Opinion ID: 1359971
Heading Depth: 2
Heading Rank: 1

Heading: Fraud and Concealment

Text: South Carolina law generally favors arbitration. McMillan v. Gold Kist, Inc., 353 S.C. 353, 359, 577 S.E.2d 482, 485 (Ct.App.2003). In interpreting agreements within the scope of the FAA, due regard must be given to the federal policy favoring arbitration, and ambiguities as to the scope of the arbitration clause itself resolved in favor of arbitration. Stokes v. Metropolitan Life Ins. Co., 351 S.C. 606, 610, 571 S.E.2d 711, 714 (Ct.App.2002) (quoting Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University, 489 U.S. 468, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989)). Any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration. Zabinski v. Bright Acres Associates, 346 S.C. 580, 597, 553 S.E.2d 110, 118 (2001). Further, unless the Court can say with positive assurance that the arbitration clause is not susceptible to an interpretation that covers the dispute, arbitration should be ordered. Id. at 597, 553 S.E.2d at 118. A written provision in any contract evidencing a transaction involving commerce to settle by arbitration shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. 9 U.S.C.A. § 2 (2000). A party cannot avoid arbitration through rescission of an entire contract when there is no independent challenge to the arbitration clause itself. There must be fraud in the inducement of the arbitration agreement to avoid arbitration of the contract. South Carolina Pub. Serv. Auth. v. Great Western Coal (Kentucky), Inc., 312 S.C. 559, 562-63, 437 S.E.2d 22, 24 (1993) (citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.E.2d 1270 (1967)). Fraud as a defense to an arbitration clause must be fraud specifically as to the arbitration clause and not the contract generally.  South Carolina Pub. Serv. Auth., id. at 563, 437 S.E.2d at 24 (emphasis added). In the present case, CCP alleged that at the time it was considering and negotiating the 1996 Services Agreement with United, CCP relied on and utilized the employees and services of United to run virtually all of CCP's business. Further, CCP had no employees of its own, and used United employees to fill all of its officer positions. CCP alleged that, during the 1996 negotiations, Bill Martin [3] was both its CEO and a paid employee of UHS. CCP alleged that as its CEO, Martin was responsible for negotiating and reviewing proposed contracts. CCP further alleged that Martin failed to object to the inclusion of the arbitration clause in the 1996 Services Agreement because Martin knew United had committed various torts and other wrongful acts against CCP and Martin knew that United planned to commit additional torts and wrongful acts against CCP in the future. Alternatively, CCP alleged that Martin knew United inserted the arbitration clause into the 1996 Services to limit CCP's ability to discover the extent of United's misconduct and to limit its ability to recover punitive or exemplary damages. CCP further alleged that Martin failed to disclose to CCP's board of directors why United wanted the arbitration clause included or to explain the impact of the provision, and that Martin told CCP's board that the 1996 Services Agreement was merely changing the method of payment between CCP and United. The trial court found that the pleadings failed to state a claim that CCP was fraudulently induced into agreeing to the arbitration provision. The trial court found that any reliance on the alleged misconduct only went to the entire 1996 Services Agreement and not solely to the arbitration clause. Accordingly, the trial court ruled that, pursuant to Prima Paint, any claims regarding the making of the 1996 Service Agreement must be arbitrated. CCP argues on appeal that the fraud alleged in the complaint is particular to the arbitration clause and does not go to the entire agreement. CCP essentially alleges that the contract was procured through fraud and that the arbitration clause was a vehicle used by United to further the fraud, to prevent its discovery, and to prevent recovery if the fraud was discovered. CCP also argues that, had Martin performed his duties as CEO and informed CCP that United was committing torts, breaches of the 1984 contract, and various other malfeasances against CCP, CCP would never have agreed to a clause mandating arbitration and limiting punitive damages. However, CCP claims that because United controlled so much of its business and possessed so many of its records and files, CCP was held captive by United and would have been forced to sign the 1996 Services Agreement regardless of whether Martin informed CCP of United's misconduct and its intent to commit future misconduct. [4] Therefore, CCP contends in its brief that, had it known United was acting improperly, CCP would have still signed the 1996 Services Agreement, but would not have agreed to the arbitration clause within the contract. [5] We hold that CCP made no allegation of fraud specifically as to the arbitration clause, but only challenged the contract generally in its assertion that United committed fraud as to the contract. CCP has not alleged that United lied or committed fraud to induce CCP to enter into the arbitration clause or that United lied or misrepresented the effect of the arbitration agreement, its validity, CCP's ability to recover punitive damages, or CCP's ability to demand a jury trial. Therefore, the issue of whether the entire contract was fraudulently induced is the proper question here; meaning the matter must be decided in arbitration. South Carolina Pub. Serv. Auth., id. at 563, 437 S.E.2d at 24. The dissent argues that CCP's allegation that the arbitration provision was inserted to limit CCP's ability to discover the extent of the misconduct and to limit punitive damages is sufficient under notice pleading rules to survive a 12(b)(6) motion. However, the dissent ignores the rationale behind Prima Paint and the strong presumption favoring arbitration of disputes. Further, in very similar cases, other courts have held an allegation that an arbitration clause was used to further a scheme to defraud is not sufficient to allege fraud as to the arbitration clause specifically. Garten v. Kurth, 265 F.3d 136, 143-44 (2nd Cir.2001) (citing Campaniello Imports, Ltd., v. Saporiti Italia, S.p.A., 117 F.3d 655 (2nd Cir.1997)) (where there is merely a link between the arbitration clause and general fraud alleged by the plaintiff, and nothing deficient in an arbitration clause itself, a plaintiff may not establish a connection between the alleged fraud and the arbitration clause merely by adding the allegation that the arbitration clause was a part of the overall scheme to defraud); Phillips v. Home Equity Services, Inc., 179 F.Supp.2d 840, 845 (N.D.Ill.2001) (where there was no evidence that the defendants misrepresented the purpose or the operation of the arbitration clause, there was no evidence to conclude that the parties never agreed to arbitrate their dispute); Hayes Children Leasing Co. v. NCR Corp., 37 Cal.App.4th 775, 43 Cal.Rptr.2d 650 (Cal.App. 1 Dist.1995) (holding that it is not enough to allege that the arbitration clause was inserted to further a fraudulent scheme; the question in all cases simply is whether the agreement to arbitrate itself was induced by some fraud). We can find no allegation in the complaint that the arbitration clause itself was induced by fraud. CCP has simply alleged that United was engaged in fraudulent conduct throughout negotiations, and that the arbitration clause was inserted in a scheme to further that fraud. To follow the dissent's rationale would violate the holding in Prima Paint [6] and undermine the policy favoring arbitration.