows that the supermarket defense is not arbitrable.

I am mindful that if my views were to prevail, this dispute would necessarily be fragmented into judicial and arbitral fora. However, the Supreme Court has resolved that the policy favoring liberal construction of arbitration agreements does not extend to requiring a party "to submit to arbitration any dispute which he has not agreed so to submit."¹²  Accordingly, it is clear to me that where a party has agreed only to arbitrate disputes concerning obligations under the lease, and where his obligations are expressly limited to those set forth in the writing, he may not be required to arbitrate a claim which is predicated on an obligation which does not appear in the lease. In these circumstances, the arbitrator is without jurisdiction to resolve the dispute.

I would therefore reverse so much of the district court's order as refuses to enjoin arbitration of Arlen's "supermarket defense," and I would remand for further proceedings before the district court.