DICKINSON R. DEBEVOISE, UNITED STATES DISTRICT JUDGE
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.
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 proceeding selected by the parties "be speedy and not subject to delay and obstruction in the courts" supported this result. Id.
The result in Prima Paint is not wholly logical. It leaves federal courts with the rather rare and narrow issue of whether fraud was directed specifically to the arbitration clause while passing the more frequent and usually more complex question of whether fraud was directed to the entire contract to the arbitration panel, a group chosen more for their technical knowledge than their legal skills. This approach also seems to run counter to Article 2's broad declaration that a written arbitration agreement be considered valid and enforceable "save upon such grounds as exist at law or equity for the revocation of any contract."
Nonetheless subsequent Supreme Court cases have confirmed that Prima Paint is alive and healthy and, if nothing else, the case has come to stand as an expression of the Court's militant determination to enforce arbitration agreements freely chosen by the parties. The challenge for the party who believes himself to be the victim of a fraud and wishes to fight it out in court is to demonstrate that the fraud was specifically directed to the arbitration clause or to convince the court to craft some exception to the Prima Paint doctrine.
Plaintiffs first argue that bribery should not be treated as fraud in the inducement but as a species of fraud in factum (or fraud in the execution) that vitiates NPC's assent to the agreement and makes the contract void ab initio. Plaintiffs, relying primarily upon Cancanon v. Smith Barney, Harris, Upham & Co., 805 F.2d 998 (11th Cir. 1986), argue that the defense of fraud in factum creates an exception to Prima Paint's separability rule.
Cancanon was a securities fraud action brought by purchasers of a money market account who alleged that the defendant brokerage firm wasted their principal in unauthorized trading. The account agreement, a form contract, contained an arbitration clause and the defendant moved for an order compelling arbitration pursuant to Section 4 of the Arbitration Act. Plaintiffs, who did not speak English, argued that since defendant represented that the contract was for a money market account, plaintiffs had never assented to a contract for a securities account. Plaintiffs argued that this fraud in factum, as opposed to fraud in the inducement, voided the entire contract including the arbitration clause and therefore overcame the Prima Paint separability doctrine. 805 F.2d at 999-1000.
The Cancanon Court adopted the plaintiffs' position. Citing the Restatement of Contracts, the court observed that "where misrepresentation of the character or essential terms of a proposed contract occurs, assent to the contract is impossible. In such a case there is no contract at all." Cancanon, 805 F.2d at 1000. Thus, "where the allegation is one of fraud in factum, i.e., ineffective assent to the contract, the issue is not subject to resolution pursuant to an arbitration clause contained in the contract document." Id.
Several other cases have taken positions consistent with this approach. In Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., 636 F.2d 51 (3d Cir. 1980), for instance, the defendant argued that certain documents, which the plaintiff contended were contracts, were signed only as confirmations of delivery dates. 636 F.2d at 53. The court observed that the "mere execution of a document . . . . even assuming that it is executed by a corporate agent, does not negate the factual assertion that such signature was not intended to represent a contractual undertaking." Id. at 54-55. If such a defense were mounted against a motion to compel arbitration under Section 4 of the Act, and if the allegations were set forth in an affidavit, a proceeding held before the case was committed to arbitration and limited to the issue of whether or not an agreement had been reached would be appropriate. Id. at 55. See also Interocean Shipping Co. v. National Shipping & Trading Corp., 462 F.2d 673, 676 (2d Cir. 1972); Dougherty v. Mieczkowski, 661 F. Supp. 267, 274-75 (D.Del. 1987).
Even if allegations of fraud in factum created an exception to Prima Paint doctrine, however, the allegations in the complaint do not set forth such a claim. As the Cancanon court made clear, fraud in factum exists where there is a "misrepresentation of the character or essential terms" of a contract. As the authors of the Restatement expressed it:
If a misrepresentation as to the character or essential terms of a proposed contract induces conduct that appears to be a manifestation of assent by one who neither knows nor has reasonable opportunity to know of the character or essential terms of the proposed contract, his conduct is not effective as a manifestation of assent.
