SW Legal studies in Business

Contract Requiring Arbitration Applies to Dispute with Subcontractor Too
Description Appeals court held that when international parties to a contract calling for arbitration of all disputes later hire a subcontractor to help perform the contract, problems caused by the subcontractor are subject to arbitration and may not go to litigation.

Topic International Law
Key Words Arbitration; Subcontracts
C A S E   S U M M A R Y
Facts NAFT, a New York company, had Smoothline, a Hong Kong company, produce telephones that NAFT resold to various companies. This was done on the basis of an oral agreement. After a while, Smoothline hire Welback, another Hong Kong company, to make phones as a subcontractor, to be paid directly by NAFT. NAFT agreed to allow Welback do the work but at that point NAFT and Smoothline signed a contract that included an arbitration clause requiring arbitration of disputes to occur in New York before the American Arbitration Association. Later, when more phones were ordered, Smoothline hired another Hong Kong company, Greatsino, to help produce phones for NAFT. When the defect rate in the phones began to run high, NAFT cut its payments to all companies and complained about the quality. Smoothline and Greatsino sued NAFT in the Princely District Court in Liechtenstein for breach of contract. NAFT petitioned the federal court in New York to enjoin the proceedings in Liechtenstein and to compel arbitration. The court held that since Greatsino was brought in as a subcontractor after the contract was signed that the arbitration clause did not apply to the work it performed, so the arbitration clause did not apply. NAFT appealed.
Decision Reversed. The arbitration clause in the contract between NAFT and Smoothline, the principal contractor, stated that it applied to "any dispute ... with respect to the subject matter of this agreement." The agreement was for the production of telephones and specified repair obligations, payment methods, and other details relevant to this dispute. Although Greatsino was hired by Smoothline, with NAFT's permission, as a subcontractor at a later date, that action was part of the subject matter of the agreement, so that all disputes here are subject to the arbitration requirement. Federal policy favors arbitration. Since the contract stated a clear intent to arbitrate, arbitration is required for all matters related to the contract as the relationship evolved over time.
Citation Smoothline Ltd. v. North American Foreign Trading Corp., 249 F.3d 147 (2nd Cir., 2001)

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