Diamond Waterproofing Systems, Inc. v. 55 Liberty Owners Corp.

Issue Discussed: Statute of Limitations

Submitted by Elizabeth V. Kniffen, Dennis Anderson

Date Promulgated: March 24, 2005

Diamond Waterproofing Sys., Inc. v. 55 Liberty Owners Corp., 4 N.Y.3d 247, 826 N.E.2d 802 (2005)

Court: Court of Appeals of New York

Issue Decided: When a contract with an arbitration provision states that New York law applies, but does not state specifically that New York law will govern enforcement of the contract, is the issue of timeliness to be decided by the arbitrator or by the court?

In 1995, Diamond Waterproofing Systems, Inc. (“Diamond Systems”) and Liberty Owners Corporation (“Liberty”) contracted for Diamond Systems to reconstruct the façade and roof of a Manhattan building owned by Liberty. Under the contract, they agreed to submit “[a]ny controversy or Claim arising out of or related to the Contract” for arbitration. They also agreed that the contract “shall be governed by the law of the place where the Project is located.”

Diamond Systems completed the work in October of 1996. But inspections conducted after the World Trade Center attacks of September 11, 2001, revealed cracks in the façade that were not present when the project was completed. On September 20, 2002, Liberty served an arbitration demand seeking damages equal to the cost to repair the façade. But Liberty served the demand on Diamond Waterproofing, Inc. (“Diamond Company”), rather than Diamond Systems. Diamond Company, which was not a party to the contract between Liberty and Diamond Systems, petitioned for a permanent stay of arbitration, and the Supreme Court granted the petition.

On February 10, 2003 – six years and four months after completion of the project –  Liberty commenced a new arbitration proceeding naming Diamond Systems as the respondent. Diamond Systems petitioned for a permanent stay, arguing that arbitration was barred by a six-year statute of limitations under New York law. Liberty cross-moved to dismiss Diamond Systems’ petition, arguing that (1) the issue of timeliness was for the arbitrator to decide because the Federal Arbitration Act (“FAA”) applied to the proceeding; and (2) the arbitration demand was timely under the relation-back doctrine.

The Supreme Court granted Diamond Systems’ petition for a permanent stay of arbitration and denied Liberty’s cross motion, reasoning that the FAA did not apply because there was no “substantial nexus” between the project and interstate commerce, and the timeliness issue was, therefore, a matter for the court. The Supreme Court, Appellate Division reversed, denying Diamond Systems’ petition for a permanent stay, granting Liberty’s cross motion, and dismissing the petition. The Appellate Division concluded that the FAA applied to the contract because the project “affected” interstate commerce. The Appellate Division also concluded that under the FAA, timeliness was an issue for the arbitrator, not the courts. Diamond Systems moved for leave to appeal to the Court of Appeals, which granted the motion and accepted the appeal.

As an initial matter, the Court of Appeals held that the FAA applied to the contract. Reviewing U.S. Supreme Court cases, the court held that the FAA applies to transactions that “affect” interstate commerce, and that the state Supreme Court had erred in applying the more demanding “substantial effect on interstate commerce” standard. The court noted that numerous out-of-state entities – designers, engineers, subcontractors and suppliers – were involved in the project, and that the transaction therefore affected interstate commerce.

Turning to the question of whether timeliness should be determined by the arbitrator or the court, the court noted U.S. Supreme Court cases stating that when the FAA applies, it should be presumed that allegations of waiver, delay, and time limits are to be decided by the arbitrator. The court also noted that under New York law, parties agreeing to arbitrate are free to agree that specific issues will be decided by the courts, rather than through arbitration. Then, citing and quoting its earlier decision in Matter of Smith Barney, Harris Upham & Co. v. Luckie, 85 N.Y.2d 193, 623 N.Y.S.2d 800, 647 N.E.2d 1308 (1995), the court stated the following rule:

A choice of law provision, which states that New York law shall govern both “the agreement and its enforcement,” adopts as “binding New York’s rule that threshold Statute of Limitations questions are for the courts.” In the absence of more critical language concerning enforcement, however, all controversies, including issues of timeliness, are subjects for arbitration.

Applying this rule to the language of the contract, the court observed that the parties had agreed to submit “[a]ny controversy or Claim arising out of or related to the Contract” for arbitration. But their choice of law provision provided only that “[t]he Contract shall be governed by the law of the place where the Project is located,” and did not express an intent to have New York law govern enforcement of the agreement. Thus, the court concluded that the timeliness issue was to be determined by the arbitrator, and not by the courts.