Republic of Nicaragua, a Foreign Sovereign v. Standard Fruit Company, Standard Fruit and Steamship Company, and Castle & Cooke, Inc.

The Republic of Nicaragua appeals from two orders of the district court which denied its motion to compel international arbitration of a contract dispute (Count I) and granted summary judgment to Standard Fruit Company (“SFC”) and its two parent companies, Standard Fruit and Steamship Company (“Steamship”) and Castle & Cooke, Inc. (“C & C”), 1 on Nicaragua’s breach of contract claim (Count II).

Nicaragua raises three points on appeal. First, it argues that the questions of whether a document entitled “Memorandum of Intent” was a valid contract and whether Standard Fruit Company was bound by that contract should have been referred to arbitration in the first instance, not decided by the district court. Secondly, it contends that disputed issues of material fact exist on the question of whether the Memorandum of Intent was a binding contract for the purchase and sale of bananas, or merely an “agreement to agree” at some later date. Finally, Nicaragua alleges that a factual dispute exists on the question of whether the Memorandum of Intent was executed on behalf of SFC, thus precluding summary judgment on that issue as well.

We hold that although it was the court’s responsibility to determine the threshold question of arbitrability, the district court improperly looked to the validity of the contract as a whole and erroneously determined that the parties had not agreed to arbitrate this dispute. Instead, it should have considered only the validity and scope of the arbitration clause itself. In addition, the district court ignored strong evidence in the record that both parties intended to be bound by the arbitration clause. As all doubts over the scope of an arbitration clause must be resolved in favor of arbitration, and in light of the strong federal policy favoring arbitration in international commercial disputes, Nicaragua’s motion to compel arbitration should have been granted. Whether the Memorandum was binding, whether it covered banana purchases, and whether Standard Fruit Company was bound by it are all questions properly left to the arbitrators. Finally, genuine disputes of fact exist as to the intent of the parties and the validity and scope of the Memorandum. Therefore, the grant of summary judgment to the three defendants is reversed.

FACTS

Since 1970, defendant Standard Fruit Company has been involved in the production and purchase of bananas in western Nicaragua. It is a wholly-owned subsidiary of Standard Fruit and Steamship Company, which purchases the bananas from SFC and transports and distributes them in the U.S. Steamship in turn is a wholly- *472 owned subsidiary of C & C. From 1970 until October 1982, SFC operated by entering into limited partnership agreements with sixteen different landowners in Chi-nandega Province, Nicaragua. The equity interests in the partnerships 2 were allocated such that the landowners held 80% and SFC held 20%. Secondly, SFC leased the 16 banana plantations from their owners and assigned those leases to the partnerships. Third, each partnership entered into an exclusive fruit purchase agreement with SFC, promising to sell all export-quality bananas from its plantations to SFC.

A. THE REVOLUTION

In 1979, the Sandinistas overthrew the Somoza government in Nicaragua, forming a new “Government of National Reconstruction,” led by a three-person junta. The Sandinistas wished to assume closer control over the banana industry, and eventually to transfer SFC’s shares in the partnerships to the Nicaraguan government. For over a year, the new government discussed these issues with SFC’s representative in Nicaragua, General Manager James Sousane.

On June 23, 1980, Nicaraguan Minister of Foreign Trade Alejandro Martinez Cuen-ca sent Sousane a memo (at Sousane’s request) which proposed a set of basic guiding principles for the new contractual relationship between the Republic of Nicaragua and SFC, including the transfer proposal mentioned above. SFC objected to this proposal on the grounds that it could not transfer its 20% share in the partnerships to the government without the consent of its partners. Negotiations continued on this and other points until December 20, 1980.

