Opinion ID: 213655
Heading Depth: 3
Heading Rank: 1

Heading: Interpretation of Arbitration Clause's Scope

Text: The parties agree that the Arbitration Clause requires that they settle by binding arbitration any dispute that may arise under [the MSA]. [9] (Emphasis added). Appellants allege that this language is insufficient to encompass a dispute over the validity of the MSA and that the parties never intended to arbitrate such a dispute. To this effect, they argue that the use of the language arising under (as opposed to, e.g., arising under or relating to) presupposes a valid agreement. Thus, they contend that the parties did not agree to arbitrate their current dispute over the validity of the MSA. In determining whether Appellants' claims fall within the scope of the Arbitration Clause, we focus on the factual allegations underlying their claims in the Complaint. See Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc., 473 U.S. 614, 622 n. 9, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985); see also Medtronic AVE, Inc. v. Advanced Cardiovascular Systems, Inc., 247 F.3d 44, 55 (3d Cir.2001). In the Complaint, Appellants claimed, first, that RMS fraudulently induced them to enter into the MSA by intentionally misleading them with regards to the coverages and payment rates that insurance companies paid in Puerto Rico. Appellants further claimed that RMS also committed fraud during the performance of the MSA by, among other things, purposefully breaching its obligations to provide support to DAC in the negotiation of coverages with insurance companies. This latter claim (i.e., fraud in the performance of the MSA) easily falls within the scope of the Arbitration Clause's arising under language and does not warrant further discussion. Accordingly, we find that said claim is encompassed under the Arbitration Clause. On the other hand, the former claim (i.e., fraud in the inducement of the MSA) deserves further analysis. Under Puerto Rico law, the consent of the contracting parties is one of the requisites for the existence of a contract. 31 P.R. Laws Ann. tit. 31, § 3391 (2008). Where consent is wholly lacking, as in a simulated contract, no contract is deemed to have existed. See Lummus Co. v. Commonwealth Oil Refining Co. 280 F.2d 915, 930 n. 21 (1st Cir.1960) (citing, inter alia, Guzmán v. Guzmán, 78 P.R.R. 640, 78 D.P.R. 673 (1955)). On the other hand, if a contract contains the necessary effectuating requisites (including the consent of the contracting parties), although tainted with defect or vice, there is nonetheless a contract because the defect may be cured. Id. (citation and internal quotation marks omitted). An example of a situation where a contract may exist despite being tainted with defect or vice is when fraud is committed during its formation. See Colón v. Promo Motor Imports, Inc., 144 D.P.R. 659, 668 (1997) (official translation). [10] Under Puerto Rico contract law, fraud is a type of contractual deceit (dolo or dolus). See Márquez v. Torres Campos, 11 P.R. Offic. Trans. 1085, 111 D.P.R. 854, 863-64 (1982). Puerto Rico law distinguishes between contractual deceit occurring at the contracting stage (i.e., during the formation of the contract) and contractual deceit occurring in the course of the performance of the contract. See Colón, 144 D.P.R. at 668 (citing Canales v. Pan American, 12 P.R. Offic. Trans. 411, 425, 112 D.P.R. 329, 340 (1982); Márquez, 11 P.R. Offic. Trans. at 1098, 111 D.P.R. at 864). Contractual deceit that occurs during the formation of the contract, if deemed serious, may give rise to the nullification of the contract. Id. In this case, although the executed contract may not be deemed nonexistent, it is voidable, and the period of limitations for bringing an action for annulment is four years. Id. ; see also 31 P.R. Laws Ann. tit. 31, § 3512 (2008). On the other hand, contractual deceit that arises not at the contracting stage, but in the course of the performance of the contract, does not give rise to the nullification of the contract. Colón, 144 D.P.R. at 668; see also Márquez, 11 P.R. Offic. Trans. 1085, 111 D.P.R. at 863-64. Rather, in such cases, the person who engages in deceit shall be liable for the damage knowingly caused by his or her nonfulfillment. Colón, 144 D.P.R. at 668; see also 31 P.R. Laws Ann. tit. 31, §§ 3018, 3019 and 3024 (2008). After unpacking Appellants' allegations in the Complaint and construing them in light of the applicable law, their story becomes clear. Appellants factually allege that, although the MSA exists, it is voidable and should be annulled, because RMS allegedly committed fraud during its formation. Our task here is not to resolve this dispute, but rather to determine whether it is arbitrable under the Arbitration Clause. See Municipality of San Juan v. Corporación Para El Fomento Económico De La Ciudad Capital, 415 F.3d 145, 149 (1st Cir.2005) (citing AT & T Techs., Inc. v. Commc'ns Workers of America, 475 U.S. 643, 649, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986)). As previously stated, the parties do not contest that the Arbitration Clause is construed with reference to Puerto Rico law and is subject to the FAA. [11] Therefore, in construing the Arbitration Clause, we are guided by the following principles. If the terms of [the Arbitration Clause], its conditions and exclusions, are clear and specific, and leave no room for ambiguity or for diverse interpretations, they should be thus applied. Unisys Puerto Rico, Inc. v. Ramallo Bros. Printing, Inc., 1991 WL 735351 (P.R.), 128 D.P.R. 842, 852 (1991) (citing 31 P.R. Laws Ann. tit. 31, § 3471). If the words should appear contrary to the evident intention of the contracting parties, the intention shall prevail. 