Opinion ID: 779436
Heading Depth: 2
Heading Rank: 2

Heading: Whether ACE's Fraudulent Inducement Claim Is Within the Scope of the Arbitration Clause

Text: 16 It is well settled that a claim or defense of fraudulent inducement, when it challenges generally the enforceability of a contract containing an arbitration clause rather than specifically the arbitration clause itself, may be subject to arbitration. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967) ([I]f the claim is fraud in the inducement of the arbitration clause itself—an issue which goes to the `making' of the agreement to arbitrate—the federal court may proceed to adjudicate it. But the statutory language [of the FAA] does not permit the federal court to consider claims of fraud in the inducement of the contract generally.). This is true because arbitration clauses as a matter of federal law are `separable' from the contracts in which they are embedded, and ... where no claim is made that fraud was directed to the arbitration clause itself, a broad arbitration clause will be held to encompass arbitration of the claim that the contract itself was induced by fraud. Id. at 402, 87 S.Ct. 1801. 17 We recently explained Prima Paint 's doctrine of severability: 18 If a party alleges that a contract is void and provides some evidence in support, then the party need not specifically allege that the arbitration clause in that contract is void, and the party is entitled to a trial on the arbitrability issue pursuant to 9 U.S.C.A. § 4.... However, under the rule of Prima Paint, if a party merely alleges that a contract is voidable, then, for the party to receive a trial on the validity of the arbitration clause, the party must specifically allege that the arbitration clause is itself voidable. 19 Sphere Drake Ins. Ltd. v. Clarendon Nat'l Ins. Co., 263 F.3d 26, 32 (2d Cir.2001). In the present case, ACE offers no evidence that the Agreement is void. Indeed, by consistently arguing that the Agreement should be rescinded on the basis of fraud, ACE has conceded that the Agreement is, at most, voidable. See id. at 31 (A void contract is one that produces no legal obligation.... Unlike a void contract, a voidable contract is an agreement that `[u]nless rescinded ... imposes on the parties the same obligations as if it were not voidable.' (quoting Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts § 1:20, at 50 (4th ed.1990))). Moreover, ACE has never contended that CUL's alleged fraud was directed specifically to the arbitration clause, but instead has argued that the entire Agreement was fraudulently induced. Thus, ACE's claim of fraudulent inducement is not on its face precluded from arbitration. 20 The question that remains is whether the arbitration clause at issue is broad enough to encompass ACE's fraud claim. See generally Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc., 252 F.3d 218, 224-27 (2d Cir.), cert. denied, ___ U.S. ___, 122 S.Ct. 546, 151 L.Ed.2d 423 (2001). We conclude that the district court erred in ruling that the arbitration clause is not broad and that ACE's fraud claim is not arbitrable. The district court reached this result by ignoring more recent decisions of this Court that, taken together, compel the conclusion that the arbitration clause at issue is broad and by relying on distinguishable Second Circuit case law. 21 This Court in Hartford Accident addressed whether two differently worded arbitration clauses were broad enough to accommodate environmental pollution disputes that had arisen between an insurer and a reinsurer. 246 F.3d at 226-27. The first clause (Clause I) read, in pertinent part: [I]n the event of any difference arising between the contracting parties it shall be submitted to arbitration.... Id. at 223. The second clause (Clause II) was very similar to the one at issue in the present case: [I]f any dispute shall arise between [insurer] and [reinsurer] with reference to the interpretation of this Agreement or their rights with respect to any transaction involved, ... such dispute, upon the written request of either party, shall be submitted to [arbitration].... Id. This Court concluded that both clauses had a broad scope. Id. at 224. 22 The Court reasoned that, while Clause I was unquestionably sufficiently broad to encompass the disputed claims, Clause II also encompassed the disputes, even though it contained a measure of ambiguity in its phrasing. Id. at 226-27. Disagreeing with the district court's conclusion that Clause II limited the scope of arbitration to individual transactions, this Court offered the following analysis: 23 The district court's one-sentence explanation that the limitation of the arbitration to disputes particular to specific pending claims is made more explicit [in Clause II] is unavailing. By made more explicit, the district court must have read the phrase with respect to any transaction to modify both the interpretation of this Agreement and their rights. This construction seems less natural than reading the prepositional phrase to modify only the phrase their rights. Nevertheless, assuming both constructions to be reasonable, we are required to resolve this ambiguity in favor of arbitration. 24 Id. at 227 (internal citations omitted). In short, based on a natural reading and given the presumption in favor of arbitrability, the Hartford Accident Court read the phrase rights with respect to any transaction involved to constitute broad arbitration language. Accord Quackenbush v. Allstate Ins. Co., 121 F.3d 1372, 1380 (9th Cir.1997) (finding the clause, if any dispute shall arise between [Mission] and [Allstate] with reference to the interpretation of this Agreement or their rights with respect to any transaction involved ... such dispute shall be submitted to [arbitration], to be broad in scope, calling for arbitration of all contractual disputes (alteration in original)). 2 25 The arbitration provision in the present case also contains the preamble, As a condition precedent to any right of action hereunder. Relying heavily on this phrase, ACE argues that the word hereunder renders the arbitration clause distinguishable from Hartford Acccident 's Clause II because it limits the scope of the clause to disputes arising under the contract and therefore excludes disputes over fraudulent inducement or termination—issues that are arguably pre- and post-contract formation. 