Law School Case Brief
Prima Paint Corp. v. Flood & Conklin Mfg. Co. - 388 U.S. 395, 87 S. Ct. 1801 (1967)
Under § 4 of the United States Arbitration Act of 1925 (Act) with respect to a matter within the jurisdiction of the federal courts save for the existence of an arbitration clause, the federal court is instructed to order arbitration to proceed once it is satisfied that the making of the agreement for arbitration or the failure to comply with an arbitration agreement is not in issue. Accordingly, if the claim is fraud in the inducement of the arbitration clause itself - an issue which goes to the "making" of the agreement to arbitrate - the federal court may proceed to adjudicate it. But the statutory language does not permit the federal court to consider claims of fraud in the inducement of the contract generally. In passing upon an application of § 3 of the Act, for a stay while the parties arbitrate, a federal court may consider only issues relating to the making and performance of the agreement to arbitrate.
The parties had entered into a consulting agreement after the corporation purchased the assets of the company's paint business. After the corporation failed to make the first payment due under the agreement the company served notice to arbitrate. The corporation filed suit seeking rescission of the entire agreement on the basis of fraud allegedly consisting of the company's misrepresentation that it was solvent and able to perform the agreement while it was completely insolvent. The company moved to stay the court action pending arbitration. The company contended that whether there was fraud in the inducement of the consulting agreement was a question for the arbitrators. The district court granted the company's motion. On appeal, the court of appeals affirmed.
Can fraud in the inducement of the consulting agreement be a question for arbitration?
The Court affirmed the court of appeals' decision that an arbitrator was to resolve the corporation's claim of fraud in the inducement in regard to the agreement the corporation had entered into with the company. It held that holding that (1) because the agreement was tied to the interstate transfer of the assets it affected interstate commerce and was within the coverage of the Act; (2) the arbitration clause in the agreement was separable from the rest of the agreement; and (3) allegations as to the validity of the agreement in general, as opposed to the arbitration clause in particular, were to be decided by the arbitrator.
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