Restatement of Contracts (Second) sec. 163 (emphasis added). As noted in explanatory comments accompanying this section, "the party may believe that he is not assenting to any contract or that he is assenting to a contract entirely different from the proposed contract." Id., Comment A. See also Langley v. Federal Deposit Ins. Corp., 484 U.S. 86, 108 S. Ct. 396, 402, 98 L. Ed. 2d 340 (1987) (Fraud in factum is "the sort of fraud the procures a party's signature to an instrument without knowledge of its true nature or contents."); Southwest Administrators, Inc. v. Rozay's Transfer, 791 F.2d 769, 774 (9th Cir. 1986) ("[Fraud in inducement] induces a party to assent to something he otherwise would not have; [fraud in factum] induces a party to believe the nature of his act is something entirely different than it actually is."); 12 Williston on Contracts sec. 1488 (3d Ed. 1970).
These explanations demonstrate that the fraud in factum doctrine is inapposite in the present situation. There is no question but that the NPC officials negotiating the contract were fully aware of the nature of its terms; that is why they resisted the Westinghouse draft and why Marcos, in turn, was repeatedly forced to bring pressure to bear in order to override their opposition. Plaintiffs do not claim, nor can they, that they were duped or deceived as to the nature or terms of the agreement as they must in order to make out a claim for fraud in factum. They understood the contract all too well.
What plaintiffs' actually allege is a defense of duress or coercion: Marcos allegedly received payments in return for which he used his power and influence to force the NPC to assent to an oppressive, one-sided agreement. Cancanon itself, however, takes pains to distinguish these defenses from those of fraud in factum. In Merrill Lynch, Pierce, Fenner & Smith v. Haydu, 637 F.2d 391 (5th Cir. Unit B 1981), a stock brokerage customer who signed options trading agreements with arbitration clauses claimed that she had been distracted and coerced by high pressure sales talk amounting under the circumstances to confusion, undue influence and duress. The Cancanon court observed that "these were not allegations of ineffective assent, but rather of fraud in the inducement of a contract. . . . Thus the [ Haydu ] court properly held that these allegations were subject to resolution by arbitration." Cancanon, 805 F.2d at 100 n.5.
Plaintiffs argue that coercion through bribery is a form of coercion so different in degree and kind that it rises to the level of fraud in factum. Perhaps there is some form of coercion so extreme that is equivalent to a lack of assent. That is not this case, however, and plaintiffs' attempts to force the doctrine to fit their allegations would contort the doctrine beyond recognition.
Alternatively, if plaintiffs could demonstrate that the coercion or duress were directed specifically to the arbitration clause, this would satisfy Prima Paint and it would be appropriate to have a hearing on this issue. It is clear that plaintiffs have raised a material issue of fact with respect to whether or not the "commission" payments specifically induced assent to the arbitration clause.
As plaintiffs' own papers demonstrate, however, any payments ultimately received by Marcos could not be the basis for voiding the contract or any of its clauses since Marcos was not acting as a third party who coerced the NPC to contract but as the ultimate authority of the nation who had full power to commit the NPC to the contract.
Plaintiffs' complaint explains at some length the scope of power Marcos exercised over the Philippines. The following political analysis is drawn from paragraphs 4 through 9.
In 1972, just before the end of his second elected term as President, President Marcos issued Proclamation No. 1081 declaring a state of martial law in the Philippines. Marcos subsequently abolished the congress and assumed legislative power through the issuance of presidential decrees, orders, proclamations, letters of instruction and directives. In General Order No. 1 issued on September 22, 1972 Marcos provided that "I shall govern the nation and direct the operation of the entire Government, including all its agencies and instrumentalities, and in my capacity shall exercise all the powers and prerogatives appurtenant and incident to my position as Commander in Chief of all the Armed Forces of the Philippines." General Order No. 3, issued at the same time, prohibited the judiciary from considering any case involving the validity, legality or constitutionality of the Proclamation declaring martial law or any of the actions Marcos took in form of decisions and orders under the authority of martial law.
