(2014/5775)

Kol Torah is honored to present an important and precedent setting ruling of the Beth Din of America.  We thank Rav Shlomo Weissman, the director of the Beth Din of America, for kindly granting permission to print this ruling.  We hope our publishing this article will help to raise the profile of dispute resolution in proper Batei Din. Last week, we presented the facts of the case and the first part of the discussion. This week, we will conclude with the remainder of the discussion and the decision.

4: Ratification

Even if it could be argued that the Respondent was not initially bound to the Agreement, the Respondent effectively ratified the Agreement through its course of conduct following its execution.  For a significant period following the execution of the Agreement and its implementation, employees of the Respondent communicated with the Claimant about the services he was rendering; furnished documents and other information to the Claimant, which the Claimant used to generate savings for the Respondent; and paid some of the invoices presented by the Claimant.  The Respondent did not repudiate the Agreement at any point during this time.

5: Actual Halachic Authority by Virtue of Spouse’s Ownership

There is a dispute among contemporary Poskim (Jewish legal decisors) as well as secular legal scholars as to who is the owner of a corporation.  John Marshall said, “A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law.”[2]  Shareholders hold shares, which entitle them to certain contractual rights.

There are multiple Halachic perspectives on how to treat a corporation.  One view is that it is a separate legal entity, i.e., the shareholders do not own assets but have a residual claim.  A second one is that it is a partnership, whose “shareholders” own the assets.  A third idea is that shareholders are creditors of the company.  A fourth analysis is a hybrid of the first and second opinions:  sometimes a corporation is regarded as a separate entity and at other times it is treated as if it were a partnership.  In one Teshuvah (responsum), R. Moshe Feinstein held that a corporation is the Halachic equivalent of a partnership, and that shareholders retain title to the company’s assets as partners.[3]  Yet, elsewhere he classifies a corporation as an independent entity separate from its shareholders.[4] R. Feinstein’s outlook on the Halachic nature of corporations appears to depend on the character of the particular corporation.  Where the same persons hold ownership and managerial control, the entity is akin to a partnership, and the shareholders are deemed to own the assets.  Where there is a functional separation of ownership and control, the corporation is its own entity.  One of the owners of Dunkirk and Royal was the wife of JB.  Under a literal application of the Halachic concept that a wife’s assets vest in her husband,[5] the authority of the wife of JB to bind the entities would inure to JB.  Because Dunkirk and Royal are closely-held and, effectively, owner-managed entities, we believe that R. Feinstein would say that they are Halachically classified as partnerships, and that JB had the authority to bind them. 

6: Benefit Received

We note that even under a strict application of halacha without regard for the applicability of secular law or commercial custom in this case, it is possible that the Claimant would be entitled to receive compensation for the value of the work it performed under the Halachic principle of Yoreid LeToch Sdeih Chaveiro Shelo BiRshut (if one enters his the field of his neighbor [and plants in it] without his permission).[6]  Had we issued an award under that theory, we would have had to assess the benefit to the Respondent and what portion of that benefit the Claimant would have been entitled to receive.

Choice of Law

According to clause (d) of Section 3 of the Rules and Procedures of the Beit Din, “[i]n situations where the parties to a dispute explicitly adopt a ‘choice of law’ clause, either in the initial contract or in the arbitration agreement, the Beit Din will accept such a choice of law clause as providing the rules of decision governing the decision of the panel to the fullest extent permitted by Jewish Law.”  Since the Agreement was valid and binding upon the Parties, and contained a New York governing law provision, any substantive disputes arising under it must be resolved according to the laws of the State of New York.

The Savings

The Agreement provides that, “[i]f a course of action suggested by [the Claimant] is substantially implemented and a credit, refund or saving is achieved, [the Respondent] will pay [the Claimant] a performance fee… of Thirty Three and Third Percent (33 1/3%) of all refunds, credits, savings or other benefits recovered for [the Respondent] from prior billings… and 33 1/3% of all credits, savings, reductions or other benefits to [the Respondent’s] taxes, rates and Costs as compared with [the Respondent’s] former taxes, rates and Costs for a period of 30 months from the date the credit savings reductions or other benefits received are first reflected in the Bills.”

The Respondent asserts that certain savings would have been realized even without the efforts of the Claimant.  Were a binding contract not in effect, we would be sympathetic to such an assertion.  The Agreement, however, states that if a course of action suggested by the Claimant is substantially implemented and a credit, refund, or saving is achieved, the Respondent will compensate the Claimant.  As a matter of New York law, contracts are to be interpreted in line with their plain meaning.[7]  The Agreement did not include carve-out language that excluded from compensation savings that ultimately could have been achieved by the Respondent without the intervention of the Claimant.  We are therefore prepared to award compensation to the Claimant based upon the full savings it achieved for the Respondent.

