Michael-Curry Companies v. Knutson Shareholders Liquidating Trust
1989 Minn. LEXIS 313, 1989 WL 150235, 449 N.W.2d 139 (1989)
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Rule of Law:
An arbitration clause that covers any controversy 'arising out of, or relating to... the making' of an agreement is sufficiently broad to compel arbitration of a claim of fraudulent inducement, even if the clause does not explicitly mention the word 'fraud'.
Facts:
- Knutson Companies, Inc. (KCI), the predecessor to the Knutson Shareholders Liquidating Trust (Trust), entered into a stock purchase agreement to sell the stock of its subsidiary, D & L Building, Inc., to Michael-Curry Companies, Inc. (MCCI).
- The agreement contained an arbitration clause covering 'Any controversy or claim arising out of, or relating to, this Agreement, or the making, performance, or interpretation thereof'.
- After the initial sale, the Trust and MCCI executed an amendment to the agreement which guaranteed that MCCI would earn a minimum profit on D & L's ongoing construction projects.
- The amendment also included a clause stating that, except for the changes made, the original agreement 'shall remain in full force and effect.'
- Subsequently, MCCI claimed D & L's projects experienced serious losses and demanded reimbursement from the Trust under the profit guaranty.
- The Trust refused to pay, alleging that MCCI had known D & L's business was deteriorating before the amendment was signed but failed to disclose this information, thereby fraudulently inducing the Trust to agree to the profit guaranty.
Procedural Posture:
- MCCI filed a Demand for Arbitration, which the Trust refused.
- MCCI then sued the Trust in Minnesota district court (trial court) for breach of contract.
- The Trust answered and counterclaimed, asserting fraud in the inducement as a defense and reason to avoid arbitration.
- MCCI moved the district court to compel arbitration, and the Trust filed a cross-motion to stay arbitration pending a court trial on the fraud claim.
- After an initial order and remand, the district court ultimately stayed arbitration, ruling that the fraud claim must be decided by the court because the contract did not specifically mention arbitrating fraud.
- MCCI (appellant) appealed the district court's order to the Minnesota Court of Appeals (intermediate appellate court).
- The Court of Appeals reversed the trial court, holding the arbitration clause was broad enough to cover the fraud claim.
- The Trust (appellant) petitioned for and was granted review by the Minnesota Supreme Court (highest court).
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Issue:
Does an arbitration clause that applies to any controversy 'arising out of, or relating to, this Agreement, or the making, performance, or interpretation thereof' compel arbitration of a claim that a subsequent amendment to that contract was fraudulently induced?
Opinions:
Majority - Justice Keith
Yes. An arbitration clause covering disputes relating to the 'making' of a contract is sufficiently broad to compel arbitration of a fraudulent inducement claim. The court applied the two-prong test from Atcas v. Credit Clearing Corp., under which a fraud in the inducement claim is arbitrable if the clause either (1) specifically mentions fraud, or (2) is 'sufficiently broad to comprehend' it. While this clause does not specifically mention fraud, its inclusion of controversies relating to 'the making' of the agreement satisfies the second prong. A claim of fraud in the inducement directly challenges the 'making' or formation of the contract itself. Requiring the explicit use of the word 'fraud' would undermine Minnesota's strong public policy favoring arbitration and would render the second prong of the Atcas test meaningless.
Analysis:
This decision reinforces Minnesota's strong public policy in favor of arbitration by broadly interpreting the scope of arbitration clauses. It clarifies the 'sufficiently broad' standard from the Atcas test, establishing that language covering 'the making' of a contract is enough to encompass claims of fraudulent inducement. This ruling makes it more difficult for parties to avoid agreed-upon arbitration by alleging fraud in the contract's formation. Consequently, parties wishing to reserve fraudulent inducement claims for judicial resolution must now use explicit exclusionary language in their arbitration clauses.