On January 17, 1973, Marcos issued Proclamation No. 1104 deciding that martial law would continue in force indefinitely. Also on that date Marcos issued Proclamation No. 1102 declaring that the people had "ratified" a new constitution. This constitution legitimized all orders and decrees previously issued by Marcos and empowered him to rule through the issuance of orders and decrees in the future. When a case presented the Philippines Supreme Court with the issue of the new constitution's legality, Marcos allegedly summoned the justices to Malacanang palace and threatened to declare a revolutionary form of government if they invalidated the constitution. Ultimately the Supreme Court held that, although the constitution had not been properly ratified by the people, its validity was a political question beyond the competence of the Court.
Beyond his general self-assumed authority as dictator, Marcos also promulgated directives that gave him specific authority over the NPC. About the time that negotiations on the PNPP contract began in earnest, Marcos issued Presidential Decree No. 380. Pursuant to his authority established under the new constitution and General Order No. 1, Marcos made certain changes through this order to the NPC charter. Section 11 of the decree modifies Section 15-A of the Charter to place the NPC "under the direct supervision of the Office of the President . . ." Significantly Marcos "authorized" the General Manager of the NPC to enter into a contract with Westinghouse, see Affidavit of Alejandro Melchor, dated Nov. 9, 1988, Exhibit H, and after the contract was signed nonetheless "approved" it, see Affidavit of Marcelino C. Ilao, dated Feb. 6, 1989 at para. 16.
Plaintiffs argue that under the law of the Philippines the NPC was a separate juridical entity that Marcos was without legal authority to direct or control. In support of this proposition, plaintiffs, pursuant to Fed. R. Civ. P. 44.1, submit the affidavit of Edurardo G. Montenegro, an undersecretary in the Department of Justice of the Republic of the Philippines.
Montenegro observes that the Philippines Supreme Court has stated that the NPC "has a personality of its own, distinct and separate from that of the Government." Montenegro Affidavit para. 3 quoting Rayo v. CFI of Bulacan, 110 SCRA 456, 460 (1981) (Supreme Court of the Philippines). He notes that the NPC Charter, even after amendments by Marcos, required that construction contracts be awarded exclusively on the basis of competitive bidding. Montenegro Affidavit para. 5; Charter paras. 9, 10. Montenegro concedes that the President had certain specific duties related to the NPC and that the agency was under the President's "direct supervision." However, under "well-established Philippine precedents," according to Montenegro, "supervision" is a term of art in administrative law that is comparatively limited in scope:
In administration law supervision means overseeing or the power or authority of an officer to see that subordinate officers perform their duties. If the latter fail or neglect to fulfill them the former may take such action or step as prescribed by law to make them perform their duties. Control, on the other hand, means the power of an officer to alter or modify or nullify or set aside what a subordinate officer had done in the performance of his duties and to substitute the judgment of the former for that of the latter.
Montenegro Affidavit para. 6, quoting Mondano v. Silvosa, 51 Official Gazette No. 6 2884, 2888 (1955) (Supreme Court of the Philippines).
In conclusion Montenegro finds "no support in the laws of the Republic of the Philippines for the proposition that in 1974 - 1976 President Marcos had authority to direct that PNPP contracts be awarded to Westinghouse and Burns & Roe contrary to NPC's wishes and in derogation of the established competitive bidding requirements." Montenegro Affidavit para. 8.
The authority marshalled by Montenegro, however, does not necessarily support the conclusion he reaches. Although Marcos may not have had authorization under the NPC Charter to direct the "operational affairs" of the NPC, it is clear that through the issuance of presidential decrees and other orders that he could control whatever aspect of the governmental machinery that attracted his attention. Plaintiffs do not dispute that these fiats were legal under then-existing domestic law or that they were obeyed by government agencies and the citizenry.
Under Section 74 of the Revised Administrative Code (Act No. 2711) as it was in force during the relevant period, as Montenegro points out, Marcos had broad powers over governmental agencies:
All executive functions of the Government of the Republic of the Philippines shall be directly under the Executive Department, subject to the supervision and control of the President of the Philippines in matters of general policy.