Court Finds Fraudulent Inducement Claim Insufficient To Avoid Compliance With Arbitration Clause

On December 4, 2024, Justice Joel M. Cohen granted a motion to compel arbitration against a plaintiff despite the plaintiff’s claim that it had been fraudulently induced to enter into the contract containing the arbitration clause. In Selim 730 LLC v. SHVO 730 LLC, et al., Index No. 653193/2024, the plaintiff asserted that the defendants induced it to enter into a 2021 settlement agreement by deliberately misstating the amount of certain ownership interests of a joint investment vehicle that was the subject of a dispute between them. After the plaintiff sued, the defendants submitted to the Court an agreement in which the plaintiff released all its claims concerning the settlement agreement and agreed to arbitrate any claims arising out of it. Although the plaintiff contended that it was fraudulently induced to enter the agreement, the Court granted the defendants’ motion to compel arbitration. It explained:

Plaintiff’s suggestion that raising the specter of fraudulent inducement is sufficient to remove this issue from the arbitrator’s purview is unavailing. “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, or the arbitration clause was inserted into the contract to accomplish a fraudulent scheme.” . . . Here, Plaintiff does not plead that any alleged fraud relates to the parties’ rights to litigate versus arbitrate in the event of a dispute, but instead to Seren-730’s purported ownership interest in Crown730. While Plaintiff argues that it would not have entered into the agreement if it had known the “true” facts regarding Defendants’ ownership interest in the 730 Investment, this is insufficient as it does not relate to the arbitration clause itself.

The attorneys at Schlam Stone & Dolan frequently advise clients concerning arbitration provisions in contracts. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning such issues.