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REPUBLIC OF THE PHILIPPINES v. WESTINGHOUSE ELEC.

May 18, 1989

THE REPUBLIC OF THE PHILIPPINES and NATIONAL POWER CORPORATION, Plaintiffs,
v.
WESTINGHOUSE ELECTRIC CORPORATION, WESTINGHOUSE INTERNATIONAL PROJECTS COMPANY, and BURNS AND ROE ENTERPRISES, INC., Defendants



The opinion of the court was delivered by: DEBEVOISE

 This is an action brought by the Republic of the Philippines and the National Power Corporation ("NPC"), the Philippine government agency responsible for electric power generation, against Westinghouse Electric Corporation ("WECOR"), a Pennsylvania corporation, Westinghouse International Projects Company ("WIPCO"), a wholly-owned subsidiary of WECOR (these entities are sometimes referred to collectively as "Westinghouse") and Burns and Roe Enterprises, Inc. ("Burns & Roe"), a New Jersey corporation. This case arises out of the construction of the 600-megawatt Philippines Nuclear Power Plant Unit 1 ("PNPP") in Bagac, Bataan during a ten-year period commencing in 1976. The fifteen-count complaint alleges breach of contract, fraud, tortious interference with fiduciary duties, negligence, civil conspiracy, RICO violations, antitrust violations and various pendent state claims. Defendants moved to stay this action pending arbitration pursuant to contractual arbitration clauses and Section 3 of the Federal Arbitration Act of 1925, as amended, 9 U.S.C. sec. 3, and/or pursuant to the court's inherent power to manage its docket. This motion has been vigorously contested by both sides and the parties have been permitted to file several supplemental briefs and affidavits.

 I. The Background of the Dispute

 Some understanding of the complaint's factual allegations is required in order to address knowledgeably the issues raised by this motion. For the purposes of this discussion only, plaintiffs' allegations will be accepted as true.

 In the summer of 1973, Ferdinand E. Marcos, then President of the Republic of the Philippines, announced his government's decision to build the nation's first nuclear powerplant. Affidavit of Ramon R. Ravanzo dated Oct. 21, 1988 ("Ravanzo Affidavit"), para. 2. A number of foreign companies with technical expertise sought to obtain at least a piece of what promised to be a lucrative project. Westinghouse sought the contract for the construction of the plant's nuclear steam supply system and Burns & Roe was interested in obtaining the architect/engineering ("A/E") contract for the project.

 Plaintiffs allege that, after consulting with Westinghouse sales employees who operated in the country, both Westinghouse and Burns & Roe concluded that the way in which business was done in the Philippines required the retention of a special sales representative ("SSR") who had both access to and influence in Malacanang, the presidential palace, if they were to have a chance of obtaining the contract. Since 1972, when Marcos declared a state of martial law, Marcos had ruled the nation largely by decree and his direct assent to such a high-profile project was considered essential. The complaint alleges that it was understood that the SSR would offer Marcos a "piece of the action" in order to obtain his endorsement of the bidders.

 Westinghouse and Burns & Roe ultimately came to retain Herminio T. Disini as their SSR under separate agreements. Disini was a well-known Philippine businessman and close personal friend of President Marcos whose wife was also Mrs. Marcos' cousin and personal physician. The first test for Disini, even before any formal SSR agreements were entered, was to obtain the NPC project consulting contract for Burns & Roe.

 Since the NPC had no expertise in the construction of nuclear power plants, it sought to enter a consulting contract to obtain technical advice and to assist it in selecting between competing project bidders. Although Burns & Roe bid for this contract, NPC announced its intention to award the contract to a competitor, Ebasco Industries, Inc. The Westinghouse and Burns & Roe Philippine operatives agreed that this prospect spelled disaster for their chances at the project since Ebasco was known to be a corporate ally of General Electric, a Westinghouse competitor, and would be expected to assert its influence with NPC on behalf of its confederate. Disini allegedly boasted to Burns & Roe that he could obtain a turnkey contract for PNPP project for Westinghouse including an A/E subcontract for Burns & Roe. Burns & Roe gave Disini the green light and requested that he intervene on their behalf. Days later, Marcos, directed NPC to award the consulting contract to Burns & Roe. *fn1"

 This demonstration of influence ultimately persuaded Westinghouse to retain Disini as SSR, agreeing to commission payments of three percent of the total contract price to be paid to various Disini-controlled corporations. Like Burns & Roe, Westinghouse allegedly knew that these commission payments were being passed through Disini to Marcos. Westinghouse wrote Marcos to request an opportunity to present a proposal for a turnkey contract for PNPP. Marcos agreed to hear Westinghouse and wrote the NPC to tell it he was meeting with Westinghouse.

