07/29/2011 02:06:00 PM EST
First Circuit Finds Fraudulent Inducement Claims Arbitrable by Virtue of the “Ambiguity” of “Arising Under” Language — Despite Granite Rock
By Louis M. Solomon
Dialysis Access Center, LLC, et al.
(DAC) v. RMS Lifeline, Inc. (RMS),
No. 10-1872 (1st Cir. Mar. 2011) [enhanced version available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law], includes a step-by-step refresher of the current state of
the law on when in international litigation an arbitration clause can force a
party to present validity and enforceability issues to the arbitrator rather
than to a court. The case contains a hair-splitting ruling of
interest to corporate lawyers drafting arbitration provisions and so deserves
an extended summary here. See generally our discussion of the issue of who decides what in the arbitration-litigation context in
our e-book, International
Practice: Topics and Trends
DAC and RMS entered into a
management services agreement (MSA) for the development, building, management,
and operation of a vascular access center in Puerto Rico. The contract included
a Puerto Rico choice of law provision and an arbitration clause containing an
obligation to use good faith to resolve a dispute and a binding arbitration
provision for any "dispute that may arise under this Agreement". DAC alleged
that the formation of the MSA was infected with fraud and that it was
fraudulently induced to enter into the MSA.
The First Circuit handled this
fairly typical fact pattern as follows:
First, because the District Court
not only ruled that the fraudulent inducement claims were arbitrable but also
dismissed (rather than stayed) the case, the Court of Appeals found that it had
appellate jurisdiction under Section 16 of the Federal Arbitration Act for
the Court of Appeals followed the U.S. Supreme Court's decision in Granite
Rock Co. v. Int'l Bhd. of Teamsters, 130 S.Ct. 2847 (2010) [enhanced version / unenhanced version ],
that "except where the parties clearly and unmistakably provide otherwise, it
is the court's duty to interpret the agreement and to determine whether the
parties intended to arbitrate grievances concerning a particular matter".
Third, the Court of Appeals followed
the U.S. Supreme Court's decision in Howsam v. Dean Witter Reynolds, Inc.,
537 U.S. 79 (2002) [enhanced version / unenhanced version ],
that "procedural" questions which grow
out of the dispute and bear on its final disposition' are presumptively not for
the judge, but for an arbitrator, to decide". All this is known and
Fourth, the First Circuit then
grappled with the role of presumptions, or the "federal policy favoring
arbitration", as to which the Supreme Court has stated that "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." Mastrobuono
v.Shearson Lehman Hutton, Inc., 514 U.S. 52, 62 (1995) [enhanced version / unenhanced version ],
(quoting Volt Info. Scis., Inc. v.
Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 468, 476 (1989 [enhanced version / unenhanced version ])).
That federal policy came under attack - or at least under scrutiny - in Granite
Rock, which has been read to reapply a strict constructionist patina over
arbitrability questions. The First Circuit reads Granite Rock as
clarifying the presumption, where courts "discharge this duty by: (1) applying
the presumption of arbitrability only where a validly formed and enforceable
arbitration agreement is ambiguous about whether it covers the dispute at hand;
and (2) adhering to the presumption and ordering arbitration only where the
presumption is not rebutted". It also embraced the "positive assurance"
phraseology that: "In evaluating the scope of . . . arbitration clauses, . . .
arbitration will be ordered unless it may be said with positive assurance that
the arbitration clause is not susceptible of an interpretation that covers the
Fifth, in applying these general
principles to a claim for fraud in the inducement to an arbitration clause
requiring arbitration not of any dispute "arising under or relating to" the
agreement but only "arising under" the agreement, the Court of Appeals joins
the other Circuits limiting to its facts (a polite way of saying refused to
follow) In re Kinoshita & Co., 287 F.2d 951, 953 (2d Cir. 1961) [enhanced version ], , where the Second Circuit found that where 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" and
not to the issue of its formation or enforceability. The First Circuit noted In
re Kinoshita's "inconsistency with federal policy favoring arbitration,
particularly in international business disputes". But the way it found
arbitration of the fraudulent inducement claim arbitrable in the case before it
- despite the narrow arbitration clause and despite Puerto Rico law that
fraudulently induced contracts were null - was by finding the "arising
under" language ambiguous - and then applying the federal policy favoring
arbitration. In doing so the Court of Appeals had to distinguish Granite
Rock itself, which held that an arbitration clause requiring arbitration of
disputes arising under a collective bargaining agreement was not broad enough
to encompass the dispute over the date of ratification of the CBA itself. The
distinction the First Circuit drew was that the "parties here do not dispute
the MSA's existence. Rather, they dispute the validity of the MSA".
Finally, the Court of Appeals held
that the controversy over whether the good-faith negotiation condition was met
was an issue for the arbitrator to decide.
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