Volt Info. Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. U.

Justice Brennan,

with whom Justice Marshall joins, dissenting.

The litigants in this case were parties to a construction contract which contained a clause obligating them to arbitrate disputes and making that obligation specifically enforceable. The contract also incorporated provisions of a standard form contract prepared by the American Institute of Architects and endorsed by the Associated General Contractors of America; among these general provisions was §7.1.1: “The *480Contract shall be governed by the law of the place where the Project is located.”1 When a dispute arose between the parties, Volt invoked the arbitration clause, while Stanford attempted to avoid it (apparently because the dispute also involved two other contractors with whom Stanford had no arbitration agreements).

The Federal Arbitration Act (FAA), 9 U. S. C. § 1 et seq., requires courts to enforce arbitration agreements in contracts involving interstate commerce. See ante, at 474. The California courts nonetheless rejected Volt’s petition to compel arbitration in reliance on a provision of state law that, in the circumstances presented, permitted a court to stay arbitration pending the conclusion of related litigation. Volt, not surprisingly, suggested that the Supremacy Clause compelled a different result. The California Court of Appeal found, however, that the parties had agreed that their contract would be governed solely by the law of the State of California, to the exclusion of federal law.2 In reaching this *481conclusion the court relied on no extrinsic evidence of the parties’ intent, but solely on the language of the form contract that the “ ‘law of the place where the project is located’ ” would govern. App. 66-67.3

This Court now declines to review that holding, which denies effect to an important federal statute, apparently because it finds no question of federal law involved. I can accept neither the state court’s unusual interpretation of the parties’ contract, nor this Court’s unwillingness to review it. I would reverse the judgment of the California Court of Appeal.4

I

Contrary to the Court’s view, the state court’s construction of the choice-of-law clause is reviewable for two independent ■ reasons.

A

The Court’s decision not to review the state court’s interpretation of the choice-of-law clause appears to be based on the principle that “the interpretation of private contracts is ordinarily a question of state law, which this Court does *482not sit to review.” Ante, at 474. I have no quarrel with the general proposition that the interpretation of contracts is a matter of state law. By ending its analysis at that level of generality, however, the Court overlooks well-established precedent to the effect that, in order to guard against arbitrary denials of federal claims, a state court’s construction of a contract in such a way as to preclude enforcement of a federal right is not immune from review in this Court as to its “adequacy.”

Many of our cases that so hold involve, understandably enough, claims under the Contract Clause. In Appleby v. City of New York, 271 U. S. 364 (1926), for example, petitioners alleged that the city had unconstitutionally impaired their rights contained in a contract deeding them certain submerged lands in the city harbor. Chief Justice Taft stated the issue for the Court as follows:

“The questions we have here to determine are, first, was there a contract, second, what was its proper construction and effect, and, third, was its obligation impaired by subsequent legislation as enforced by the state court? These questions we must answer independently of the conclusion of [the state] court. Of course we should give all proper weight to its judgment, but we can not perform our duty to enforce the guaranty of the Federal Constitution as to the inviolability of contracts by state legislative action unless we give the questions independent consideration.” Id., at 379-380.

Similarly, in Indiana ex rel. Anderson v. Brand, 303 U. S. 95 (1938), the question was whether the State’s repeal of a teacher tenure law had impaired petitioner’s contract of employment. We reversed the judgment of the State Supreme Court, notwithstanding that it rested on the state ground that petitioner had had no contractual right to continued employment: “On such a question, one primarily of state law, we accord respectful consideration and great weight to the views of the State’s highest court but, in order that the constitu*483tional mandate may not become a dead letter, we are bound to decide for ourselves whether a contract was made, what are its terms and conditions, and whether the State has, by later legislation, impaired its obligation.” Id., at 100. See also Phelps v. Board of Education of West New York, 300 U. S. 319, 322-323 (1937); Irving Trust Co. v. Day, 314 U. S. 556, 561 (1942).

The issue has not arisen solely in cases brought under the Contract Clause. Memphis Gas Co. v. Beeler, 315 U. S. 649 (1942), was a Commerce Clause case where appellant’s constitutional challenge to a state tax was dependent on a particular interpretation of a contract under which appellant operated. While we sustained the Tennessee court’s construction of that contract (and thus did not reach the federal issue), we emphasized that the “meaning and effect of the contract” were “local questions conclusively settled by the decision of the state court save only as this Court, in the performance of its duty to safeguard an asserted constitutional right, may inquire whether the decision of the state question rests upon a fair or substantial basis.” Id., at 654.