On that date, Nicaragua promulgated “Decree No. 608,” which declared that the banana industry was to become a state monopoly, that all plantation leases would be transferred to a new government agency, and that all preexisting lease, partnership, and fruit purchase contracts were nullified. SFC interpreted this decree as an expropriation of its business, and immediately ceased all operations in Nicaragua. Sousane and a few key employees left the country, and no more bananas were purchased. Both sides were surprised and upset by the issuance of the decree and the almost immediate withdrawal of SFC, with the bananas still ripe on the trees and ready to pick. As a result, Nicaragua requested a “summit meeting” at which SFC and its two parent companies, Steamship and C & C, could sort out their differences with the Sandinistas and come back to the country. The situation had obviously reached crisis proportions.

B. THE MEMORANDUM

The meeting commenced in San Francisco on Friday, January 9, 1981, and continued for three days of intense negotiations, led by C & C Vice-President and General Counsel Robert Moore (principal draftsman of the Memorandum) and Norton Tennille, Nicaragua’s legal counsel. On Sunday, January 11, a document entitled “Memorandum of Intent” was executed by two officers of C & C, two officers of Steamship, and two Ministers of Trade and a member of the ruling junta of Nicaragua. Sousane and other SFC representatives participated in the negotiations but did not sign the document. 3

The Memorandum, termed an “agreement in principle,” contained an arbitration provision, and envisioned the renegotiation and replacement of four operating contracts between SFC and “the competent Nicaraguan national entity.” 4 These were *473 to include a detailed fruit purchase contract, a technical assistance contract, the transfer of SFC’s shares in the production societies, and Nicaragua’s purchase of SFC’s assets in the country. The Memorandum also established the essential elements of the fruit purchase contract: a price term ($4.30 per box, less specified deductions), the length of the contract (five years, although no dates were specified), and stated that it would cover all the first-quality bananas produced by the Nicaraguan growers. Additional provisions rescinded the terms of Decree 608 for five years, reinstated SFC’s favored tax status, and clarified the financing arrangements for Nicaragua’s banana industry.

Within a week after the Memorandum was signed, SFC returned to Nicaragua and resumed its operations there. In addition, it began negotiating with Nicaraguan officials regarding the technical assistance and fruit purchase contracts referred to in the Memorandum, as well as the share transfers and asset buy-outs. Many subsequent drafts of these four documents were exchanged, some similar to the Memorandum and some not, although none were ever finalized and executed.

Throughout the negotiations and for the next 22 months, SFC complied with the terms of the Memorandum as though it were bound by it. For example, it began paying $4.30 per box of bananas, rather than $1.26 as it had been paying up to that time, and bought over $30 million worth of bananas at that price. Nicaragua, in turn, began allowing the $.75 per box deduction for asset buy-back, debt reduction, and technical assistance, for a total rebate of over $3.5 million to SFC over the two years. During this period, C & C and SFC produced and disseminated a number of documents which referred to the Memorandum as “a contract,” a “commitment,” or “a final agreement,” several of which were signed and/or approved by Robert Moore. These included a C & C press release sent out the day after the Memorandum was signed, SEC reports, Annual Reports, letters, telexes, letters to the editor, and internal memoranda. Although SFC, Steamship, C & C, and Nicaragua all acted as though the Memorandum was binding for almost two years, the implementing contracts were never finalized, and SFC left Nicaragua for good on October 25, 1982.

The arbitration clause states that:

Any and all disputes arising under the arrangements contemplated hereunder ... will be referred to mutually agreed mechanisms or procedures of international arbitration, such as the rules of the London Arbitration Association.

Nicaragua admits that this clause is less than crystal clear and in fact refers to an association which does not exist. However, it introduced a letter written by Robert Moore, principal draftsman of the Memorandum, to explain the inconsistency. The letter, written to Nicaragua’s representative only three weeks after the negotiations, described the “deep sense of urgency on both sides,” the “exceedingly tight time schedule,” and the “highly political nature of the agreement (from the Nicaraguan standpoint).” It explained that, during the negotiations themselves, neither side could remember the name of the arbitration body in London, and stated: “What resulted was an agreement providing for arbitration but without finally fixing the forum or an automatic method of transmitting disputes.” Moore suggested “we would be better off agreeing in advance that Paragraph IV was to be read and interpreted to provide for arbitration by [a certain] agency,” and concluded “I am sure you will agree that it is best done in the infancy of the agreement and at a time that negotiations of the implementing agreements are being worked out.” (Emphasis added). 5 Although this letter seems to suggest both that C & C intended the clause to be binding and that the parties intentionally left it vague because they could not remember the name of the London arbitration agency, the district court disregarded this evidence.