 At the Westinghouse presentation in May 1974, Marcos directed Westinghouse to use Burns & Roe as the project A/E subcontractor. Two weeks after the meeting, Westinghouse wrote Marcos requesting a commitment letter for the entire project. Marcos forwarded the letter to his Executive Secretary, Alejandro Melchor, who was also a member of the NPC Board, with a handwritten notation stating that if Westinghouse could deliver the financing terms discussed, "let us give them a letter of commitment." The following day, Marcos issued an order directing NPC General Manager Ravanzo to negotiate a turnkey contract for the construction of PNPP with Westinghouse.

 In obedience to this directive, the NPC entered into contract negotiations with Westinghouse. Ravanzo established a negotiating committee comprised of three subgroups: a technical panel, a commercial panel and a legal panel, each comprised of NPC officials who were to meet with their Westinghouse counterparts in lengthy negotiations over the course of 1975. Looking back on that time, General Secretary Ravanzo recalled that Westinghouse refused to negotiate any critical contract terms:

 
NPC objected to many of the provisions proposed by Westinghouse, including the risk of loss, payment schedule, warranties, arbitration and liability limitation clauses. However, our efforts to negotiate better terms were frustrated because Westinghouse knew that it had the President's support and that NPC could not go to any other supplier for the nuclear plant. Therefore Westinghouse could get whatever terms it wanted, and NPC was powerless to bargain effectively. It was the first time in my experience that we were negotiating a contract in which I knew from the outset that we did not have a chance.

 Ravanzo Affidavit para. 7.

 Plaintiffs allege that when negotiations hit a snag, Disini would be called upon to intervene and, in response, Marcos would call Ravanzo to urge him into action. Frustrated with the slow progress of negotiations, Marcos at one point allegedly ordered the parties onto a Philippines naval vessel and gave the captain orders to cruise Manila Bay until agreement on certain provisions was obtained.

 Among the terms in the Westinghouse draft contract considered by the legal panel, was the arbitration clause, Article 24. An alternate member of the NPC legal panel who was apparently actively involved in negotiations, Agripino E. Bagcal, recalled that Westinghouse was intransigent during negotiations and even indicated at one point that the terms in the draft contract were nonnegotiable. Affidavit of Agripino E. Bagcal ("Bagcal Affidavit"), dated Oct. 24, 1988, para. 3. Bagcal recalled that Article 24 was "lengthily discussed." Id. at para. 4. Because of bad experience with arbitrations in the past and because the Westinghouse draft contract was thought to favor the drafter, NPC wanted the procedural protections available in a judicial forum. Id. The parties' disparate positions on this issue are reflected in the minutes kept by Bagcal of the first meeting of the legal panel on January 24, 1975. Bagcal Affidavit Exhibit A. Apparently Westinghouse continued to insist on the inclusion of the arbitration clause and the parties were soon at an impasse.

 The minutes of the next meeting of the legal panel reflect that some minor modifications were made to the arbitration clause. Bagcal Affidavit Exhibit B. The arbitration clause was again discussed at the April 18, 1975 meeting of the legal panel. Westinghouse's feet were still in cement on the issue. At this point, Westinghouse acceded to the clause and the parties agreed on languages pledging to use their "best efforts" to resolve any disputes arising out the contract informally before they were referred to arbitration. According to Bagcal, the NPC team surrendered on this point because it became clear to them "that Westinghouse was extremely intractable and was not likely to compromise." Bagcal Affidavit at para. 6. Bagcal also observed that "we were under pressure to move forward with the negotiations because according to Mr. Ravanzo, that was the order of the higher authority in government." Id. This "higher authority" was Marcos.

