Opinion ID: 743069
Heading Depth: 2
Heading Rank: 3

Heading: Mandatory arbitration was stipulated

Text: 49 The Federal Arbitration Act, 9 U.S.C. §§ 1 et seq., establishes a liberal policy in favor of arbitration, see Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983), as a means to reduce the costliness and delays of litigation. Genesco, Inc. v. T. Kakiuchi & Co., 815 F.2d 840, 844 (2d Cir.1987) (citing H.R.Rep. No. 96, at 1, 2 (1924)). Moreover, [t]he federal policy favoring arbitration is even stronger in the context of international transactions. Deloitte Noraudit v. Deloitte Haskins & Sells, 9 F.3d 1060, 1063 (2d Cir.1993) (citations omitted). 50 The District Court dismissed appellants' claims against Gidatex because they were subject to mandatory arbitration. In reviewing the District Court's determination concerning the arbitrability of appellants' claims, the court must engage in a two-step process: first, it must determine whether the parties agreed to arbitrate, and second, it must determine whether the scope of the agreement encompasses the claims asserted. Id. 51
52 Appellants concede that they are a party to a contract containing an arbitration clause, but argue that they have properly alleged a claim of fraud in the inducement of the arbitration clause that may be adjudicated by the court. Under the Federal Arbitration Act, a federal court faced with an arbitration clause must order arbitration to proceed in accordance with the terms of the agreement once it is satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue. 9 U.S.C. § 4. The Supreme Court has further elaborated that while a fraud in the inducement of the arbitration clause itself--an issue which goes to the 'making' of the agreement to arbitrate may be adjudicated by the court, the statutory language does not permit the federal court to consider claims of fraud in the inducement of the contract generally. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-04, 87 S.Ct. 1801, 1805-06, 18 L.Ed.2d 1270 (1967). Accordingly, the District Court ordered arbitration to proceed after finding that the complaint did not demonstrate that the claims of fraudulent inducement and misrepresentation relate only to the arbitration clause, as opposed to the entire agreement. Campaniello Imports, Ltd. v. Saporiti Italia S.P.A., 1996 WL 437907, at  9. Appellants challenge this last determination. 53 Appellants note that they alleged that [i]t was a part of the [defendants'] scheme to include an arbitration-in-Italy clause which they hoped would prevent plaintiffs from seeking redress in the New York courts where the remedies for fraud were more extensive than in an arbitration in Italy. Am. Compl. p 60. The amended complaint also alleges that [h]ad plaintiffs known the defendants [sic] true intentions, they would never have agreed to the settlement of the action or to the inclusion of the arbitration-in-Italy clause. Am. Compl. p 98. Thus, appellants contend, the court should have heard their claim because these allegations purportedly raise an issue as to fraud in the inducement of the arbitration clause in particular. 54 Appellants argue that their claim of fraud in the inducement of the arbitration clause in particular is factually indistinguishable from the one that the Supreme Court determined should be adjudicated by a federal court in Moseley v. Electronic & Missile Facilities, Inc., 374 U.S. 167, 83 S.Ct. 1815, 10 L.Ed.2d 818 (1963). In Moseley, the petitioner maintained that the defendant, a contractor, had enacted a fraudulent scheme whereby the defendant would obtain work and materials from subcontractors without making payments and then force the subcontractors to accept much less than the value of their claims. One of the means allegedly used to effect this scheme was the insertion in the subcontracts of a clause requiring arbitration of disputes in New York, even though the work was performed in Georgia. Consequently, the Moseley Court found that the issue of fraud should first be adjudicated before the rights of the parties under the subcontracts can be determined. Id. at 171, 83 S.Ct. at 1817. 55 The only other case to consider Moseley in depth in similar circumstances is Arnold v. Arnold Corp., 920 F.2d 1269 (6th Cir.1990). Facing the same allegation that an arbitration clause was part of a scheme to defraud, the Sixth Circuit stated that the plaintiff does not argue that the inclusion of the arbitration clause in the contract was effected by superior bargaining power or that, for all practical purposes, it deprived him of his day in court, as was the case in Moseley. Id. at 1278-79. The Supreme Court and Circuit Court decisions in Moseley 4 do not, however, seem to focus on either superior bargaining power or complete denial of a remedy. 56 Nevertheless, appellants' allegations concerning the arbitration-in-Italy clause lack important elements present in the allegations in Moseley. In Moseley, the challenged arbitration clause allowed the contractor to circumvent the provisions of the Miller Act, which expressly granted a cause of action to plaintiffs to sue in federal court in the district in which the contract was performed, which was in Georgia and not in New York. The Campaniello companies have adduced no similar particularized facts specific to the choice of forum or the arbitration clause which indicate how it was used to effect the scheme to defraud other than to suggest generally that the remedies for fraud were more extensive in New York than in Italy. We do not consider such conclusory allegations sufficient to establish that the arbitration clause in particular was a tool used to further a scheme to defraud. 57 We believe that the only way to reconcile Prima Paint with Moseley is to require some substantial relationship between the fraud or misrepresentation and the arbitration clause in particular. In Prima Paint, the Supreme Court clearly distinguished between fraud in the inducement of the arbitration clause itself, which may be considered by the federal court, and fraud in the inducement of the contract generally. 388 U.S. at 403-04, 87 S.Ct. at 1805-06. This distinction would be eviscerated if a claimant could transform a general fraud claim into fraud in the inducement of the arbitration clause merely by stating that the arbitration clause is an element of the scheme to defraud. 