Opinion ID: 4565238
Heading Depth: 2
Heading Rank: 2

Heading: Fraud in the Execution

Text: The next question then is whether MZM has put the formation of the arbitration agreement “in issue” by stating a claim of fraud in the execution. To state a claim, MZM must plead specific factual matter in line with that legal standard. 24 Under the FAA, agreements to arbitrate must be treated like “all other contracts.” Buckeye Check Cashing, 546 U.S. at 443. When determining whether an arbitration agreement exists, we “apply ordinary state-law principles” governing contract formation. James v. Glob. TelLink Corp, 852 F.3d 262, 265 (3d Cir. 2017) (quoting First Options, 514 U.S. at 944). The District Court applied New Jersey law, and the parties do not dispute that decision. Under New Jersey law, “[a]n agreement to arbitrate, like any other contract, must be the product of mutual assent, as determined under customary principles of contract law.” Id. at 265 (quoting Atalese v. U.S. Legal Servs. Grp., L.P., 99 A.3d 306, 312-13 (N.J. 2014) (internal quotation marks omitted)). Here, the existence of an arbitration agreement comes into play because the SFA purports to incorporate the full terms of an unattached and unsigned CBA with an arbitration provision. New Jersey law allows unsigned documents to be incorporated by reference. However, for the incorporation to be effective, “the separate document must be described in such terms that its identity may be ascertained beyond doubt and . . . the party to be bound by the terms must have had knowledge of and assented to the incorporated terms.” Bacon, 959 F.3d at 600 (quoting Alpert, Goldberg, Butler, Norton & Weiss, P.C. v. Quinn, 983 A.2d 604, 617 (N.J. Sup. Ct. 2009)) (internal quotation marks omitted). It is undisputed that the SFA describes the incorporated agreements with enough detail to identify them as the CBAs. The point of contention is whether Perry had “knowledge of and assented to” the essential terms in those documents. Id. “It is the general rule that where a party affixes [her] signature to a written instrument, . . . a conclusive presumption 25 arises that [she] read, understood and assented to its terms and [she] will not be heard to complain that [she] did not comprehend the effect of [her] act in signing.” Peter W. Kero, Inc. v. Terminal Const. Corp., 78 A.2d 814, 817 (N.J. 1951); see Morales v. Sun Constructors, Inc., 541 F.3d 218, 221 (3d Cir. 2008) (“It will not do for a man to enter into a contract, and, when called upon to respond to its obligations, to say that he did not read it when he signed it, or did not know what it contained.” (quoting Upton v. Tribilcock, 91 U.S. 45, 50 (1875))). Indeed, if all it took to avoid a signed contract was to claim ignorance of its content or legal effect, “contracts would not be worth the paper on which they are written.” Upton, 91 U.S. at 50; see Novitsky v. Am. Consulting Engineers, L.L.C., 196 F.3d 699, 702 (7th Cir. 1999). It is undisputed that Perry signed the SFA in 2002. Her signature thus creates a presumption that she “read, understood, and assented to” the terms of that document. Kero, 78 A.2d at 817. Considering that the single sentence in the SFA does nothing more than incorporate the longer-form CBAs, it is difficult to conceive how Perry would not have understood that all the essential terms of her agreement with the union were to be found in the separately incorporated documents and that, by virtue of signing the SFA, she was agreeing to be bound by those terms. However, Perry avers that she signed the SFA “without knowledge or a reasonable opportunity to obtain knowledge of its character or its essential terms.” JA53 (Compl. ¶ 87). Perry never asked to see the incorporated agreements. Nor does she contend that, had she asked, she would have been refused. Had Perry requested and studied those documents, she could have easily identified the alleged error, and “this entire dispute could have been averted.” Central Pennsylvania 26 Teamsters Pension Fund v. McCormick Dray Line, Inc., 85 F.3d 1098, 1108 (3d Cir. 1996) (rejecting fraud-in-theexecution claim where employer failed to read the contract despite having opportunities to do so). Her failure to read is not by itself sufficient to avoid the legal effects of her signature, especially given her extensive business training and nearly thirty-year experience running a construction company for high-profile projects. See Sheet Metal Workers Int’l. Ass’n Local Union No.27, AFL-CIO v. E.P. Donnelly, Inc., 673 F. Supp. 2d 313, 328 & n.23 (D.N.J. 2009) (“Walking blindfolded through one’s business affairs does not excuse the ensuing collision.” (citing Novitsky, 196 F.3d at 702)). But