Weinrott v. Carp

Decision Date26 April 1973
Citation298 N.E.2d 42,32 N.Y.2d 190,344 N.Y.S.2d 848
Parties, 298 N.E.2d 42 In the Matter of the Arbitration between George E. WEINROTT et al., Respondents, v. Emile CARP et al., Appellants.
CourtNew York Court of Appeals Court of Appeals

Leonard Feldman and Lawrence Milberg, Great Neck, for appellants.

Isadore B. Hurwitz, New York City, for respondents.

WACHTLER, Judge.

This is the second time this case has been before this court in a long and tortuous journey which started over five years ago. It first appeared in 1967, when appellants sought to stay arbitration proceedings on the ground that the contract containing the arbitration clause was induced by fraud. In affirming the denial of a stay we impliedly adhered to the 1957 decision of Matter of Wrap-Vertiser Corp. (Plotnick), 3 N.Y.2d 17, 163 N.Y.S.2d 639, 143 N.E.2d 366, which held that fraud in the inducement of a contract was an issue for the court and not the arbitrators. The reason for our denial of the stay was that the evidence did not raise a substantial question of fact as to the existence of such fraud (Matter of Carp (Weinrott), 20 N.Y.2d 934, 286 N.Y.S.2d 285, 233 N.E.2d 297).

Following our decision, the parties proceeded to arbitration. Protracted hearings resulted in an award directing appellants to pay respondents $30,713.47, and that award has been upheld by both the Supreme Court and the Appellate Division, 37 A.D.2d 548, 322 N.Y.S.2d 531. On this appeal we have decided to consider, among other things, whether our determination in Matter of Wrap-Vertiser Corp. (Plotnick), 3 N.Y.2d 17, 163 N.Y.S.2d 639, 143 N.E.2d 366, Supra, has retained its vitality in the light of subsequent experience and contemporary attitudes concerning the role of arbitration in the settlement of commercial disputes and to decide whether in the future, fraud in the inducement of a contract containing a broad arbitration clause should be an issue for the arbitrators.

The substantive disagreement in this case arises from a licensing and joint-venture agreement pursuant to which the appellants were licensed to use a process developed for the construction of single- and double-story buildings. The process itself utilized panels made of plywood and polyurethane filler which, it is alleged, contained sufficient strength to make conventional framing of each structure unnecessary. Assertions of fraud in the inducement consist of alleged misrepresentations regarding the capabilities of the process, respondents' experience in using it, its approval by governmental agencies, ownership of the process, and its actual use in the construction of model homes.

On this appeal, appellants urge that the arbitrators erred in rejecting an offer of newly discovered evidence concerning fraud in the inducement. The offer, of course, followed our judicial determination that no substantial issue of fraud was presented. Appellants' contention was adequately answered below: 'Viewing (appellants') argument on this point in the light most favorable to them and thus assuming that the arbitrators' decision was based upon their determination that the issue of fraud in the inducement has been determined adversely to (appellants) by the courts and that this was not, in fact, the holding of the courts, at most it then appears that the arbitrators erred in application of a rule of law. But as stated in Matter of Aimcee Wholesale Corp. v. Toner (Tomar) Products (21 N.Y.2d 621, 626 (289 N.Y.S.2d 968, 237 N.E.2d 223)): 'Arbitrators are not bound by rules of law and their decisions are essentially final. Certainly, the awards may not be set aside for misapplication of the law (CPLR 7511)"

We turn now to review the decision which gave birth to this protracted litigation (Matter of Wrap-Vertiser Corp. (Plotnick), 3 N.Y.2d 17, 163 N.Y.S.2d 639, 143 N.E.2d 366, Supra). Read strictly, Wrap-Vertiser concerned itself solely with the contractual language employed by the parties in an arbitration provision, giving that language a narrow interpretation. Some courts have interpreted it accordingly (Matter of Amphenol Corp. (Microlab), 49 Misc.2d 46, 47, 266 N.Y.S.2d 768, 769, affd. 25 A.D.2d 497, 267 N.Y.S.2d 477; Matter of Fabrex Corp. (Winard Sales Co.), 23 Misc.2d 26, 200 N.Y.S.2d 278). Read broadly, however, Wrap-Vertiser asserts the legal proposition that fraud in the inducement, coupled with a claim for rescission, is always a matter for judicial determination prior to arbitration. Either reading, we now believe, frustrates rather than promotes both the intention of the parties and the salutary function of arbitration agreements.