58 This fact becomes evident if one considers the evidentiary trial that would have to be conducted in this case to determine if there was fraud in the inducement of the arbitration clause. Since there is no fraud or misrepresentation that relates directly to the arbitration clause, the District Court would have to determine whether the appellees defrauded appellants into settling their case and accepting a sham contract with an arbitration clause; in short, the District Court would have to adjudicate the entire fraud claim. Similarly, in every instance where there is a fraud going to the contract generally and an allegation that the arbitration clause was part of the scheme to defraud, the court would have to adjudicate the entire scheme to defraud. Consequently, there would never be an instance where a claim of fraud going to a contract generally would be sent to arbitration by a federal court. 5 59 We interpret Prima Paint and Moseley consistently with a determination that there must be some substantial relationship between the fraud or misrepresentation and the arbitration clause in particular in order to protect the obvious distinction drawn in Prima Paint between the arbitrability of fraud relating to a contract generally and fraud in the inducement of the arbitration clause in particular. In Prima Paint, the Court stated that the federal court may adjudicate only those issues which go to the 'making' of the agreement to arbitrate. 388 U.S. at 403-04, 87 S.Ct. at 1806-07. Although Prima Paint, which was decided after Moseley, states that the opinion is consistent with the decision in Moseley, id. at 404 n. 12, 87 S.Ct. at 1806 n. 12 the Court did not elaborate upon the details of the fraud involved in Moseley in either case. Given these circumstances, we read Moseley narrowly to give effect to the clearer language of Prima Paint. 60 There is no indication here that there was any misrepresentation or fraud related to the arbitration clause itself. Here, the parties negotiated the contract in Italy and appellants used Italian counsel in those negotiations; thus, they agreed to arbitration in Italy. There are no allegations that appellants were not aware of the content or import of the arbitration clause; the parties were involved in arms-length negotiations over the specific terms of the Gidatex Agreement and separately negotiated each of the amendments, including the arbitration clause. 61 In short, we find no facts which suggest that fraud was an issue which goes to the 'making' of the agreement to arbitrate. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. at 403-04, 87 S.Ct. at 1805. Other courts in this Circuit have similarly required some nexus between the alleged fraud or misrepresentation and the arbitration clause in particular. See, e.g., Castro v. Marine Midland Bank, N.A., 695 F.Supp. 1548, 1551 n. 1 (S.D.N.Y.1988) (stating that plaintiff must demonstrate that whatever fraud occurred misled plaintiff as to the arbitration agreement itself); Rush v. Oppenheimer & Co., 681 F.Supp. 1045, 1053 (S.D.N.Y.1988) (finding that courts retain jurisdiction only over claims that statements pertaining to the underlying agreement were fraudulent with respect to the arbitration agreement). 62 Appellants have only claimed that the alleged misrepresentations and omissions fraudulently induced them to enter into a settlement. They have not suggested that they were in any way misled as to the import or content of the arbitration clause; in fact, the arbitration clause was specifically amended as a result of arms-length negotiations. Appellants may not now establish a connection between the alleged fraud and the arbitration clause in particular merely by adding the allegation that the arbitration clause was a part of the overall scheme to defraud.
63 Having found that the appellants have not raised an issue of fraud as to the arbitration clause, we next address the scope of the arbitration agreement. Consistent with the federal policy of encouraging arbitration, the federal courts construe the scope of such agreements broadly. See Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. at 24-25, 103 S.Ct. at 941-942 (stating any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration). 64 The Gidatex Agreement stipulated that [a]ny controversy between the two parties regarding the above agreement is to be resolved through Italian arbitration. When reviewing the scope of an arbitration agreement, this Court must focus on the factual allegations in the complaint and determine whether the allegations underlying the claims 'touch matters' covered by the parties' ... agreements. Genesco, Inc. v. T. Kakiuchi & Co., 815 F.2d at 846. Appellants' second, third and fourth claims essentially involve claims that appellees sought fraudulently to violate and terminate the Gidatex Agreement; clearly these claims touch matters involved in the agreement. Similarly, the fourth claim seeking damages for unjust enrichment alleges that Gidatex received unjust benefits through repudiation and termination of plaintiffs' agency agreement. Am. Compl. p 127. This claim is naturally dependent on appellants' rights under the Gidatex Agreement and also touches matters covered by the Gidatex Agreement; thus, the unjust enrichment claim is also subject to mandatory arbitration. 6 65 In addition, we agree with appellees that the arbitration clause extends to disputes between the Campaniello companies and Filippini. Courts in this and other circuits consistently have held that employees or disclosed agents of an entity that is a party to an arbitration agreement are protected by that agreement. Roby v. Corporation of Lloyd's, 996 F.2d 1353, 1360 (2d Cir.), cert. denied, 510 U.S. 945, 114 S.Ct. 385, 126 L.Ed.2d 333 (1993). Appellants have not alleged that they dealt with Filippini outside of his capacity as an agent for Gidatex. Filippini uttered the alleged misrepresentations during negotiations between Gidatex and the Campaniello companies and entered into the Gidatex Agreement as the company's administrator. Since appellants' claims against Filippini arise out of his relationship with Gidatex, they are also subject to mandatory arbitration. See Creative Securities Corp. v. Bear Stearns & Co., 671 F.Supp. 961, 968 n. 11 (S.D.N.Y.1987) (finding claims against employees which arise out of the employee relationship are subject to arbitration clause in contract with principal), aff'd, 847 F.2d 834 (2d Cir.1988); Brener v. Becker Paribas Inc., 628 F.Supp. 442, 451 (S.D.N.Y.1985) (same).