*474 C. THE DISTRICT COURT OPINION

The district court applied a three-part test for arbitrability: “first, whether the parties entered into a contract; second, that the contract included an agreement to arbitrate disputes, and third, that the disputes covered by the arbitration agreement included those which are before the Court.” It then proceeded to find that the Memorandum as a whole was not a binding contract, that the arbitration provision was not a present agreement to submit to arbitration, but merely “a provision declaring the expectations of the parties that contracts to be negotiated later would include agreements to arbitrate,” and that in any "event the scope of the clause was not broad enough to require arbitration of the Memorandum’s enforceability. The court determined that the phrase “all arrangements contemplated hereunder” in Paragraph IV referred only to the “implementing agreements” subsequently to be negotiated, executed, and performed in Nicaragua, and not to the Memorandum itself.

JURISDICTION

Diversity jurisdiction over the two issues in this consolidated appeal is proper under 28 U.S.C. §§ 1332(a)(4) & 1603(a), since the case involves a lawsuit between a foreign state and American citizen corporations. As noted above, both the denial of arbitration (Count I) and the grant of summary judgment on the breach of contract claim (Count II) are properly before this court. Other counts alleged in the complaint remain before the district court. 6

I. NICARAGUA’S MOTION TO COMPEL

Nicaragua contends that the district court erred in denying its motions to compel international arbitration of its breach of contract claim and to stay judicial proceedings pending arbitration. It claims that the court should have limited its inquiry to the narrow question of whether the parties had, in fact, agreed to submit the validity of the contract itself to arbitration. Instead, the district court first determined that no binding sales contract existed between the parties and then proceeded to conclude, based on a preponderance of the evidence standard, that there was also no agreement to arbitrate. In the alternative, the court also found that the scope of the arbitration clause did not cover the question of whether the Memorandum of Intent was a binding contract. 7

Determinations of arbitrability, like the interpretation of any contractual provision, are subject to de novo review. Mediterranean Enterprises, Inc., v. Ssangyong Corp., 708 F.2d 1458, 1462-63 (9th Cir.1983); In re Bubble Up Delaware, Inc., 684 F.2d 1259, 1264 (9th Cir.1982); Drake Bakeries, Inc. v. Local 50, Am. Bakery & Confectionery Wkrs. Int’l, 370 U.S. 254, 256, 82 S.Ct. 1346, 1348, 8 L.Ed.2d 474 (1962). We decline to adopt SFC’s proposed “clearly erroneous” “especially deferential” standard of review on the threshold question of arbitrability. Cf. Interocean Shipping Co. v. National Shipping and Trading Corp., 523 F.2d 527 (2d Cir.1975), ce rt. denied 423 U.S. 1054, 96 S.Ct. 785, 46 L.Ed.2d 643 (1976). The district court’s interpretation of the contract language is a question of law to be reviewed de novo. United States v. City of Twin Falls, 806 F.2d 862, 869 (9th Cir.1986), cert. denied 482 U.S. 914, 107 S.Ct. 3185, 96 L.Ed.2d 674 (1987).

Both parties agree that federal substantive law governs the question of arbi- *475 trability. See Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983); Prima Paint v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967); Mediterranean Enterprises, 708 F.2d at 1463-4. The Federal Arbitration Act 8 reflects “Congress’ intent to provide for the enforcement of arbitration agreements within the full reach of the Commerce Clause.” Perry v. Thomas, 482 U.S. 483, 490, 107 S.Ct. 2520, 2525, 96 L.Ed.2d 426 (1987).