Indeed, our ability to review state-law decisions in such circumstances is not limited to the interpretation of contracts. In Rogers v. Alabama, 192 U. S. 226 (1904), we noted the

“necessary and well settled rule that the exercise of jurisdiction by this court to protect constitutional rights cannot be declined when it is plain that the fair result of a decision is to deny the rights. It is well known that this court will decide for itself whether a contract was made as well as whether the obligation of the contract has been impaired. But that is merely an illustration of a more general rule.” Id., at 230 (citation omitted).

We accordingly reversed the state court’s dismissal, on grounds of “prolixity,” of petitioner’s motion to quash an *484indictment returned against him by a grand jury from which all blacks had been excluded.5

While in this case the federal right at issue is a statutory, not a constitutional, one, the principle under which we review the antecedent question of state law is the same. Where “the existence or the application of a federal right turns on a logically antecedent finding on a matter of state law, it is essential to the Court’s performance of its function that it exercise an ancillary jurisdiction to consider the state question. Federal rights could otherwise be nullified by the manipulation of state law.” Wechsler, The Appellate Jurisdiction of the Supreme Court: Reflections on the Law and the Logistics of Direct Review, 34 Wash. & Lee L. Rev. 1043, 1052 (1977). See also Hill, The Inadequate State Ground, 65 Colum. L. Rev. 943 (1965).

No less than in the cited cases, the right of the instant parties to have their arbitration agreement enforced pursuant to the FAA could readily be circumvented by a state-court construction of their contract as having intended to exclude the applicability of federal law. It is therefore essential that, while according due deference to the decision of the state court, we independently determine whether we “clearly would have judged the issue differently if [we] were the state’s highest court.” Wechsler, supra, at 1052.6

*485B

Arbitration is, of course, “a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” Steelworkers v. Warrior & Gulf Co., 363 U. S. 574, 582 (1960). I agree with the Court that “the FAA does not require parties to arbitrate when they have not agreed to do so.” Ante, at 478. Since the FAA merely requires enforcement of what the parties have agreed to, moreover, they are free if they wish to write an agreement to arbitrate outside the coverage of the FAA. Such an agreement would permit a state rule, otherwise preempted by the FAA, to govern their arbitration. The substantive question in this case is whether or not they have done so. And that question, we have made clear in the past, is a matter of federal law.

Not only does the FAA require the enforcement of arbitration agreements, but we have held that it also establishes substantive federal law that must be consulted in determining whether (or to what extent) a given contract provides for arbitration. We have stated this most clearly in Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U. S. 1, 24-25 (1983):

“Section 2 [of the FAA] is a congressional declaration of a liberal federal policy favoring arbitration agreements, *486notwithstanding any state substantive or procedural policies to the contrary. The effect of the section is to create a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act. . . . [T]he Courts of Appeals have . . . consistently concluded that questions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration. We agree. The Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, 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.”

More recently, in Mitsubishi Motors Corp. v. Soler ChryslerPlymouth, Inc., 473 U. S. 614 (1985), we stated that a court should determine whether the parties agreed to arbitrate a dispute “by applying the ‘federal substantive law of arbi-trability.’” Id., at 626, quoting Moses H. Cone, supra, at 24. See also Southland Corp. v. Keating, 465 U. S. 1 (1984).

The Court recognizes the relevance of the Moses H. Cone principle but finds it unoffended by the Court of Appeal’s decision, which, the Court suggests, merely determines what set of procedural rules will apply. Ante, at 476.7 I agree fully with the Court that “the federal policy is simply to ensure the enforceability, according to their terms, of private agreements to arbitrate,” ibid., but I disagree emphatically *487with its conclusion that that policy is not frustrated here. Applying the California procedural rule, which stays arbitration while litigation of the same issue goes forward, means simply that the parties’ dispute will be litigated rather than arbitrated. Thus, interpreting the parties’ agreement to say that the California procedural rules apply rather than the FAA, where the parties arguably had no such intent, implicates the Moses H. Cone principle no less than would an interpretation of the parties’ contract that erroneously denied the existence of an agreement to arbitrate.8

