Fraud Claim Does Not Invalidate Arbitration Provision Unless Fraud Relates to That Provision

On June 27, 2018, the Second Department issued a decision in Zafar v. Fast Track Leasing, LLC, 2018 NY Slip Op. 04774, holding that a fraud claim does not invalidate an arbitration provision unless the fraud relates to that provision, explaining:

A party may not be compelled to arbitrate a dispute unless there is evidence which affirmatively establishes that the parties clearly, explicitly, and unequivocally agreed to arbitrate the dispute. Under both federal and New York law, unless it can be established that there was a grand scheme to defraud which permeated the entire agreement, including the arbitration provision, a broadly worded arbitration provision will be deemed separate from the substantive contractual provisions, and the agreement to arbitrate may be valid despite the underlying allegation of fraud.

The broad arbitration clause in the 2014 agreement, together with the other provisions of the 2014 agreement, demonstrate that the plaintiffs explicitly and unequivocally agreed to arbitrate the matters that are the subject of this action. In addition, the plaintiffs' bare conclusory assertions of fraud failed to establish that any alleged fraud was part of a grand scheme that permeated the entire agreement, including the arbitration clause.

(Internal citations omitted).

This decision illustrates the general rule that dispute resolution provisions in a contract, such as a waiver of a right to a jury trial or a requirement that a dispute be arbitrated, will be enforced even when there is a claim for breach of the contract or that the plaintiff was induced to enter into the contract (but not the dispute resolution provision itself) by fraud. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding the enforceability of a contractual dispute resolution provision.