31 P.R. Laws Ann. tit. 31, § 3471 (2008). Furthermore, consistent with the federal pro-arbitration policy, there is a presumption that `ambiguities as to the scope of the arbitration clause itself [must be] resolved in favor of arbitration.' PowerShare, 597 F.3d at 15 (alteration in original) (quoting Volt, 489 U.S. at 475-76, 109 S.Ct. 1248). We apply this presumption in favor of arbitrability only if the Arbitration Clause is ambiguous about whether it covers the dispute at hand; . . . adhering to the presumption . . . only where the presumption is not rebutted. Granite Rock, 130 S.Ct. at 2858-59. Applying the aforementioned principles, we find that the terms of the Arbitration Clause are not clear or specific and leave room for reasonable diverse interpretations on the issue of whether the parties agreed to arbitrate Appellants' fraudulent inducement claim and the resulting dispute over the validity of the MSA. Thus, we find that the Arbitration Clause is ambiguous on this issue. Nevertheless, as discussed below, the strong federal pro-arbitration policy establishes a presumption (which Appellants fail to rebut) that the Arbitration Clause's arising under language is sufficiently broad to encompass Appellants' claims. In Prima Paint, the Supreme Court found that the language of the arbitration clause there at issue, which required arbitration of controversies arising out of or relating to a certain consulting agreement, was easily broad enough to encompass Prima Paint's claim that the consulting agreement was procured by fraud. Prima Paint, 388 U.S. at 406, 87 S.Ct. 1801. Appellants attempt to distinguish Prima Paint by arguing that the absence of the words relating to from their Arbitration Clause should compel a different result. The federal courts of appeal have wrestled with the interpretation of arbitration clauses similar to the one here in question and have reached different results on the issue of whether they encompass disputes pertaining to the validity of a contract of which the respective arbitration clause forms a part. In an early case, In re Kinoshita & Co., 287 F.2d 951, 953 (2d Cir.1961), the Second Circuit found that when an arbitration clause refers to disputes or controversies `under' or `arising out of' the contract, arbitration is restricted to disputes and controversies relating to the interpretation of the contract and matters of performance. The Court reasoned that the phrase arising under is narrower in scope than the phrase arising out of or relating to, the standard language recommended by the American Arbitration Association. Id. Accordingly, the Court concluded that the arbitration clause was not sufficiently broad to encompass a dispute or controversy about an alleged fraudulent inducement of the contract in which the arbitration clause was included. Id. In Mediterranean Enterprises Inc. v. Ssangyong Corp., 708 F.2d 1458, 1464 (9th Cir.1983), the Ninth Circuit explained that arising hereunder was synonymous with arising under and, relying on Kinoshita, found that the language `arising hereunder' is intended to cover . . . only [disputes] relating to the interpretation and performance of the contract itself. The Ninth Circuit has subsequently reaffirmed this narrow construction of the arising under language. See Tracer Research Corp. v. Nat'l Envtl. Servs. Co., 42 F.3d 1292, 1294-95 (9th Cir.1994). On the other hand, the Second Circuit has subsequently changed course and, although not formally overruling Kinoshita, has severely confined its holding to its precise facts, noting that Kinoshita is inconsistent with the federal policy favoring arbitration. [12] See ACE Capital Re Overseas Ltd. v. Cent. United Life Ins. Co., 307 F.3d 24, 33 (2d Cir.2002) (As a result [of later Second Circuit cases], the authority of Kinoshita is highly questionable in [the Second] Circuit. (first alteration in original) (citation and internal quotation marks omitted)); Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc., 252 F.3d 218, 225-26 (2d Cir. 2001) (In In re Kinoshita & Co., . . . we intimated that the use of the phrase `arising under' an agreement, in an arbitration clause, indicated that the parties intended the clause be narrowly applied. We have, however, since limited this holding to its facts, declaring that absent further limitation, only the precise language in Kinoshita would evince a narrow clause.); Genesco, Inc. v. T. Kakiuchi & Co., Ltd., 815 F.2d 840, 854 n. 6 (2d Cir.1987) ([W]e recognize, as did Samitri, that Kinoshita is inconsistent with the federal policy favoring arbitration. . . .); S.A. Mineracao Da Trindade-Samitri v. Utah Int'l, Inc., 745 F.2d 190, 194 (2d Cir.1984) (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.). Accordingly, in these later cases, the Second Circuit found that language similar (but not identical) to the language in Kinoshita was sufficiently broad to encompass fraudulent inducement claims. See, e.g., ACE Capital, 307 F.3d at 31-34 (noting that the language any right of action hereunder was, at least when paired with other more expansive language in the arbitration agreement, broad enough to include a contractual fraudulent inducement claim); Genesco, Inc., 815 F.2d at 854 (noting that the language all claims . . . of whatever nature arising under this contract was sufficiently broad to encompass a claim of fraud in the inducement); S.A. Mineracao Da