Section 2, therefore, embodies a clear federal policy of requiring arbitration unless the agreement to arbitrate is not part of a contract evidencing interstate commerce or is revocable “upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2.

Id. at 489, 107 S.Ct. at 2525. The standard for demonstrating arbitrability is not a high one; in fact, a district court has little discretion to deny an arbitration motion, since the Act is phrased in mandatory terms. The Supreme Court has emphasized that the Act

leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed.

Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 218, 105 S.Ct. 1238, 1241, 84 L.Ed.2d 158 (1985) (emphasis in original). Such agreements, if made, shall be “rigorously enforce[d].” Id. at 221, 105 S.Ct. at 1242. The Ninth Circuit agrees:

Under Section 4 of the Act, the district court must order arbitration if it is satisfied that “the making of the agreement for arbitration ... is not in issue ...” Therefore, the district court “can only determine whether a written arbitration agreement exists, and if it does, enforce it ‘in accordance with its terms.’ ”

Howard Elec. & Mech. v. Briscoe Co., 754 F.2d 847, 849 (9th Cir.1985) (emphasis added, citations omitted). See also Cone, 460 U.S. at 15, 103 S.Ct. at 936.

However, this “ ‘liberal federal policy favoring arbitration agreements’ ... is at bottom a policy guaranteeing the enforcement of private contractual arrangements.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 625, 105 S.Ct. 3346, 3353, 87 L.Ed.2d 444 (1985) (quoting Cone, 460 U.S. at 24, 103 S.Ct. at 941). “Thus, as with any other contract, the parties’ intentions control, but those intentions are generously construed as to issues of arbitrability.” Id. 473 U.S. at 626, 105 S.Ct. at 3353. Therefore, the only issue properly before the district court was whether the parties had entered into a contract “evidencing a transaction involving commerce” under the Act and committing both sides to arbitrate the issue of the contract’s validity.

Nicaragua contends that the court made three fundamental errors below. First, it argues that the district court improperly looked to the contract as a whole to determine arbitrability, which is impermissible under Prima Paint v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967); secondly, that it held Nicaragua to an incorrect and overly harsh standard of proof for arbitrability, in violation of clear federal policy; and thirdly, that the court’s interpretation of the scope of the arbitration clause was clearly erroneous on the factual record.

*476 A. THE PRIMA PAINT DOCTRINE

Nicaragua’s primary claim is that the three-part test applied to determine whether the parties had in fact agreed to arbitrate violates Prima Paint, which expressly held that courts may not consider challenges to a contract’s validity or enforceability as defenses against arbitration. 388 U.S. at 404, 87 S.Ct. at 1806. Relying on the “unmistakably clear congressional purpose that the arbitration procedure ... be speedy and not subject to delay and obstruction in the courts,” id., Prima Paint demands that arbitration clauses be treated as severable from the documents in which they appear unless there is clear intent to the contrary. An arbitration clause may thus be enforced even though the rest of the contract is later held invalid by the arbitrator. Accord, Teledyne, Inc. v. Kone Corp., 892 F.2d 1404, 1410 (9th Cir.1990).

As the Arbitration Act only applies to “contracts evidencing transactions in commerce,” courts must first make a threshold finding that the document at least purports to be such a contract. 9 U.S.C. § 2; Prima Paint, 388 U.S. at 401, 87 S.Ct. at 1804. However, in Prima Paint the Supreme Court did not rule on whether the contract was valid or enforceable — just that it existed. The Court rejected Prima Paint’s argument that it could not be forced into arbitration because its entire contract (including the arbitration clause at issue) was fraudulently induced and therefore void. The Court held that because the fraud did not go to the making of the arbitration clause itself, the clause was severable and enforceable. Id. at 404, 87 S.Ct. at 1806. It therefore ordered the parties to proceed to arbitration of all disputed issues, including the questions of fraud in the inducement and the entire contract’s validity.