 Negotiations on other points continued throughout the year with occasional interventions by President Marcos. In November, 1975 a final draft was submitted to the Philippine Solicitor General for review. In separate memoranda directed to both Ravanzo and Marcos he recommended that the contract not be signed. Affidavit of Estelito P. Mendoza, dated Nov. 21, 1988, Exhibits A & B. This counsel was ignored, however, and the contract was signed in a formal ceremony on February 9, 1976 and approved by Marcos two days later. Affidavit of Marcelino C. Ilao dated Feb. 6, 1989 at para. 16.

 The plaintiffs allege that in addition to the commission payments paid to Disini corporations by defendants that were funneled to Marcos, Marcos benefited financially by the construction of the plant through a complex network of financial interests in various Disini enterprises that performed work as Westinghouse subcontractors. Thus Marcos allegedly directed that a Disini-controlled company, Power Contractors, Inc., be awarded the civil/structural construction subcontract although it had done no comparable work and despite NPC's objections. Similarly, although NPC objected to the selection of the Engineering and Construction Co. of Asia, owned by a company controlled by Marcos' brother-in-law, as the mechanical and electrical installation subcontractor because of the company's poor reputation, Westinghouse nonetheless awarded it the contract. In addition, a Disini-owned insurance company underwrote half of the construction risk of the project, although a private insurer had never before been permitted to underwrite a government construction project, and another Disini company was selected to serve as PCI's purchasing agent.

 II. The Applicable Legal Standards

 The critical provisions of the Arbitration Act, for the purposes of this case, are Sections 2, 3 and 4, 9 U.S.C. secs. 2, 3, 4. Section 2 provides that a written agreement to resolve disputes through arbitration in a "contract evidencing a transaction involving commerce . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." Section 3 requires a federal court in which suit has been brought "upon any issue referable to arbitration under an agreement in writing for such arbitration" to stay the court action pending arbitration once it finds that the issue is arbitrable under the agreement. Section 4 is not directly relevant to the present motion, brought under Section 3, but is nonetheless useful as a point of reference. It permits a party "aggrieved by the alleged failure, neglect or refusal of another to arbitrate under a written agreement for arbitration" to obtain an order compelling arbitration if the court determines that an agreement exists and that it has not been honored.

 The initial question raised by this motion is whether the plaintiffs' allegations of bribery may be considered in determining whether the action should be stayed pending arbitration. Defendants argue that under the doctrine announced by the Supreme Court in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S. Ct. 1801, 18 L. Ed. 2d 1270 (1967), the allegations are properly directed to the arbitration panel and not the court.

 In Prima Paint the purchaser of a paint business which entered into a consulting contract with the corporate seller to commence after the sale sought rescission of the contract on the grounds that the seller fraudulently represented that it was solvent and able to perform the contract when, in fact, it had filed a petition under Chapter 11 of the Bankruptcy Code shortly after execution of the agreement. 388 U.S. at 398. The seller argued that the contract's arbitration clause governed even allegations of fraud directed to the entire contract.

 The Supreme Court noted that the issue was settled under Section 4 of the Act which permits the court to issue an order compelling arbitration only if "the making of the agreement for arbitration" is is not in issue. Prima Paint, 388 U.S. at 403.

 
Accordingly, if the claim is fraud in the inducement of the arbitration clause itself -- an issue which goes to the 'making' of the agreement to arbitrate -- the federal court may proceed to adjudicate it. But the statutory language does not permit the federal court to consider the claims of fraud in the inducement of the contract generally.

 388 U.S. at 404. Although the case before the Court arose under Section 3, the Court ruled that this reasoning applied to that section as well because it was "inconceivable that Congress intended the rule to differ depending upon which party to the agreement first invokes the assistance of a federal court." Id.

 Thus under either section 3 or 4, the arbitration clause is to be treated as conceptually "separable" from the remainder of the contract. "In passing upon a section 3 application for a stay while the parties arbitrate, a federal court may consider only issues relating to the making and performance of the agreement to arbitrate." Prima Paint, 388 U.S. at 404. The Court concluded that the language of the Act, and the clear Congressional purpose that the arbitration ...


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