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Current Developments in the Commercial Divisions of the
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Posted: June 22, 2015

Arbitration Provision in Contract Allegedly Procured by Fraud Still Enforceable

On June 9, 2015, Justice Demarest of the Kings County Commercial Division issued a decision in Alksom Realty LLC v. Baranik, 2015 NY Slip Op. 50869(U), enforcing an arbitration provision despite claims that the plaintiff was fraudulently induced to enter into the agreement.

In Alksom Realty, the defendants sought to dismiss most of the plaintiff’s claims on the ground that they were subject to arbitration provisions. The plaintiff opposed, arguing that the contracts in which the provisions were found had been procured by fraud. The court denied the motion, explaining:

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. To demonstrate that fraud permeated the entire contract, it must be established that the agreement was not the result of an arm’s length negotiation. In an arm’s length transaction, the parties are typically sophisticated businesspeople, are represented by counsel, and have the opportunity to fully negotiate the terms of the agreement.

Plaintiffs argue that the agreement to purchase stock of SSR was not an arm’s length transaction in that Komolov was not represented by counsel and because both Agreement 1 and Agreement 2 were prepared by Roman in English, which Komolov claims he is not fluent in. Plaintiffs further argue that the entire transaction was a grand scheme to defraud because the plaintiff were fraudulently induced to purchase stock in a corporation that was no longer active and did no business, rendering the Arbitration Clause invalid. However, plaintiff does not dispute that he signed both Agreement 1 and Agreement 2. An arbitration clause is generally separable from substantive provisions of a contract, so that an agreement to arbitrate is valid even if the substantive provisions of the contract are induced by fraud. Thus, as a general rule, the issue of fraud in the inducement should be determined by the arbitrator. Here, although plaintiffs allege fraud in the inducement, there is no allegation that the arbitration clause itself was induced by fraud. The language of the arbitration clause is broad and does not specifically exclude fraud in the inducement from the issues to be determined by arbitration. Therefore, the arbitration clause should be enforced and plaintiffs are directed to submit the first through twelfth causes of action to arbitration.

(Internal quotations and citations omitted).

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