In the instant case, the district court made a preliminary “Factual Conclusion” that the Memorandum “was not intended as a binding contract,” in direct opposition to the Prima Paint rule. 9 In addition to providing the basis for granting summary judgment on the merits, this conclusion is also the basis for the alternative holdings that no agreement to arbitrate existed, and that the present dispute lay outside the scope of the clause. All three holdings rely chiefly on the trial testimony of Robert Moore, who drafted most of the Memorandum, and on what the court termed the “unambiguous” language of the document itself. However, as Nicaragua correctly points out, Moore’s testimony directly conflicts with contemporary documents in the record, which should have precluded any summary judgment. As a matter of law, the key language in Paragraph IV seems highly ambiguous, since it refers to “the arrangements contemplated hereunder,” and thus requires extensive inquiry into just what arrangements are being referred to. Finally, many of the cases relied on by the district court are not controlling in this circuit, and several favor Nicaragua’s position rather than SFC’s. 10

For example, the district court cited Georgia Power Co. v. Cimarron Coal *477 Corp., 526 F.2d 101, 106 (6th Cir.1975), cert. denied, 425 U.S. 952, 96 S.Ct. 1727, 48 L.Ed.2d 195 (1976), for the proposition that the arbitration provisions of a proposed agreement must be interpreted in their context rather than alone. However, that statement was made in reference to the strict presumption favoring arbitration, in the context of affirming an arbitration order. Thus, it has no relevance to Prima Paints, clear directive that courts disregard surrounding contract language and “consider only issues relating to the making and performance of the agreement to arbitrate.” 388 U.S. at 404, 87 S.Ct. at 1806. The correct analysis is set forth in Sauer-Getriebe KG v. White Hydraulics, Inc., 715 F.2d 348, 350 (7th Cir.1983), cert. denied, 464 U.S. 1070, 104 S.Ct. 976, 79 L.Ed.2d 214 (1984):

White argues that if there is no contract to buy and sell motors there is no agreement to arbitrate. The conclusion does not follow its premise. The agreement to arbitrate and the agreement to buy and sell motors are separate. Sauer’s promise to arbitrate was given in exchange for White’s promise to arbitrate and each promise was sufficient consideration for the other.

Id. There, the Seventh Circuit ordered arbitration despite the facts that the district court had found the contract “vague and ambiguous,” and construed it against its drafter. 11 See also Teledyne, Inc. v. Kone Corp., 892 F.2d 1404, 1410 (9th Cir.1990).

Thus, in the absence of any evidence that Paragraph IV of the Memorandum was intended as non-severable, we must strictly enforce any agreement to arbitrate, regardless of where it is found. Under Prima Paint and Teledyne, we hold that the district court erred in considering the contract as a whole to determine the threshold question of whether Nicaragua may enforce the arbitration agreement contained in Paragraph IV.

Three Valleys Mun. Water District v. E.F. Hutton & Co., Inc., 925 F.2d 1136 (9th Cir.1991), is not to the contrary, as that case involved entirely different facts. There, no issue existed as to whether the Client Agreements which called for arbitration were valid contracts; instead, the plaintiffs argued that the Agreements were void because the signatory was without authority to bind his principals. As we hold below in response to SFC’s similar argument, the issue of agency is essentially a legal one and must be decided by a court. See Part II below; Three Valleys at 1140-1142. However, where the parties admit to signing a document that contains an arbitration provision, as here and in Teledyne, all questions regarding breach of the agreement must be referred to arbitration.

