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Current Developments in the Commercial Divisions of the
New York State Courts
Posted: June 2, 2018

Plaintiff Cannot Avoid Arbitration Absent Allegations of Fraud Relating Specifically to Inclusion of Arbitration Clause

On May 25, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Curtis v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 2018 NY Slip Op. 31011(U), holding that a plaintiff could not avoid the effect of an arbitration clause without showing that the clause, not just the contract in which it was contained, was a result of fraud, explaining:

Turning to plaintiffs’ fraud-based arguments, all parties acknowledge that, under the doctrine of separability, plaintiffs’ allegations of fraud will not defeat the arbitration provisions in question unless the alleged fraud either goes to the arbitration provision itself or was part of a grand scheme that permeated the entire contract including the arbitration provision. With respect. to the latter, 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. Plaintiffs do not dispute that the agreements were a result of an arm’s length negotiation, thus their argument that fraud permeated the entire agreements reduces to an argument that the arbitration clauses were inserted into the agreements to accomplish the purported fraudulent scheme.

Plaintiffs’ argument that the fraud went to the arbitration provision itself contravenes the allegations of the complaint, which relate to inducement to contract generally. Additionally, although plaintiffs argue the arbitration clauses will help defendant conceal its fraudulent scheme from the eyes of the public, and thus aid defendant in repeating this scheme, plaintiffs have made no allegations that the arbitration clauses were inserted in the contract to help accomplish the fraudulent scheme alleged in the complaint – that is, the fraudulent scheme perpetrated against them. Plaintiffs have cited no case in which a court found that the potential use of an arbitration clause in the ex post cover-up of a fraudulent scheme is sufficient to find that the arbitration clause was inserted into the contract to accomplish a fraudulent scheme. Indeed, if such an argument were sufficient, it would be difficult to imagine a scenario in which an allegation of fraud did not render an arbitration clause unenforceable.

(Internal quotations and citations omitted).

This decision illustrates the general rule that dispute resolution provisions in a contract, such as a waiver of a right to a jury trial or a requirement that a dispute be arbitrated, will be enforced even when there is a claim for breach of the contract or that the plaintiff was induced to enter into the contract (but not the dispute resolution provision itself) by fraud. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the enforceability of a contractual dispute resolution provision.

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