logo

Source: www.nyfraudclaims.com

In my November 29, 2016 post, I explained the standards for nullifying an arbitration provision based upon a claim that a party was induced by fraud to enter into that arbitration agreement.  As set forth in Markowits v Friedman, 144 A.D.3d 993 (2d Dep’t 2016), the analysis is as follows:

“[A] broad arbitration provision is separable from the substantive provisions of a contract such that the agreement to arbitrate is valid even if the substantive provisions of the contract were induced by fraud.” (citations omitted).

The Court continued:

“The issue of fraud in the inducement affects the validity of the arbitration clause only when the fraud relates to the arbitration provision itself, or was part of a grand scheme that permeated the entire contract” [for which the plaintiff] must…“establish[] that the agreement was not the result of an arm’s length negotiation, or the arbitration clause was inserted into the contract to accomplish a fraudulent scheme.” (citations omitted).

Two new decisions in other jurisdictions followed this reasoning.

First Department

In New York Mar. & Gen. Ins. Co. v Jorgensen & Co., 2017 NY Slip Op 05186 (1st Dep’t Decided June 27, 2017), the First Department affirmed the lower court’s decision compelling arbitration, holding:

“The [lower] court correctly determined that the claims asserted against defendant Jorgensen, which plaintiff describes as essentially alleging ‘fraud and intentionally dishonest conduct,’ are subject to arbitration pursuant to the broad arbitration clause in the parties’ Program Management Agreement (see e.g. Szabados v Pepsi-Cola Bottling Co. of N.Y., 174 A.D.2d 342 [1st Dep’t 1991]). The complaint does not allege fraud in the inducement of the arbitration clause or fraud permeating the entire agreement (see Matter of Silverman [Benmor Coats], 61 NY2d 299, 307-308 [1984]).”

Albany County

In Doller v Prescott, 2017 NY Slip Op 50871(U) (Sup. Ct., Albany Co. Decided June 26, 2017), the context was an action instituted by an employee who was an investment banker and financial industry executive against his former employer for breach of their employment agreement.  The employer moved to compel arbitration of the dispute.  The employee tried to avoid arbitration by alleging the agreement was illegal in part and affected by fraud.  The Court rejected these assertions, following the above standards, and citing Second Department case law:

“[Employee] opposes arbitration, claiming that the arbitration clause should not be given effect because the Employment Agreement includes ‘illegal aspects’ insofar as it was the product of defendants’ alleged fraud. ‘Where an agreement consists of an unlawful objective in part and a lawful objective in part, the court may sever the illegal aspect and enforce the legal one, so long as the illegal aspects are incidental to the legal aspects and are not the main objective of the agreement’ (Lanza v Carbone, 130 A.D.3d 692 [2d Dep’t 2015] [internal quotation marks and citation omitted]). In other words, absent proof of ‘a grand scheme to defraud which permeated the entire agreement, including the arbitration provision . . . , a broadly worded arbitration provision will be deemed separate from the substantive contractual provisions, and the agreement to arbitrate may be valid despite the underlying allegation of fraud’ (Riverside Capital Advisors, Inc. v Winchester Global Trust Co. Ltd., 21 AD3d 887, 889 [2d Dep’t 2005] [internal quotation marks and citation omitted]).

Here, [Employee] does not allege that the arbitration clause is itself the product of fraud. Nor is there any allegation ‘that the [Employment] Agreement was not the result of an arm’s length negotiation, or the arbitration clause was inserted into the contract to accomplish a fraudulent scheme’ (Markowits v Friedman, 144 AD3d 993, 997 [2d Dep’t 2016] [internal quotation marks and citation omitted]). Under the circumstances, ‘the arbitration agreement is valid and the claim of fraudulent inducement is for the arbitrator’ to decide (id.).”

The courts continue to adhere to the strict standards, across the New York jurisdictions.