that is not the end of the inquiry. There is an exception to this general rule when a party’s “signature is obtained by fraud or imposition in the execution of the instrument.” Kero, 78 A.2d at 817 (citations omitted). Fraud in the execution (or fraud in the factum) occurs when a party is compelled to sign the instrument “by reason of a misrepresentation intended to deceive [her] as to its purport or content[.]” Id. at 817-18. Because this rule is intended to protect both “the unwary and foolish as well as the vigilant,” the signer’s negligence in failing to read the instrument or “in trusting a representation” does not excuse the other party’s intentional fraudulent act. Id. at 818. “This is particularly true where a relation of natural trust and confidence, though not strictly a fiduciary relation, exists between the [contracting] parties.” Id. at 818 (citing 5 Williston on Contracts § 1516 (rev. ed. 1937)). Fraud in the execution may also be present “when a party executes an agreement with neither knowledge nor reasonable opportunity to obtain knowledge of its character or its essential terms” by reason of “excusable ignorance.” 27 Connors v. Fawn Min. Corp., 30 F.3d 483, 490, 491 (3d Cir. 1994) (applying the Uniform Commercial Code in a labor case arising out of the LMRA and ERISA) (quotation marks omitted); see also Restatement (Second) of Contracts § 163 (1981). Although excusable ignorance does not require an affirmative intent to defraud, it typically involves some sort of misconduct or imposition that cuts off the signer’s opportunity to read, such as “significant time pressure” and reliance on an erroneous “assurance” that the parties’ oral understanding had been or would be accurately memorialized in an instrument. Connors, 30 F.3d at 488, 492-93. In short, “[f]ailing to read a contract does not excuse performance unless fraud or misconduct by the other party prevented one from reading.” New Gold Equities Corp. v. Jaffe Spindler Co., 181 A.3d 1050, 1064 (N.J. Super. Ct. 2018) (citation omitted). The complaint does not explicitly allege an intent to defraud or mislead. And at oral argument, MZM disavowed that it was asserting a claim of willful fraud or “bait and switch.” Oral Arg. Audio 43:45-44:45. Rather, MZM claims that Perry signed the SFA incorporating statewide CBAs with an arbitration provision in reliance on Taylor’s assurance that it was a single-project agreement without any mention of arbitration. Contracting parties have a right to trust each other to draw up paperwork that accurately memorializes “the oral understanding between them,” and the “presentation of the paper for signature is in itself a representation that the terms of such oral agreement have been or will be embodied in the writing.” Kero, 78 A.2d at 818; see also Connors, 30 F.3d at 493 (concluding that fraud in the execution occurs where a party “surreptitiously substitutes a materially different contract” before or after the counterparty signs). 28 According to Perry, Taylor “confirmed” that the document he needed her to sign “was only for the Newark Airport job,” and “at no time did . . . Taylor advise her” that he wanted her to agree to statewide CBAs. JA58 (Perry Decl. ¶ 9). And there is no indication that they discussed arbitration. We can infer from these allegations that Perry and Taylor reached an oral understanding on a single-project agreement with no mention of an arbitration provision and that Taylor assured Perry that the SFA reflected that understanding. Yet Taylor presented her with an SFA that was “materially different” insofar as it incorporated statewide, self-renewing CBAs with an arbitration provision. Connors, 30 F.3d at 493. Perry alleges that Taylor never provided her copies of the incorporated agreements. Nor did she ask for them. These facts cut both ways, because they can suggest an effort on the part of Taylor to keep those documents from Perry or something less nefarious such as the parties’ common failure to act diligently. We view these allegations in favor of MZM, as we must at this stage. Moreover, Perry alleges that she had good reason to trust and rely on Taylor’s representation because, after having dealt with him for many years, he knew and understood that MZM was an open shop and was not interested in entering into any statewide CBA with or without an arbitration provision. It bears noting that the complaint seems to allege that the union did not intend to enter into statewide CBAs. If so, this could be a simple case of mutual mistake. But that is not the only plausible reading of the complaint. Viewed in the light most favorable to MZM, the allegations also raise a reasonable suspicion that this was