When There is Question Regarding Whether a Party Signed Agreement With Arbitration Clause, Question of Arbitrability is for Court, Not Arbitrator, to Decide

On June 27, 2019, Justice Borrok of the New York County Commercial Division issued a decision in Suratwala v. Gandhi, 2019 NY Slip Op. 31859(U), holding that when there is a question regarding whether a party signed an agreement containing an arbitration clause, the question of arbitrability is for the court, not the arbitrator, to decide, explaining:

With respect to Om Vagzei LLC and Om Sidhdhy Vinayak LLC, amendment of the original operating agreements only required a majority of the LLC Interests to amend such operating agreements. Schedule A of the Original Om Vagzei Agreement indicated that Mr. Suratwala has no membership interest in that entity and the other petitioners Neha Suratwala and Trupti Saratwala, collectively, only had a 22% interest. Accordingly, even taking Mr. Surutwala's forgery allegation as true and assuming that Neha Suratwala and Trupti Suratwala both did not consent to the amendment, there is no basis to stay the arbitration as it relates to Om Vagzei LLC or Om Sidhdhy Vinayak LLC because the petitioners have failed to allege a basis to find that the Amended and Restated Vagzei Agreement or the Amended and Restate Om Sidhdhy Agreement are not valid. In addition, with respect to Om Sidhdhy Vina yak LLC, Schedule A of the Original Om Sidhdhy Agreement does not indicate that Mr. Suratwala had a membership interest in that entity and none of the other petitioners are listed as members. Similarly, with respect to Om Viththal LLC, neither the Original Om Viththal Agreement, nor the Amended and Restated Om Viththal LLC Agreement list Mr. Tansukh Suratwala as a member. Accordingly, based on the submissions of the petitioners, there simply is no basis to understand how he has standing to challenge the Amended and Restated Viththal LLC Agreement. Furthermore, the Amended and Restated Om Viththal Agreement was signed by of the requisite 75% of its members so the consent of members holding 75% of the Membership Interests appears to have been met.

Finally, with respect to Aum Viththal LLC, Jai Ambe LLC, and Newberg Hotel Partners LLC, inasmuch as the Petitioners argue that the Aum Viththal Amended and Restated Agreement, the Jai Amended and Restated Agreement, and the Newberg Amended and Restated Agreement are invalid, at first blush, the petitioners' application would seem to be governed by the United States Supreme Court analysis in Nitro-Lift Tech., LLC. v Howard (568 US 17 [2012]) and Prima Paint Corp. v Flood & Conklin Manufacturing Co. (388 US 395 [1967]). In Nitro-Lift, the Court wrote:

attacks on the validity of the contract, as distinct from attacks on the validity of the arbitration clause itself, are to be resolved by the arbitrator in the first instance, not by a federal or state court (568 US at 20-21 [quotation and citation omitted]).

In Prima Paint, the Court held that claims of fraud in the inducement of the contract generally are to be determined by the arbitrator. The Court explained that, 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 court may proceed to adjudicate it in the first instance.

However, a closer examination at the basis for the petitioners' assertion that the Amended and Restated Agreements are invalid necessarily brings this case outside of this Prima Paint holding. The basis for the Court's ruling in Prima Paint was that the arbitration clause was severable from the agreement at issue in that case. Unenforceability based on fraud in the factum is a question not squarely addressed by the Prima Paint Court. As the court in Kyung In Lee v Pacific Bullion (NY) Inc. (788 F Supp 155, 157 [ED NY 1992]) aptly observed:

if a party's signature were forged on a contract, it would be absurd to require arbitration if the party attacking the contract as void failed to allege that the arbitration clause itself was fraudulently obtained. Therefore, arbitration is stayed solely with respect to Aum Viththal LLC, Jai Ambe LLC, and Newberg Hotel Partners LLC, and an evidentiary hearing is ordered to determine if the signature of Tansukh Suratwala on the Amended and Restated Agreements of those entities is a forgery, and the arbitration is stayed until such hearing occurs.

(Internal quotations omitted).

Commercial litigation involves more than courts. Disputes often are--by agreement--decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement.