On January 25, 2023, Justice Ruchelsman of the Kings County Commercial Division issued a decision in Gowanus Park LLC v. KSK Constr. Group LLC, 2023 NY Slip Op. 30253(U), holding that a fraudulent inducement claim that was unrelated to a contract’s arbitration provision was insufficient to avoid the requirement to arbitrate pursuance to that provision, explaining:
It is firmly established that the public policy of New York State favors and encourages arbitration and alternative dispute resolutions. Therefore, New York courts. interfere as little, as possible with the freedom of consenting parties to submit disputes to arbitration.
An allegation of fraud in the inducement only affects the arbitration clause when either the fraud relates to the arbitration clause itself or where the fraud was part of a grand scheme that permeated the entire contract. To demonstrate that fraud permeated the entire contract, it must pe established that the agreement was not the result of an arm’s length negotiation or the arbitration clause was inserted into the contract to accomplish a fraudulent scheme.
Thus, even 332 East 66th Street Inc., v. Walker, 59 Misc3d 1216{A), 106 NYS2d 727 [Supreme Court New York County 2018] cited by the plaintiff held that generally, under a broad arbitration provision, the claim of fraud in the inducement of the agreement is deemed to be included as a matter for arbitrators to determine. The court did explain that to avoid arbitration the fraud had to relate to the arbitration clause itself or that ‘something greater than the substantive provisions of the agreement were induced by fraud.
Indeed, the Federal courts have adopted a similar approach. In Prima Paint Corporation v. Flood Conklin Manufacturing
Company, 388 US 3951 87 S.Ct 1801, 18 L.Ed2d 1270 [1967] the Supreme Court observed that arbitration clauses as a matter of
federal law are separable from the contracts in which they are embedded, and that where no claim is made that fraud was directed to the arbitration clause itself, a broad arbitration clause will be held to encompass arbitration of the claim that the contract itself was induced by fraud. The only time the courts really involve themselves in claims that should properly be before arbitration is questions whether a contract was entered into at all.In this case the plaintiff alleges there was a grand scheme of fraud that permeated the entire contract. However, mere fraudulent inducement does not establish the fraud permeated the entire contract. Consequently, without additional evidence that fraudulent inducement included something greater than the provisions of the agreement itself no such fraudulent scheme has been presented and there is no basis upon which to deny arbitration. The plaintiff has failed to produce any evidence that the contract entered into between the parties was not an arms length negotiation or that any alleged fraud in the inducement was a scheme which permeated the entire contract.
(Internal quotations and citations omitted).