something more than an innocent mistake. Perry alleges that she felt a sense of urgency to sign the SFA because Taylor came to the work site and indicated 29 that the union would pull workers from the job if she refused to sign. The threat of halting construction could heighten a reasonable person’s sense of urgency to sign the SFA on the spot, as any disruptions on a project that had been underway for more than a year could lead to unwanted delays and higher costs. Indeed, Perry claims she signed the SFA “to avoid any labor interruptions on the job.” JA58 (Perry Decl. ¶ 9). We can infer from these allegations that Taylor intentionally pressured Perry or created an undue imposition that, combined with Perry’s reasonable reliance in his assurance, effectively foreclosed any opportunity to review the incorporated agreements before signing the SFA. And once it was signed, everyone went about their business. These allegations are enough to state a claim for fraud in the execution of the SFA by reason of excusable ignorance. Without a validly executed SFA, there could be no incorporation of the CBAs, and without validly incorporated CBAs, there could be no arbitration agreement. The Funds concede that fraud in the execution negates mutual assent, Connors, 30 F.3d at 493, and that such a claim belongs in court under Sandvik. To avoid that outcome, the Funds astutely argue that MZM has not pleaded fraud in the execution but rather fraud in the inducement.12 12 The Funds also raise this argument to dispute that MZM has mounted a proper defense under ERISA. That issue goes to the merits of the underlying dispute, which is not currently before us. At this stage, our concern is only whether MZM has put the agreement to arbitrate in issue. See AT & T, 30 Fraud in the inducement occurs when someone signs the document they intended to sign, but their assent was induced by a material misrepresentation about facts external to that document. See Sandvik, 220 F.3d at 109; 37 Am. Jur. 2d Fraud and Deceit § 2 (2020). For example, if a party misrepresents that the price of cheese will increase to induce someone into signing a contract to buy milk in bulk, that is fraud in the inducement. But if a party assures its counterparty that it is signing a contract for cheese when it is in fact a contract for milk, that is fraud in the execution. See Connors, 30 F.3d at 490 (“[Fraud in the inducement] induces a party to assent to something he otherwise would not have; [fraud in the execution] induces a party to believe the nature of his act is something entirely different than it actually is.” (quoting Southwest Adm’r, Inc. v. Rozay’s Transfer, 791 F.2d 769, 774 (9th Cir. 1986)). Again, the difference between those claims matters because, unlike fraud in the execution, which renders the entire agreement “void ab initio” as if it never existed, fraud in the inducement only renders the contract “voidable,” giving the defrauded party the option of rescinding the contract or claiming damages for deceit. See Sandvik, 220 F.3d at 107, 109-10. Thus, unless MZM were alleging fraud in the inducement of the delegation provision, the District Court would be required to submit the claim to the arbitrator pursuant 475 U.S. at 649 (“[I]n deciding whether the parties have agreed to submit a particular grievance to arbitration, a court is not to rule on the potential merits of the underlying claims.”). 31 to the 2002 CBA’s arbitration provision under Sandvik and Rent-A-Center.13 MZM does not claim fraud in the inducement. Nowhere does the complaint allege that Perry intended to assent to a statewide CBA with an arbitration provision. It alleges the opposite. See JA48 (Compl. ¶ 47) (“The only conceivable basis for the Funds to compel MZM to arbitrate any dispute would be for MZM to have agreed to a New Jersey statewide [CBA] with an arbitration provision, which MZM never did.” (emphasis added)). Contrary to the Funds’ assertion, Perry does not allege that Taylor “offered assurances that, whatever the document might say, the parties had actually entered into a more limited agreement.” Appellant’s Br. 45 (emphasis added). MZM’s contention is that Perry relied on Taylor’s confirmation that the documents reflected their oral understanding when in fact it was something “radically different.” JA50, 53 (Compl. ¶¶ 58, 88). Because MZM stated a claim of fraud in the execution of the container contract, MZM put the formation of the delegation provision in issue and thus triggered the District Court’s power to adjudicate that claim. 