Trindade-Samitri, 745 F.2d at 194-195 (noting that the language any question or dispute aris[ing] or occur[ring] under the agreement was sufficiently broad to cover fraudulent inducement claim). Other circuits have declined to follow Kinoshita because of the strong federal policy in favor of arbitration. See, e.g., Battaglia v. McKendry, 233 F.3d 720, 727 (3d Cir.2000) ([W]hen phrases such as `arising under' and `arising out of' appear in arbitration provisions, they are normally given broad construction, and are generally construed to encompass claims going to the formation of the underlying agreements.); Gregory v. Electro-Mech. Corp., 83 F.3d 382, 386 (11th Cir.1996) (arbitration clause covering any dispute . . . which may arise hereunder was sufficiently broad to encompass a fraudulent inducement claim); see also Highlands Wellmont Health Network v. John Deere Health Plan, 350 F.3d 568, 578 (6th Cir.2003) (holding that `arising out of' is broad enough to include a claim of fraudulent inducement of a contract); Sweet Dreams Unlimited, Inc. v. Dial-A-Mattress Int'l, Ltd., 1 F.3d 639, 642 (7th Cir.1993) (noting that arising out of covers all disputes having their origin or genesis in the contract, whether or not they implicate interpretation or performance of the contract per se); Mar-Len of Louisiana, Inc. v. Parsons-Gilbane, 773 F.2d 633, 637 (5th Cir. 1985) (recognizing that Kinoshita is inconsistent with federal policy favoring arbitration). The case law that we have examined suggests that the Ninth Circuit is the only federal circuit that continues to strictly adhere to the analysis in Kinoshita. We agree with the majority of the federal circuits and find that the analysis in Kinoshita is not consistent with the strong federal pro-arbitration policy set forth by the FAA. Said policy establishes a presumption in favor of arbitrability where, as here, a validly formed and enforceable arbitration agreement is ambiguous about whether it covers the dispute at hand. [13] See Granite Rock, 130 S.Ct. at 2858-59. The presumption requires that such ambiguities be resolved in favor of arbitration. Mastrobuono, 514 U.S. at 62, 115 S.Ct. 1212. As we have stated, in the present case the Arbitration Clause is ambiguous about whether it covers Appellants' fraudulent inducement claim and the resulting dispute over the validity of the MSA. Moreover, we find that it cannot be said with positive assurance that the arising under language used in the Arbitration Clause is not sufficient to encompass the current dispute over the validity of the MSA (as opposed to a dispute over the existence of the MSA). See AT & T Techs., 475 U.S. at 650, 106 S.Ct. 1415; IOM Corp., 627 F.3d at 450. Appellants have not rebutted the presumption in favor of arbitrability. [14] See Granite Rock, 130 S.Ct. at 2858-59. Accordingly, we conclude that Appellants' fraudulent inducement claim and the resulting dispute over the validity of the MSA are encompassed within the scope of the Arbitration Clause. Furthermore, we note that the present case is materially distinguishable from Granite Rock, where the Supreme Court analyzed the scope of an arbitration clause with language similar to the one here in question. In Granite Rock, the Supreme Court analyzed whether an arbitration clause requiring that the parties submit to arbitration [a]ll disputes arising under th[e] [collective bargaining agreement (CBA) ] was sufficiently broad to encompass a dispute over the ratification date of said CBA. Granite Rock, 130 S.Ct. at 2862 (emphasis in original). The Court noted that, because the CBA's arbitration clause pertained only to disputes arising under the CBA, the arbitration clause presuppose[d] the CBA's existence. Granite Rock, 130 S.Ct. at 2860-61. The Court then found as follows: [ W]e do not think the question whether the CBA was validly ratified on July 2, 2004 a question that concerns the CBA's very existencecan fairly be said to `arise under' the CBA. Id. at 2862 (emphasis added). The Court concluded that the dispute there at issue fell outside the scope of the parties' arbitration clause on grounds the presumption favoring arbitration [could not] cure. Id. Thus, although the Court recognized the presumption favoring arbitration, it ultimately determined that the specific language of the arbitration clause there at issue (i.e., arising under) could not be fairly construed as encompassing a dispute over the existence of the CBA. It is evident from the aforementioned discussion of Appellants' factual allegations that, contrary to the situation in Granite Rock, the parties here do not dispute the MSA's existence. Rather, they dispute the validity of the MSA, which Appellants challenge as voidable in light of their allegations that it was fraudulently induced. Specifically, the parties dispute whether Appellants have the right to request that the MSA be annulled, not whether the MSA currently exists. Therefore, the Supreme Court's finding in Granite Rock (i.e., that a question concerning the very existence of the CBA cannot fairly be said to arise under the CBA) does not counsel a result different from the one at which we here arrive. As we have stated, we find that the Arbitration Clause is ambiguous as to whether it encompasses the parties' dispute over the validity of the MSA. Appellants have not rebutted the presumption favoring arbitration of this dispute. For the reasons stated, we find that the Arbitration Clause's scope is sufficiently broad to encompass Appellants' claims and the resulting dispute over the validity of the MSA. [15]