Opinion
108296-2009.
Decided January 7, 2010.
McDermott Will Emory, New York City (Andrew B. Kratenstein of counsel), and Brownstein Hyatt Farber Schreck, LLP, Denver (Amy L. Benson of counsel), for Teletech Europe B.V., Plaintiff.
Reed Smith LLP, New York City (Peter D. Raymond and David A. Kochman of counsel), for Essar Services, Mauritius f/k/a/ World Focus, Defendant.
Defendant, in this action by plaintiff for breach of contract and declaratory relief, moves to compel arbitration and dismiss or stay court proceedings pending completion of the arbitration pursuant to CPLR 7503 (a). For the following reasons, defendant's motion is granted.
Background
Plaintiff was the holder of 100% of Customer Solutions Mauritius. Customer Solutions Mauritius owned 60% of TeleTech Services (India) Ltd. (TeleTech India). On November 12, 2007, plaintiff and defendant entered into a Share Transfer Agreement (STA), whereby defendant agreed to acquire plaintiff's 60% share in TeleTech India. The STA required plaintiff-seller to deposit 10% of the purchase price in an escrow account. The escrow fund was to be available to pay certain "excluded liabilities" which remained the responsibility of plaintiff. This included tax liabilities of TeleTech India arising from certain anticipated assessments in India.
On December 18, 2007, plaintiff, defendant, and JP Morgan Chase Bank, N.A. (JP Morgan), entered into an Escrow Agreement, whereby plaintiff deposited $781,749 in escrow with JP Morgan. The funds were to be made available to defendant upon JP Morgan's "receipt from the Parties of a duly executed certificate in substantially the form of Schedule I" (declaration of Agarwal, exhibit B [Escrow Agreement], § 4). On December 1, 2008, defendant sent JP Morgan a Notice of Claim for $1,697,552, and JP Morgan disbursed the escrow funds despite the fact that plaintiff did not join in the request for release.
Schedule I of the Escrow Agreement simply lists the telephone numbers and authorized signatures for persons designated to give transfer instructions without further conditions (declaration of Agarwal, exhibit B [Escrow Agreement], Schedule I).
On June 10, 2009, plaintiff filed a complaint: (1) alleging breach of contract, i.e., the Escrow Agreement, and (2) requesting declaratory relief. Aside from the fact that the funds were released without its consent, plaintiff also alleges that the certification presented by defendant to JP Morgan was insufficient to justify release under the terms of the Escrow Agreement. In particular, plaintiff maintains that the funds could not be withdrawn until a certified assessment was made and the tax became a liability of a sum certain. Defendant counters that a preliminary claim by the India taxing authorities has been made which exceeds the escrow balance and, therefore, the escrow funds were rightfully turned over to defendant. In reply, plaintiff contends that the certification presented was merely for a potential liability, which is far in excess of any final amount likely to be due to the taxing authorities and may well take years to determine. As such, plaintiff alleges that even if the company incurs a fixed tax liability at some point in time, defendant nonetheless withdrew funds from the escrow account prematurely.
Defendant has filed a motion to compel arbitration, pursuant to the STA, which plaintiff opposes. The STA is subject to arbitration in India. The Escrow Agreement, entered into with JP Morgan and the parties five weeks after the STA, does not have an arbitration clause; instead, it specifies New York courts as the appropriate forum.
Discussion
The issue is whether the dispute regarding the withdrawal from the escrow account is governed by the forum selection clause contained in the STA or the clause in the Escrow Agreement. The STA states:
"12.DISPUTE RESOLUTION AND ARBITRATION
12.1The Parties hereby agree that they intend to discharge their obligations in utmost good faith. The Parties therefore agree that they will, at all times, act in good faith, and make all attempts to resolve all differences howsoever arising out of or in connection with this Agreement by discussion failing which, by arbitration [in Mumbai, India]."
(Declaration of Agarwal, exhibit A [STA], § 12.1.)
However, the Escrow Agreement states:
"Each Party irrevocably waives any objection on the grounds of venue, forum non-conveniens or any similar grounds and irrevocably consents to service of process by mail or in any other manner permitted by applicable law and consents to the jurisdiction of the courts located in the State of New York."
( Id., exhibit B [Escrow Agreement], § 13.)
Ultimately, if and when a final tax liability is assessed in India, and if a dispute still exists between the parties about whether the liability is an excluded liability to be paid by plaintiff, the issue of liability will be arbitrated in India. However, the disagreement between the parties at this time is not over the amount of excluded liabilities. That dispute is left for a later date. Instead, the dispute is merely over who holds the money which had been deposited in the escrow account pending final assessment and determination of the amount of excluded liabilities. The question presented to this Court is whether that issue, who is to have custody of the funds pending determination, is to be resolved by a court or in arbitration?