13 The complaint does not contest the Funds’ contractual right to invoke the terms of the 2002 CBA’s arbitration provision if it were binding on the parties, even though the Funds did not sign the CBA and it provides that “[o]nly the Union or the Association may submit a dispute to arbitration” under that agreement. JA97 (2002 CBA art. 21.20(b)). MZM raised this issue for the first time at oral argument before this Court—too late for us to consider it. That argument is thus forfeited. 32 C. Standard of Review Applied by the District Court The final question is whether the District Court erred by ordering limited discovery rather than compelling arbitration of the arbitrability issue on the face of the complaint. Under our decision in Guidotti, when it is clear on the face of the complaint that a validly formed and enforceable arbitration agreement exists and a party’s claim is subject to that agreement, a district court must compel arbitration under a Rule 12(b)(6) pleading standard “without discovery’s delay.” 716 F.3d at 776 (quotation marks and citation omitted). But if the complaint states a claim or the parties come forward with facts that put the formation of the arbitration agreement in issue, the court may authorize “limited discovery” to resolve that narrow issue for purposes of deciding whether to submit the matter to arbitration. Id. After discovery, the court may consider the question anew, using a summary judgment standard under Rule 56. Id. If a genuine issue of material fact remains, the court must proceed summarily to trial on “the making of the arbitration agreement.” Id. (citing 9 U.S.C. § 4). In following these procedures, courts must balance the FAA’s competing interests in moving arbitrable claims speedily and efficiently into arbitration and in ensuring that the parties have in fact agreed to arbitrate. See id. at 773. The Funds contend that the District Court erred in applying a Rule 56 summary judgment standard, rather than a Rule 12(b)(6) standard, when it refused to compel arbitration of the gateway arbitrability issue, i.e., the claim of fraud in the execution. They believe that if the District Court had applied a Rule 12(b)(6) standard, the court would have been required 33 to enforce the delegation provision as valid on its face and submit that claim to the arbitrator.14 Not so. While the District Court did not specify the standard that it applied when it decided to deny arbitration of the arbitrability issue, there is enough in the record to deduce that it complied with the procedures and standards set forth in Guidotti. At the injunction hearing, the court noted that, following discovery, the arbitrability issue would be resolved “on a summary judgment standard” or tried if necessary. JA459. In its subsequent opinion denying the motion for reconsideration, the District Court elaborated on its earlier decision, stating that the preliminary injunction “consist[ed] of little more than obedience to the Third Circuit’s command that arbitration cannot be ordered unless and until antecedent questions of fact are resolved.” JA8-9 (citing Guidotti, 716 F.3d at 771). The court also stated that “[w]hen the issue of arbitrability is not apparent on the face of the complaint,” a court may authorize discovery. JA22. We understand the District Court to mean that it reviewed the arbitrability issue “on the face of the complaint,” i.e., under a Rule 12(b)(6) standard, before denying the motion to dismiss and subjecting the parties to limited discovery. Otherwise, by its own logic, there would have been no reason to subject the parties to discovery. We also take the District 14 The Funds take issue with the District Court’s decision to consider extrinsic evidence in determining whether the SFA and CBA were validly formed. We see no error. Under New Jersey law, parol evidence is admissible to show fraud in the execution. Kero, 78 A.2d at 818; see also Connors, 30 F.3d at 493-94. 34 Court at its word that it will apply a summary judgment standard after limited discovery is complete, not that it has already applied that standard. At that time, all relevant evidence that the parties have submitted to date, including the 1999 SFA, as well as any additional evidence gathered through expedited discovery, may be put forward on a motion for summary judgment. While it would have been preferable for the District Court to have explicitly reviewed the sufficiency of the pleadings on the record before refusing to compel arbitration on the arbitrability issue, that omission was harmless. As explained in section III.B above, MZM has sufficiently alleged fraud in the execution of the container contract, putting the formation of the arbitration agreement in issue. Therefore, the Funds were not entitled to have that gateway arbitrability claim submitted to arbitration on the face of the complaint.15