While appearing to recognize that the state court’s interpretation of the contract does raise a question of federal law, the Court nonetheless refuses to determine whether the state court misconstrued that agreement. There is no warrant for failing to do so. The FAA requires that a court determining a question of arbitrability not stop with the application of state-law rules for construing the parties’ intentions, but that it also take account of the command of federal law that “those intentions [be] generously construed as to issues of arbitra-bility.” Mitsubishi Motors, supra, at 626. Thus, the decision below is based on both state and federal law, which are thoroughly intertwined. In such circumstances the state-court judgment cannot be said to rest on an “adequate and independent state ground” so as to bar review by this Court. See Enterprise Irrigation Dist. v. Farmers Mutual Canal Co., 243 U. S. 157, 164 (1917) (“But where the non-federal *488ground is so interwoven with the other as not to be an independent matter . . . our jurisdiction is plain”). With a proper application of federal law in this case, the state court’s judgment might have been different, and our review is therefore not barred. Cf. Ake v. Oklahoma, 470 U. S. 68, 74-75 (1985) (“[W]hen resolution of the state procedfiral law question depends on a federal constitutional ruling, the state-law prong of the court’s holding is not independent of federal law, and our jurisdiction is not precluded”).

II

Construed with deference to the opinion of the California Court of Appeal, yet “with a healthy regard for the federal policy favoring arbitration,” Moses H. Cone, 460 U. S., at 24, it is clear that the choice-of-law clause cannot bear the interpretation the California court assigned to it.

Construction of a contractual provision is, of course, a matter of discerning the parties’ intent. It is important to recall, in the first place, that in this case there is no extrinsic evidence of their intent. We must therefore rely on the contract itself. But the provision of the contract at issue here was not one that these parties drafted themselves. Rather, they incorporated portions of a standard form contract commonly used in the construction industry. That makes it most unlikely that their intent was in any way at variance with the purposes for which choice-of-law clauses are commonly written and the manner in which they are generally interpreted.

It seems to me beyond dispute that the normal purpose of such choice-of-law clauses is to determine that the law of one State rather than that of another State will be applicable; they simply do not speak to any interaction between state and federal law. A cursory glance at standard conflicts texts confirms this observation: they contain no reference at all to the relation between federal and state law in their discussions of contractual choice-of-law clauses. See, e. g., *489R. Weintraub, Commentary on the Conflict of Laws § 7.3C (2d ed. 1980); E. Scoles & P. Hay, Conflict of Laws 632-652 (1982); R. Leflar, L. McDougal, & R. Felix, American Conflicts Law § 147 (4th ed. 1986). The same is true of standard codifications. See Uniform Commercial Code § 1-105(1) (1978); Restatement (Second) of Conflict of Laws § 187 (1971). Indeed the Restatement of Conflicts notes expressly that it does not deal with “the ever-present problem of determining the respective spheres of authority of the law and courts of the nation and of the member States.” Id., § 2, Comment c. Decisions of this Court fully bear out the impression that choice-of-law clauses do not speak to any state-federal issue. On at least two occasions we have been called upon to determine the applicability vel non of the FAA to contracts containing choice-of-law clauses similar to that at issue here. Despite adverting to the choice-of-law clauses in other contexts in our opinions, we ascribed no significance whatever to them in connection with the applicability of the FAA. Scherk v. Alberto-Culver Co., 417 U. S. 506 (1974); Bernhardt v. Polygraphic Co., 350 U. S. 198 (1956).9 The great weight of lower court authority similarly rejects the notion that a choice-of-law clause renders the FAA inapplicable.10 *490Choice-of-law clauses simply have never been used for the purpose of dealing with the relationship between state and federal law. There is no basis whatever for believing that the parties in this case intended their choice-of-law clause to do so.

Moreover, the literal language of the contract — “the law of the place” — gives no indication of any intention to apply only state law and exclude other law that would normally be applicable to something taking place at that location. By settled principles of federal supremacy, the law of any place in the United States includes federal law. See Claflin v. Houseman, 93 U. S. 130, 136 (1876); Hauenstein v. Lynham, 100 U. S. 483, 490 (1880) (“[T]he Constitution, laws, and treaties of the United States are as much a part of the law of every State as its own local laws and Constitution”). As the dissenting judge below noted, “under California law, federal law governs matters cognizable in California courts upon which the United States has definitively spoken.” App. 82 (opinion *491of Capaccioli, J.). Thus, “the mere choice of California law is not a selection of California law over federal law . . . Id., at 84. In the absence of any evidence to the contrary it must be assumed that this is what the parties meant by “the law of the place where the Project is located.”

