Prima Paint Corp. v. Flood & Conklin Manufacturing. Co.
388 U.S. 395 (1967)
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Rule of Law:
Under the Federal Arbitration Act, a claim of fraud in the inducement of a contract containing a broad arbitration clause is to be resolved by an arbitrator, unless the claim of fraud is directed specifically to the arbitration clause itself.
Facts:
- Prima Paint Corporation purchased the paint business of Flood & Conklin Manufacturing Company (F&C).
- Shortly after, on October 7, 1964, the parties entered into a 'Consulting Agreement' under which F&C would provide consulting services, customer lists, and a covenant not to compete in exchange for payments from Prima Paint.
- The agreement contained a broad arbitration clause stating that 'Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration'.
- One week after the agreement was signed, on October 14, 1964, F&C filed for Chapter XI bankruptcy.
- Prima Paint contended that F&C had fraudulently misrepresented its financial solvency, claiming it would not have entered the agreement had it known F&C was insolvent and intended to file for bankruptcy.
- When the first payment was due, Prima Paint paid the amount into escrow and notified F&C of the alleged breach and fraudulent inducement.
- In response, F&C served Prima Paint with a notice of intention to arbitrate the dispute.
Procedural Posture:
- Prima Paint filed suit against Flood & Conklin in the U.S. District Court for the Southern District of New York seeking rescission of the consulting agreement.
- Contemporaneously, Prima Paint petitioned the District Court for an order enjoining F&C from proceeding with arbitration.
- F&C cross-moved to stay Prima Paint's court action pending arbitration.
- The District Court granted F&C’s motion to stay the action, holding that the fraud claim was a question for the arbitrators.
- Prima Paint (appellant) appealed to the U.S. Court of Appeals for the Second Circuit.
- The Court of Appeals dismissed the appeal, affirming the lower court's decision.
- The U.S. Supreme Court granted certiorari to resolve a circuit split on the issue.
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Issue:
Under the United States Arbitration Act, does a federal court or an arbitrator decide a claim that a contract was fraudulently induced when the contract contains a broad arbitration clause, but the claim of fraud is not directed at the arbitration clause itself?
Opinions:
Majority - Fortas, J.
No, the arbitrator decides the claim of fraudulent inducement. Under § 4 of the United States Arbitration Act, a federal court's inquiry when considering a motion to stay litigation pending arbitration is limited to issues relating to the making and performance of the agreement to arbitrate itself. This establishes a 'separability' doctrine, where the arbitration clause is considered separable from the contract in which it is embedded. Since Prima Paint's claim of fraud was directed at the entire consulting agreement and not specifically at the arbitration clause, the claim falls within the scope of the broad arbitration clause and must be resolved by the arbitrator. This interpretation honors the plain meaning of the statute and the clear congressional purpose for arbitration to be a speedy procedure, unhindered by judicial delays. The federal arbitration statute is based on Congress's power over interstate commerce and admiralty, and thus, this federal rule applies in federal courts even in diversity cases.
Dissenting - Black, J.
Yes, a federal court should decide the claim of fraudulent inducement. The Court's holding is 'fantastic' because it forces a party to arbitrate the validity of a contract that may be void from the beginning due to fraud. Section 2 of the Arbitration Act explicitly states that arbitration agreements are enforceable 'save upon such grounds as exist at law or in equity for the revocation of any contract.' Fraud is a quintessential ground for the revocation of a contract. If the entire contract is void, then the arbitration clause contained within it is also void, leaving nothing to be arbitrated. The legislative history clearly shows Congress intended for courts to determine the threshold legal question of whether a valid contract exists before compelling arbitration. The majority's 'separability' doctrine is a judicial invention that improperly elevates arbitration clauses above all other contractual provisions and potentially denies a party their right to a jury trial on the issue of fraud.
Analysis:
This landmark decision established the 'separability doctrine' as a core principle of U.S. federal arbitration law. By treating the arbitration agreement as a distinct contract separate from the main container contract, the Court significantly limited the ability of parties to resist arbitration by raising defenses that apply to the contract as a whole. This ruling strengthened the enforceability of arbitration clauses under the Federal Arbitration Act and solidified a national policy favoring arbitration. Future litigation challenging the validity of a contract with an arbitration clause would have to be narrowly tailored to attack the arbitration provision itself to be heard by a court.