There is no doubt that parties can contract to submit the issue of fraud in the inducement to arbitration (Atcas v. Credit Clearing Corp. of Amer., 292 Minn. 334, 197 N.W.2d 448; Lawrence Co. v. Devonshire Fabrics,271 F.2d 402, 410 (2d Cir.)). The problem lies in discerning exactly what issues the parties have committed to the jurisdiction of the arbitrators. Courts construing differently worded but nonetheless similarly broad arbitration agreements have come to different conclusions as to whether the parties intended to submit the issue of fraud in the inducement to the arbitrators. (Compare Prima Paint v. Flood & Conklin, 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270; Lawrence, 271 F.2d 402, Supra; Necchi Sewing Mach. Sales Corp. v. Sewline Co., 194 F.Supp. 602, 603 (S.D.N.Y.) with Matter of Wrap-Vertiser Corp. (Plotnick), 3 N.Y.2d 17, 163 N.Y.S.2d 639, 143 N.E.2d 366, Supra; Reynolds Jamaica Mines v. La Societe Navale Caennaise,239 F.2d 689, 691 (4 Cir.); Atcas, 292 Minn. 334, 197 N.W.2d 448, Supra.)

In Wrap-Vertiser, 3 N.Y.2d 17, 18, 163 N.Y.S.2d 639, 640, 143 N.E.2d 366, Supra, the arbitration clause called for the arbitration of any question 'as to the validity, interpretation or performance of this agreement'. There the court held that such a provision did not contemplate the submission of fraud in the inducement to the arbitrators. Yet in the case of Matter of Amphenol Corp. (Microlab), 49 Misc.2d 46, 47, 266 N.Y.S.2d 768, 769, Supra, the court held the following arbitration agreement to include submission of the issue of fraud in the inducement to arbitration: 'In the event of any dispute, controversy or misunderstanding arising between the parties hereto which may directly or indirectly concern or involve any of the terms, covenants or conditions hereof or the construction of any of its provisions or the general subject matter thereof, the parties agree to submit.'

Similarly in Matter of Fabrex Corp. (Winard Sales Co.), 23 Misc.2d 26, 200 N.Y.S.2d 278, Supra the court held that an arbitration clause extending to 'Any controversy arising under or in relation to this contract' was meant to cover fraud in the inducement. In the case of Housekeeper v. Lourie, 39 A.D.2d 280, 281, 333 N.Y.S.2d 932, 934 the court held that the clause agreeing to submit 'any controversy or claim arising out of or relating to this contract or the subject matter hereof or the breach hereof' to arbitration included the submission of fraud in the inducement to the arbitrators.

The Amphenol and the Fabrex cases distinguished Wrap-Vertiser on the grounds that the Wrap-Vertiser arbitration clause was narrower. The court in Matter of Coler (GCA Corp.), 39 A.D.2d 656, 331 N.Y.S.2d 938 went so far as to call the Wrap-Vertiser situation Sui generis. (See, also, Matter of Fabrex Corp. (Winard Sales Co.), 23 Misc.2d 26, 28, 200 N.Y.S.2d 278, 280, Supra.)

A careful reading of Wrap-Vertiser demonstrates that it was not Sui generis, nor is Wrap-Vertiser distinguishable from Amphenol and Fabrex solely on the basis of construction of the contractual arbitration clause. The difference between Wrap-Vertiser and Amphenol and Coler, lies more in a different policy regarding arbitration clauses than in the different arbitration clauses under consideration. In this regard it is noted that all of the cases involved what could fairly be termed broad arbitration agreements.

The Amphenol and Coler cases represent a trend away from the Wrap-Vertiser policy of the very narrow construction of arbitration agreements. (See, also, Matter of Kellogg Co. (Monsanto Chem. Co.), 9 A.D.2d 744, 745, 192 N.Y.S.2d 869, 870.) Our court, too, has given some indications of a willingness to expand the narrow confines of the Wrap-Vertiser approach. In Matter of Exercycle Corp. (Maratta), 9 N.Y.2d 329, 334, 214 N.Y.S.2d 353, 355, 174 N.E.2d 463, 464 we said: 'Once it be ascertained that the parties broadly agree to arbitrate a dispute 'arising out of or in connection with' the agreement, it is for the arbitrators to decide what the agreement means and to enforce it according to the rules of law which they deem appropriate in the circumstances.' In the case now before us the arbitration clause reads: 'All disputes, controversies or claims arising hereunder, the interpretation of any of the provisions or the performance called for thereunder shall be settled by arbitration in New York, in accordance with the rules then obtaining of the American Arbitration Association and any decision arising therefrom may be entered as a judgment in any court of competent jurisdiction.'

This provision is clearly a 'broad' provision, and whether or not it will be given effect depends more on policy than on the wording of the provision itself.

In the case of Atcas v. Credit Clearing Corp. of Amer., 292 Minn. 334, 338, 197 N.W.2d 448, 451, Supra the Supreme Court of Minnesota held that fraud in the inducement was to be decided by the courts under an arbitration provision which mandated that 'Any controversy whatsoever, relating to this Agreement shall be settled by arbitration'. The court stated that 'the contract contains no reference to fraud in the inducement or how that issue should be resolved if it is raised' (Id., at p. 341, 197 N.W.2d at p. 453) and, therefore, since it was not a specified issue, it could not be submitted to arbitration. Such a demand for...

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