Opinion ID: 1058557
Heading Depth: 2
Heading Rank: 1

Heading: Arbitration of Claim for Fraudulent Inducement

Text: The FAA applies to a written provision in any maritime transaction or a contract evidencing a transaction involving interstate commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction. 9 U.S.C. § 2 (1994). The purpose of the FAA is to ensure the enforceability, according to their terms, of private agreements to arbitrate. Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 57, 115 S.Ct. 1212, 131 L.Ed.2d 76 (1995) (quoting Volt Info. Sci., Inc. v. Bd. of Tr. of Leland Stanford Junior Univ., 489 U.S. 468, 476, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989)). Generally, arbitration should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute. Doubts should be resolved in favor of coverage. United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582-83, 80 S.Ct. 1347, 4 L.Ed.2d 1409 (1960). As the United States Supreme Court has stated, Arbitration under the [FAA] is a matter of consent, not coercion, and parties are generally free to structure their arbitration agreements as they see fit. Just as they may limit by contract the issues which they will arbitrate, so too may they specify by contract the rules under which that arbitration will be conducted. Volt Info. Sci., Inc., 489 U.S. at 479, 109 S.Ct. 1248 (citations omitted). Therefore, the question becomes what the contract has to say about the arbitrability of petitioner's claim. Mastrobuono, 514 U.S. at 58, 115 S.Ct. 1212; see also Frizzell Const. Co. v. Gatlinburg, L.L.C., 9 S.W.3d 79, 84 (Tenn.1999). In this case, the arbitration clause governs all claims, demands, disputes or controversies of every kind or nature between [the parties] arising from the [sale of the vehicle]. The arbitration clause also states that arbitration shall be conducted pursuant to the provisions of the Federal Arbitration Act, 9 U.S.C. Section 12 et seq. Furthermore, it contains the provision that the parties agree that any question regarding whether a particular controversy is subject to arbitration shall be decided by the arbitrator. When a contract is controlled by the FAA and contains a broad arbitration clause, claims of fraudulent inducement are subject to arbitration. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967). Specifically, the United States Supreme Court held that the language of the FAA does not permit the federal court to consider claims of fraud in the inducement generally. Id. at 404, 87 S.Ct. 1801. Instead, the court may address allegations of fraud only if they are directed to the arbitration clause itself. Id. at 403-04, 87 S.Ct. 1801. In the case under submission, the Court of Appeals found that the claim of fraud in the inducement was not subject to arbitration despite the holding in Prima Paint . The Court of Appeals relied upon City of Blaine v. John Coleman Hayes & Assoc., Inc., 818 S.W.2d 33 (Tenn.Ct.App.1991) and Frizzell, 9 S.W.3d at 85, as well as two unreported cases. In City of Blaine , the Court of Appeals rejected the majority opinion in Prima Paint and held that the issue of fraudulent inducement could not be submitted to arbitration under the Tennessee Uniform Arbitration Act. 818 S.W.2d 33, 37-38 (Tenn. Ct.App.1991). While recognizing that the FAA provides for arbitration of claims of fraud, the Court of Appeals interpreted the Tennessee arbitration statute as requiring judicial determination on the issues of rescission of the contract including fraud in the inducement. Id. Specifically, the Court found that there was no contract to arbitrate if the contract were procured by fraud. Id. at 37. This Court has also held that claims of fraud in the inducement are to be resolved by the courts and not by an arbitrator when the contract is governed by Tennessee law. Frizzell Constr. Co., 9 S.W.3d at 84. In Frizzell , the arbitration clause purported to govern [a]ll claims, disputes and or other matters in questions arising out of, or relating to, this Agreement. Id. at 81. In addition to this arbitration clause, the contract contained a clause stating that Tennessee law would form the basis for deciding questions concerning the contract's scope and interpretations. We held that: By stating that the contract is to be governed by Tennessee law, the parties have indicated their intention to arbitrate all disputes arising out of, or relating to their agreement  but only to the extent allowed by Tennessee law.... Therefore, because Tennessee law contemplates judicial resolution of contract formation issues, we conclude that the parties have indicated their intention not to submit such issues to arbitration. Id. at 85. The case under submission differs from City of Blaine and Frizzell in that both City of Blaine and Frizzell specifically provided that the laws of Tennessee would govern the arbitration of the contract. In contrast, the arbitration agreement in this case clearly states that it is to be governed by the FAA and not the Tennessee Uniform Arbitration Act. This distinction is important considering the long history in the federal courts of allowing arbitration of fraudulent inducement claims under the FAA, see Prima Paint, 388 U.S. at 402-05, 87 S.Ct. 1801, even though Tennessee law prohibits the arbitration of such claims, see Frizzell, 9 S.W.3d at 84. In Frizzell , we stressed that, in deciding whether a claim of fraudulent inducement is subject to arbitration, courts must focus upon the specific terms of the contract at issue. 9 S.W.3d at 84. We held that if the parties agreed to arbitrate the claim of fraudulent inducement, then despite such a prohibition under Tennessee law, the claim must be submitted to arbitration. Id. The converse is equally true  if the parties did not agree to arbitrate the claim of fraudulent inducement, then they could not be compelled to arbitrate the claim despite the fact that the claim could be arbitrated under the FAA. Id. It is undisputed that Taylor signed a contract that specifically stated that all claims, demands, disputes or controversies of every kind or nature between [the parties] arising from the [sale of the vehicle] shall be settled by binding arbitration pursuant to the provisions of the Federal Arbitration Act.  (Emphasis added). Therefore, because Taylor knowingly signed the contract, she agreed to arbitrate a claim of fraudulent inducement.