As set forth above, the Parties disagree regarding the baseline from which to calculate the savings, leaving us with two possibilities: an estimate relative to the Posted Rate and one relative to the Firm Rate.  The Agreement does not specify precisely how the savings should be calculated in instances when such savings must be estimated, and here, again, our task is to ascertain the intent of the Agreement based on the plain meaning of the language of the Agreement.  While both methods could be bona fide approaches to estimating the savings, we find the one proposed by the Claimant to be more compelling because it is based upon historical data applicable to the Respondent’s savings, while the one suggested by the Respondent is derived from hypothetical savings to unrelated third parties, whose profile could materially differ from that of the Respondent.  In our view, the Claimant’s methodology offers the simpler and more straightforward path towards calculating the “savings” to which the Agreement refers.

Based on this, the Claimant is entitled to $247,677.63 from Dunkirk.

Dunkirk is entitled to a credit of $4,548.77 relating to overpayments it made for invoices 77-1352, 77-1364, and 77-1376. 

Thus, the net amount that Dunkirk owes to the Claimant is $243,128.86.

The Claimant asserts that Royal owes to it $4,333.22.  In its July 11, 2013 and August 18, 2013 letters to us, the Respondent did not contest the calculations behind such assertion.  Accordingly, Royal owes to the Claimant $4,333.22.

Costs of Proceedings

According to Section 28 of the Rules and Procedures of the Beit Din, “[t]he Beit Din, in its award, may assess arbitration fees and expenses in favor of any party and, in the event any administrative fees or expenses are due the Beit Din, in favor of the Beit Din.”  Fees and expenses are generally paid by the side that incurs such fees, unless it is clear that one side acted improperly such as by initiating frivolous actions.  In this case, we have ruled on some matters in favor of the Claimant and on some matters in favor of the Respondent, thus indicating that the matters brought before us were not frivolous.  Moreover, the Arbitration Agreement gave us the discretion whether to resolve the controversy according to din or Pesharah HaKerovah LaDin.  Thus, had we resolved the case in accordance with din, we would have determined that the Respondent’s liability to the Claimant was less than what we have stated in this decision.  Therefore, each side shall pay its own fees and expenses in connection with these proceedings.

DECISION:

Dunkirk owes to the Claimant $243,128.86, and Royal owes to the Claimant $4,333.22 (the “Amounts”).  The Amounts are due within thirty (30) days of the date hereof, provided, however, that each of Dunkirk and Royal shall be entitled to pay its portion of the Amounts in installments if it notifies the Claimant, in writing within thirty (30) days of the date hereof, that the immediate payment of the Amounts presents a bona fide cash flow problem for it (the “Cash Flow Letter”).  In such case, Dunkirk and Royal, as the case may be, shall pay its portion of the Amounts as soon as it can, but at a minimum in six (6) equal monthly installments, the first due simultaneously with the delivery of the Cash Flow Letter, and each subsequent payment due on the monthly anniversary thereafter.  If Dunkirk or Royal fails to make a timely minimum payment, then the entire remaining balance it owes shall be due immediately and the Claimant may sue in secular court to obtain such outstanding balance.

Each of the Parties must pay its own costs and fees, and neither side is entitled to reimbursement for such costs and fees from the other side.

All other applications and claims are hereby denied.  The obligations set forth herein shall be enforceable in any court of competent jurisdiction, in accordance with the rules and procedures of the Beit Din and the arbitration agreement.  Any request for modification of this award by the arbitration panel shall be in accordance with the rules and procedures of the Beit Din, and the arbitration agreement of the Parties.  Any provision of this decision may be modified with the consent of both Parties.  All of the provisions of this Order shall take effect immediately.

We encourage the parties not to speak negatively of one another with regard to the differences and disputes upon which we have ruled. We wish Berachah VeHatzlachah to the Parties in their endeavors.

[1] http://www.israelnationalnews.com/News/News.aspx/186860

[2] Dartmouth College v. Woodward, 17 U.S. 518 (1819).

[3] R. Moses Feinstein (1895-1986), Igerot Moshe, Choshen Mishpat I, No. 15.

[4] Igerot Moshe, Even HaEzer I, No. 7.

[5] Menachot 93b.

[6] Bava Metzia 101a.

[7] Accurate Realty, LLC v. Donadio, 915 N.Y.S.2d 394 (2011) (“Interpretation of a written agreement requires us to determine the parties’ intent as derived from the language of the instrument, with the words and phrases employed given their plain meaning.”)