On appeal from the Superior Court of New Jersey, Chancery Division, Bergen County.
Michels, King and Dreier. The opinion of the court was delivered by King, J.A.D.
This appeal involves two questions of law pertinent to arbitration proceedings. They are: (1) is an agreement to arbitrate on demand of a general contractor enforceable where the subcontractor has no reciprocal right to compel arbitration, and (2) does the American Arbitration Association have the right, absent judicial order or consent of both parties, to submit to the arbitrators the issue of whether contractual disputes among an owner, general contractor and subcontractor, which arise out of the same construction project and have common factual issues, should be subject to consolidated arbitration? We conclude the answer is "yes" to both propositions and therefore affirm the Chancery Division on both appeals.
Plaintiff, Kalman Floor Company, Inc. (Kalman), a Delaware corporation, entered into a subcontract with defendant, Jos. L. Muscarelle, Inc. (Muscarelle), a New Jersey corporation, to perform flooring installation on a building being constructed in New York. The contract price was $575,000. About $500,000 had been paid to Kalman when a dispute over the quality of the work arose. Under the subcontract plaintiff had agreed to supply concrete topping work on the floors and to furnish all labor, materials, tools and equipment for the job. Kalman was required to complete its work in compliance with the general construction contract between Muscarelle and Wakefern Food Corp. (Wakefern), the owner, subject to all of the obligations assumed therein by the general contractor for the flooring work subcontracted to Kalman.
The clause in dispute here is
32. This Subcontract shall be governed by and construed in accordance with the laws of the State of New Jersey. The Subcontractor shall not institute any action, in any wise relating to this Subcontract, against the Contractor and/or the latter's surety, except in a court of competent jurisdiction in the County of Bergen, State of New Jersey. Anything herein to the contrary notwithstanding,
the Contractor shall have the right to compel arbitration of any controversy arising hereunder in the County and State of New York before the American Arbitration Association, in accordance with its rules then obtaining.
In this action the plaintiff sought to stay and the defendant sought to compel arbitration before the American Arbitration Association (AAA). The defendant Muscarelle prevailed and prevented a stay of arbitration. This appeal followed.
In support of defendant Muscarelle's position, its vice-president certified that he had conducted major negotiations with the owner, Wakefern, over a dispute arising from the prime contract. The dispute "extensively, if not exclusively" involved Wakefern's contention that the "Kalman Deferred Vibratory Absorption Process" had not been furnished and installed in conformity with the prime or general contract. As a result, payments of over $2,000,000 were denied to Muscarelle by the owner.
On April 30, 1981 Muscarelle made demand on Wakefern to arbitrate the dispute in New York, a demand Wakefern resisted. In July 1981 Judge Tyler of the Supreme Court of New York denied Wakefern's application for a stay and granted Muscarelle's motion to compel arbitration in New York. His order was affirmed by the Appellate Division of that court.
In his oral decision in this case the judge of Chancery found that the law of New Jersey applied and that the arbitration clause 32 invoked by Muscarelle was enforceable. The judge thought that Kalman could probably enforce arbitration as well, if it wanted to, but he did not have to reach that point, nor do we. He also found no disparity of bargaining power between the parties which would justify voiding the agreement, in whole or in part. The judge rejected Muscarelle's motion to compel consolidation of the Muscarelle-Kalman arbitration with the Wakefern-Muscarelle arbitration, declining to exercise jurisdiction on the point.
We conclude that the choice of New Jersey law was entirely appropriate. Paragraph 32 of the subcontract ordained
that New Jersey law controls. Muscarelle is a New Jersey corporation with its only place of business in Maywood, Bergen County, the venue of these actions. Kalman is a Delaware corporation authorized to do business in this State and appears to operate nationally. Wakefern is a New Jersey corporation with its principal place of business in Elizabeth, Union County.
We reject Kalman's contention that New York law and its courts alone should control all claims by the parties simply because New York was the construction site. Generally, where parties have agreed in a commercial agreement to be governed by the laws of a particular state, our courts will uphold the contractual choice if it is not violative of the public policy of New Jersey. See Crinnion v. The Great Atlantic & Pacific Tea Co., 156 N.J. Super. 479, 483 (App.Div.1978); Knollmeyer v. Rudco Industries, Inc., 154 N.J. Super. 309, 312-313 (App.Div.1977), certif. den., 77 N.J. 477 (1978). This view is reflected in the Restatement 2d, Conflicts of Laws, § 187 at 561 (1971), which says in pertinent part
(1) the Law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.
(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either
(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or
(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.
Professor Leflar states that of the three traditional choice of law rules, i.e., place of making, place of performance, and choice of the parties, the latter is "now regarded more highly than the two others." Leflar, American Conflicts Law, § 147 at 301 (1977). He observes that "the right of the parties to determine for themselves what State's law shall govern their
contract is now generally approved by the authorities," id. at 303, and that "the Restatement (Second) rates this as the preferred basis for contract choice of law, . . . ." ibid., so long as the law chosen is that of a state which has a substantial relation to the parties or the transaction. In accord is the Uniform Commercial Code, N.J.S.A. 12A:1-101 et seq., 1 U.L.A. 23 (1976). We conclude that this State has sufficient contacts with the parties in this three-party contractual relationship to make the choice of our law governing the arbitration clause in the subcontract a reasonable contractual term, not offensive to any previously enunciated or presently viable public policy of this forum.
We turn to the contention in Kalman's first appeal that the arbitration clause in paragraph 32 is unenforceable because it lacks mutuality. We repeat the arbitration clause in dispute.
32. . . . The Subcontractor shall not institute any action, in any wise relating to this Subcontract, against the Contractor and/or the latter's surety, except in a court of competent jurisdiction in the County of Bergen, State of New Jersey. Anything herein to the contrary notwithstanding, the Contractor shall have the right to compel arbitration of any controversy arising hereunder in the County and State of New York before the American Arbitration Association, in accordance with its rules then obtaining.
We begin with the knowledge that in several cases the New York and Florida courts have invalidated arbitration clauses which have given one party, but not the other, the right to demand arbitration. See, e.g., Arcata Graphics Corp. v. Silin, 59 A.D. 2d 1007, 399 N.Y.S. 2d 738, 738-739 (App.Div.1977); Deutsch v. Long Island Carpet Cleaning Co., 5 Misc. 2d 684, 158 N.Y.S. 2d 876, 877 (Sup.Ct.1956). We disagree with this approach and follow the contrary view in which Alaska joins.
These cases are typical of the New York approach. In Hull Dye & Print Works, Inc. v. Riegel Textile Corp., 37 A.D. 2d 946, 325 N.Y.S. 2d 782 (App.Div.1971), the court invalidated a ...