Indeed, this is precisely what we said when we once previously confronted virtually the same question. In Fidelity Federal Savings & Loan Assn. v. De la Cuesta, 458 U. S. 141 (1982), a contract provision stated: “This Deed of Trust shall be governed by the law of the jurisdiction in which the Property is located.” Id., at 148, n. 5. Rejecting the contention that the parties thereby had agreed to be bound solely by local law, we held: “Paragraph 15 provides that the deed is to be governed by the ‘law of the jurisdiction’ in which the property is located; but the ‘law of the jurisdiction’ includes federal as well as state law.” Id., at 157, n. 12. We should similarly conclude here that the choice-of-law clause was not intended to make federal law inapplicable to this contract.

Ill

Most commercial contracts written in this country contain choice-of-law clauses, similar to the one in the Stanford-Volt contract, specifying which State’s law is to govern the interpretation of the contract. See Scoles & Hay, Conflict oí Laws, at 632-633 (“Party autonomy means that the parties are free to select the law governing their contract, subject, to certain limitations. They will usually do so by means oí an express choice-of-law clause in their written contract”). Were every state court to construe such clauses as an expression of the parties’ intent to exclude the application of federal law, as has the California Court of Appeal in this case, the result would be to render the Federal Arbitration Act a virtual nullity as to presently existing contracts. I cannot believe that the parties to contracts intend such consequences to flow from their insertion of a standard choice-of-law *492clause. Even less can I agree that we are powerless to review decisions of state courts that effectively nullify a vital piece of federal legislation. I respectfully dissent.

American Institute of Architects Document A201, General Conditions of the Contract for Construction §7.1.1 (1976). See App. 40.

The California Court of Appeal correctly assumed that the FAA, were it applicable, would pre-empt the provisions of Cal. Civ. Proc. Code Ann. § 1281.2(c) (West 1982): “[I]t is apparent that were the federal rules to apply, Volt’s petition to compel arbitration would have to be granted.” App. 65.

Stanford nonetheless attempts to cast doubt on this conclusion by arguing that §§ 3 and 4 of the FAA, which provide for court orders to stay litigation and to compel arbitration, are not applicable in state court. Brief for Appellee 43-50. While we have stated that “state courts, as much as federal courts, are obliged to grant stays of litigation under § 3 of the Arbitration Act,” Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U. S. 1, 26 (1983); see also id., at 26, nn. 34-35, it is immaterial to the resolution of this case whether §§ 3 and 4 actually “apply.” The parties here not only agreed to arbitrate, but they also agreed that that agreement would be specifically enforceable. See ante, at 470, n. 1. FAA § 2 — which indisputably does apply in state court, Southland Corp. v. Keating. 465 U. S. 1 (1984) — requires the court to enforce the parties’ agreement. (Indeed, Southland Corp. can be read to stand for the proposition that §2 makes all arbitration agreements specifically enforceable. See *481id., at 31, and n. 20 (O’Connor, J., dissenting).) To stay the arbitration proceedings pending litigation of the same issues, as § 1281.2(c) provides, is not compatible with specific enforcement of the agreement to arbitrate— which is what the FAA requires here. Section 1281.2(c) therefore cannot be given effect unless — as the California Court of Appeal held — the parties somehow agreed that federal law was to play no role in governing their contract.

The court held that “the word ‘place’ was intended to mean the forum state.” App. 66. It added: “We do not find reasonable Volt’s interpretation that the ‘place’ where the project is located be construed to mean not only the state of California but also the nation of the United States of America.” Id., at 67.

I do not disagree with the Court’s holding, ante, at 477-479, that the FAA does not pre-empt state arbitration rules, even as applied to contracts involving interstate commerce, when the parties have agreed to arbitrate by those rules to the exclusion of federal arbitration law. I would not reach that question, however, because I conclude that the parties have made no such agreement.

As in Rogers, we have frequently declined to be bound by state procedural rulings that would have prevented us from reaching the federal issue. See, e. g., Davis v. Wechsler, 263 U. S. 22, 24 (1923); Brown v. Western R. Co. of Ala., 338 U. S. 294, 295-297 (1949); NAACP v. Alabama ex rel. Patterson, 357 U. S. 449, 454-458 (1958); James v. Kentucky, 466 U. S. 341, 348-349 (1984). While in recent years we may have been more willing to examine state procedural rulings, see e. g., Henry v. Mississippi, 379 U. S. 443 (1965), one study of our cases has concluded that we have historically shown less deference to state substantive decisions on ancillary questions than to similar procedural decisions. Hill, The Inadequate State Ground, 65 Colum. L. Rev. 943, 991 (1965); cf. Davis, supra, at 25.