B. ARBITRATION AGREEMENT AND SCOPE

The next question is whether Paragraph IV in fact constitutes an agreement to arbitrate, and whether it encompasses the dispute at hand. The district court stated that the parties had not made any present agreement to submit all disputes under the Memorandum to arbitration, but merely agreed to include such clauses in future contracts. It also made a second alternative statement that the scope of the clause was too narrow to encompass the breach of contract issue, citing Mediterranean Enterprises, Inc., v. Ssangyong Corp., 708 F.2d 1458, 1462-63 (9th Cir.1983). It is unclear whether these statements were based on the language of the Memorandum itself, or on the evidence of the parties’ intent developed during the evidentiary hearing. In any case, since “the issue of arbitrability ‘is to be determined by the contract entered into by the parties,’ [t]he task before this court remains one of contractual interpretation.” Id. at 1463 (quoting Drake Bakeries v. Local 50, Am. Bakery & Confectionery Wkrs. Int’l., 370 U.S. *478 254, 256, 82 S.Ct. 1346, 1348, 8 L.Ed.2d 474 (1962)); accord, A.T. & T. Technologies v. Comm. Workers of America, 475 U.S. 643, 648-49, 106 S.Ct. 1415, 1418-19, 89 L.Ed.2d 648 (1986).

However, because of the presumption of arbitrability established by the Supreme Court, courts must be careful not to overreach and decide the merits of an arbitrable claim. Our role is strictly limited to determining arbitrability and enforcing agreements to arbitrate, leaving the merits of the claim and any defenses to the arbitrator. See Graphic Comm. Union, Dist. Council #2 v. GCIU-Employer Retirement Benefit Plan, 917 F.2d 1184 (9th Cir.1990); Camping Construction Co. v. D.C. Ironwkrs., Local U. #378, 915 F.2d 1333 (9th Cir.1990); Paulson v. Dean Witter Reynolds, Inc., 905 F.2d 1251 (9th Cir.1990); Teledyne, Inc. v. Kone Corp., 892 F.2d 1404, 1410 (9th Cir.1990); Howard Elec. & Mech. v. Briscoe, 754 F.2d 847, 850 (9th Cir.1985). 12

Here, the district court disregarded “the emphatic federal policy in favor of arbitral dispute resolution [which] applies with special force in the field of international commerce.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc., 473 U.S. 614, 631, 105 S.Ct. 3346, 3356, 87 L.Ed.2d 444 (1985); Scherk v. Alberto-Culver Co., 417 U.S. 506, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974); Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15, 92 S.Ct. 1907, 1916, 32 L.Ed.2d 513 (1972); Teledyne, 892 F.2d at 1410. According to the Supreme Court, when international companies commit themselves to arbitrate a dispute, they are in effect attempting to guarantee a forum for any disputes. Such agreements merit great deference, since they operate as both choice-of-forum and choice-of-law provisions, and offer stability and predictability regardless of the vagaries of local law:

“The elimination of all such uncertainties by agreeing in advance on a forum acceptable to both parties is an indispensable element in international trade, commerce, and contracting.”

An agreement to arbitrate before a specified tribunal is, in effect, a specialized kind of forum-selection clause that posits not only the situs of suit but also the procedure to be used in resolving the dispute.

Scherk v. Alberto-Culver Co., 417 U.S. at 518-519, 94 S.Ct. at 2456-2457 (citation omitted). See also Mediterranean, 708 F.2d at 1462-63. 13

The district court also found that the clause’s “lack of specificity” mitigated against its enforcement. However, the clear weight of authority holds that the most minimal indication of the parties’ intent to arbitrate must be given full effect, especially in international disputes. See, e.g. Bauhinia Corp. v. China Nat’l Machinery and Equip. Co., 819 F.2d 247 (9th Cir.1987) (arbitration ordered where contract contained two incomplete and contradictory arbitration clauses); Mediterranean, 708 F.2d at 1462-63 (broadly construing scope of Korean arbitration clause under the Act). 14 Under this analysis, Paragraph IV here was not too vague to be given effect, especially when considered in light of Robert Moore’s letter explaining the ambiguity.

The scope of the clause must also be interpreted liberally:

*479 as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitra tion, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.

Moses H. Co