26 We are not persuaded. We begin by noting that Hartford Accident 's Clause II actually included a prefatory phrase nearly identical to the one in the present case. 3 In quoting and discussing Clause II, however, both this Court and the district court omitted any reference to the preamble. Hartford Accident, 246 F.3d at 223; Hartford Accident & Indem. Co. v. Swiss Reinsurance Am. Corp., 87 F.Supp.2d 300, 302 (S.D.N.Y.2000). 4 Moreover, by its terms, the prefatory clause does not limit the scope of the arbitration clause but rather establishes a limitation on when a judicial action may be brought under the Agreement. 27 Even if the word hereunder in the preamble were relevant to the scope of the provision in the present case, we have not automatically construed as narrow arbitration clauses containing such phrases as under the agreement or hereunder. In S.A. Mineracao da Trindade-Samitri v. Utah International, Inc., 745 F.2d 190 (2d Cir.1984), for example, this Court considered the scope of an arbitration clause that read, in pertinent part: Whenever any question or dispute shall arise or occur under this [Agreement/Contract], such question or dispute shall ... be finally settled by arbitration in Paris, France.... Id. at 192 (first alteration in original). Noting that [u]nless excluded, claims of fraud in the inducement of a contract are arbitrable, this Court held that the clause cover[ed][the] claims of fraudulent inducement at issue. Id. at 195. 5 28 The district court relied principally on Michele Amoruso, 499 F.Supp. at 1074 (citing Kinoshita, 287 F.2d at 951), in concluding that the arbitration clause at issue is not `a broad clause applicable to all claims under the agreement' and that a panoply of other potential disputes are excluded from coverage. ACE Capital, 2001 WL 1415080, at  3. In Michele Amoruso, the district court held that an arbitration clause referring to disputes arising out of this Agreement was not broad, because it did not include any reference to disputes relating to the agreement. 6 499 F.Supp. at 1080. Michele Amoruso, however, is inconsistent with this Court's decision in Louis Dreyfus Negoce, which held that the phrase arising from, as opposed to arising under, in an arbitration clause suggests a broad scope. 252 F.3d at 226-27. 29 Michele Amoruso is also suspect for the still more compelling reason that it relied in turn almost exclusively on Kinoshita, in which this Court held that the phrase arise under [this agreement] in an arbitration clause renders the clause a narrow one if unaccompanied by an expansive phrase such as relating to. Kinoshita, 287 F.2d at 953. On the basis of this reasoning, the Kinoshita Court held that where the clause restricts arbitration to disputes and controversies relating to the interpretation of the contract and matters of performance, [f]raud in the inducement is not included. Id. The arbitration clause in this case is considerably different from the one in Kinoshita. 7 30 More importantly, Kinoshita, which was decided before the Supreme Court's more recent decisions emphasizing the strong federal policy in favor of arbitration, has frequently been criticized in this Circuit, 8 and no decision of recent vintage mentions the case without confining it to its precise facts. See, e.g., Louis Dreyfus Negoce, 252 F.3d at 225 (We have ... since limited [ Kinoshita 's] holding to its facts, declaring that absent further limitation, only the precise language in Kinoshita [arising under] would evince a narrow clause.); S.A. Mineracao, 745 F.2d at 194 (We decline to overrule In re Kinoshita, despite its inconsistency with federal policy favoring arbitration, particularly in international business disputes, because we are concerned that contracting parties may have (in theory at least) relied on that case in their formulation of an arbitration provision. We see no reason, however, why we may not confine Kinoshita to its precise facts.); St. Paul Fire & Marine Ins. Co. v. Employers Reinsurance Corp., 919 F.Supp. 133, 135 (S.D.N.Y.1996) (As a result [of later Second Circuit cases], the authority of Kinoshita is highly questionable in this Circuit.). 31 Kinoshita appears to be the principal underpinning for the district court's conclusion that the arbitration clause here is not broad enough to encompass a claim of fraudulent inducement. But because Kinoshita must be confined to its precise facts—that is, to the phrase arising under or, at most, to its equivalent, S.A. Mineracao, 745 F.2d at 194—the case has no application here. 9 The phrase arising under is simply too different, both verbally and functionally, from the prefatory phrase, [a]s a condition precedent to any right of action hereunder, to warrant application of the strictly limited holding of Kinoshita. 32 In summary, Hartford Accident and other decisions within this Circuit show that the arbitration clause in the present case is a broad one that must be held to encompass a claim of fraudulent inducement of the contract in general. There is no controlling authority for ACE's contention that the prefatory phrase operates to limit the scope of arbitration. 10 The remainder of the clause— if any dispute shall arise between the parties hereto with reference to the interpretation of this Agreement or their rights with respect to any transaction involved, whether such dispute arises before or after termination of this Agreement—uses the broad phrase any dispute; the general phrase with respect to, cf. Roby v. Corp. of Lloyd's, 996 F.2d 1353, 1361 (2d Cir.1993) (stating that [w]e find no substantive difference in the present context between the phrases `relating to,' `in connection with' or `arising from,' and holding that such language did not limit the scope of arbitration and forum selection clauses to allegations of contractual violations); the broad, open-ended phrase any transaction involved; and the temporally non-limiting phrase, whether such dispute arises before or after termination of this Agreement. The clause adds that the disputes with reference to the interpretation of this Agreement are also subject to arbitration. Thus, both this Circuit's case law and the plain meaning of the arbitration clause suggest that the clause should be construed as broad in scope. To the extent, if any, that the prefatory phrase introduces a degree of ambiguity into the provision, such ambiguity must be resolved in favor of arbitration. See Hartford Accident, 246 F.3d at 227. In interpreting the clause as it did and in denying arbitration of ACE's fraud claim, the district court committed legal error. 33