"It is well settled that a party may not be compelled to arbitrate a dispute unless there is evidence which affirmatively establishes that the parties clearly, explicitly, and unequivocally agreed to arbitrate the dispute" ( God's Battalion of Prayer Pentecostal Church, Inc. v Miele Assocs., LLP , 10 AD3d 671, 672 [2d Dept 2003]). "When deciding whether the parties agreed to arbitrate a certain matter," courts generally "should apply ordinary state-law principles that govern the formation of contracts" ( First Options v Kaplan, 514 US 938, 944). "It is for the courts to determine whether the parties agreed to submit their disputes to arbitration, if so, whether the particular dispute comes within the scope of their agreement, and finally whether there has been compliance with any condition precedent to access to the arbitration forum" ( County of Rockland v Primiano Constr. Co., 51 NY2d 1, 5). Thus, CPLR 7503 (a) directs that "where there is no substantial question whether a valid agreement was made or complied with . . . the court shall direct the parties to arbitrate."
Generally, contracts remain "separate unless the history and subject matter show[] them to be unified" ( Ripley v Int'l Railways of Cent. Am., 8 NY2d 430, 483).
"In determining whether contracts are separable or entire, the primary standard is the intent manifested, viewed in the surrounding circumstances" ( Rudman v Cowles Communications, Inc., 30 NY2d 1, 13). For that reason, the Court does not readily assume that the arbitration clause in the STA should prevail over the forum selection clause in the Escrow Agreement. However, "[e]scrow agreements are contracts that ensure performance of prior obligations between parties" ( 99 Commercial St., Inc. v Goldberg, 811 F Supp 900, 906 [SD NY 1993]). "The purpose of an escrow is to assure the carrying out of an obligation already contracted for and in furtherance of the obligation the promisor deposits money, goods, or documents to an escrow agent who agrees to part with it only on a specified condition" ( Natl. Union Fire Ins. Co. v Proskauer Rose Goetz Mendelsohn, 165 Misc 2d 539, 544 [Sup Ct, NY County 1994]).
Here, while the Escrow Agreement contains some language governing the procedure for the release and disbursements of the escrow funds (names of persons authorized to request release and a provision that both parties need to join in the request), it is devoid of terms or substantive conditions which must be met before the funds may be claimed. On the other hand, the STA explicitly provides:
"2.7 The Selling Shareholder shall deposit an amount equal to 10% of the Purchase Price (the " Escrow Amount") for a period of twelve (12) months from the Closing Date (" Escrow Period") into an Escrow Account with a mutually agreed Escrow Agent, which would be adjusted against any Excluded Liabilities and matters as specified in clause 7.7 below. On satisfaction of such Excluded Liabilities or expiry of Escrow Period whichever is earlier, the Escrow Agent shall release the Escrow Amount, if any remaining in the Escrow Account to the Selling Shareholder."
(Declaration of Agarwal, exhibit A [STA], § 2.7.)
Further, the STA provides in detail the circumstances in which defendant may make a claim against the Escrow Account for excluded liabilities. Section 7.7 of the STA states:
"[T]he Selling Shareholder specifically indemnifies and holds harmless the Purchaser and/or TeleTech India against any taxes arising from past and/or new assessments of taxation and/or the re-opening of any tax assessments of the Company and [/] or TeleTech India and any penalties or interest or other statutory charges levied by the Income Tax Department."
( Id., exhibit A [STA], § 7.7.1.)
According to the STA, defendant had no right to withdraw the funds until "satisfaction of . . . Excluded Liabilities" ( id., exhibit A [STA], § 2.7). If that did not occur within one year of the Closing Date (December 18, 2007) ( see email of Kochman, Jan. 7, 2010), the funds were to be returned to plaintiff, who nonetheless remained liable under the indemnification clause if the excluded liabilities were satisfied on a later date.
In sum, the STA contained a bargained-for agreement as to who should hold the funds pending satisfaction of excluded liabilities, including taxes owed in India. The STA, not the Escrow Agreement, sets forth the terms and conditions for release of the funds. The Escrow Agreement was premised on the existence and language in the STA. Indeed, plaintiff admits as much in its Complaint, alleging "Essar was not entitled to the release of the Escrowed Funds because, e.g. it had not provided notice of the demand to TeleTech Europe, as required pursuant to Section 7.7 of the STA, and the Backup Certificate from SR Batliboi Co. failed to certify without qualification that Essar was entitled to receive payment of the Escrowed Funds pursuant to Sections 2.7 and 7.7 of the STA" (Complaint ¶ 21). The intent of the parties as manifested by all the surrounding circumstances was that the Escrow Agreement would be merely a vehicle to carry the STA into effect. For that reason, the documents must be read together and the dispute over whether defendant prematurely claimed the escrow funds is, by agreement of the parties, a matter for arbitration.
Conclusion
For the foregoing reasons, defendant's motion to compel arbitration and stay the action is granted. Accordingly, it is
ORDERED, that the parties are directed to proceed to arbitration in compliance with the procedures set forth in the STA, and to serve a copy of this Decision and Order upon the appropriate arbitral tribunal; and it is further
ORDERED, that the Clerk is directed to enter judgment accordingly.
This constitutes the Decision and Order of the Court.