While the principle of independent review by this Court of the adequacy of the state court’s ruling is clear, the proper standard for such *485review poses a more difficult question. Indeed, our cases have employed a wide range of standards, ranging from de novo review, e. g., Appleby v. City of New York, 271 U. S. 364, 380 (1926) (“fW]e must give our own judgment . . . and not accept the present conclusion of the state court without inquiry”), to inquiring whether the state judgment rested on a “fair or substantial basis,” Memphis Gas Co. v. Beeler, 315 U. S. 649, 654 (1942); Demorest v. City Bank Co., 321 U. S. 36, 42 (1944), to determining whether the state court’s decision was "palpably erroneous,” Phelps v. Board of Education of West New York, 300 U. S. 319, 323 (1937). I have no doubt that the proper standard of review is a narrow one, but I see no need for purposes of the present case to settle on a precise formulation. As will appear below, the state court’s construction of the choice-of-law clause cannot be sustained regardless of the standard employed.

Some of the Court’s language might be read to suggest that the Moses H. Cone principle applies only to construction of the arbitration clause itself. Ante, at 476 (“[AJmbiguities as to the scope of the arbitration clause itself [must be] resolved in favor of arbitration”). Such a reading is flatly contradicted by Moses H. Cone. In language the Court omits from its quotation, ante, at 475, we made clear that the liberal rule of construction in favor of arbitrability applies “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. Cone Memorial Hospital, 460 U. S., at 25.

Whether or not “the California arbitration rules . . . generally foster the federal policy favoring arbitration,” ante, at 476, n. 5, is not the relevant question. Section 2 of the FAA requires courts to enforce agreements to arbitrate, and in Moses H. Cone we held that doubts as to whether the parties had so agreed were to be resolved in favor of arbitration. Whether California’s arbitration rules are more likely than federal law to foster arbitration, i. e., to induce parties to agree to arbitrate disputes, is another matter entirely. On that question it is up to Congress, not this Court, to “fashio[n] a legislative response,” ante, at 476, n. 5, and in the meantime we are not free to substitute our notions of good policy for federal law as currently written.

In Scherk, the contract contained the following clause: “The laws of the State of Illinois, U. S. A. shall apply to and govern this agreement, its interpretation and performance.” 417 U. S., at 509, n. 1. Despite discussing the effect of that clause in a different context, id., at 519, n. 13, we did not consider the possibility that the FAA might not apply because of the parties’ choice of the law of Illinois. Similarly, in Bernhardt the contract provided for arbitration under New York law. While we recognized a choice-of-law problem as to whether New York or Vermont law was applicable, 350 U. S., at 205, we resolved the question of arbitrability under the FAA without any reference to the choice-of-law clause.

See, e. g., Huber, Hunt & Nichols, Inc. v. Architectural Stone Co., 625 F. 2d 22, 25-26, n. 8 (CA5 1980); Commonwealth Edison Co. v. Gulf Oil Corp., 541 F. 2d 1263, 1268-1271 (CA7 1976); Burke County Public Schools Board of Education v. The Shaver Partnership, 303 N. C. 408, 420-424, 279 S. E. 2d 816, 823-825 (1981); Episcopal Housing Corp. v. Federal Ins. Co., 269 S. C. 631, 637, n. 1, 239 S. E. 2d 647, 650, n. 1 *490(1977); Tennessee River Pulp & Paper Co. v. Eichleay Corp., 637 S. W. 2d 853, 857-858 (Tenn. 1982); Mamlin v. Susan Thomas, Inc., 490 S. W. 2d 634, 636-637 (Tex. Civ. App. 1973); see also Liddington v. The Energy Group, Inc., 192 Cal. App. 3d 1520, 238 Cal. Rptr. 202 (1987) (reversing trial court ruling that had applied § 1281.2(c) rather than the FAA because choice-of-law clause specified contract would be construed under California law). But see Garden Grove Community Church v. Pittsburgh-Des Moines Steel Co., 140 Cal. App. 3d 251, 262, 191 Cal. Rptr. 15, 20 (1983); Standard Co. of New Orleans, Inc. v. Elliott Construction Co., 363 So. 2d 671, 677 (La. 1978).

Stanford contends that because the Garden Grove decision antedated the conclusion of the present contract, it must have informed the language the parties used. Brief for Appellee 31-32; Tr. of Oral Arg. 35. This argument might have greater force if the clause had been one the parties actually negotiated, rather than one they incorporated from an industry-wide form contract. In any case it is impossible to believe that, had they actually intended that a result so foreign to the normal purpose of choice-of-law clauses flow from their agreement, they would have failed to say so explicitly.