Court Upholds Arbitration Provision Despite Allegations of Fraud in Contract's Execution

The dispute involved the potential trade-in of a car and the purchase of a pickup truck by two customers at a car dealership. During the course of the transaction, one of the customers signed a document that he later learned was a contract including an arbitration provision. Before the transaction was completed, the customers had second thoughts and requested the return of their trade-in and deposit. The dealership refused, insisting that the customers had a binding contract to buy the truck. The customers sued the dealership and certain employees, alleging common law fraud and violations of state consumer protection laws. The defendants moved to dismiss and compel arbitration.

The court granted the motion to compel arbitration and stayed the case. As to the customer who signed the contract containing the arbitration provision, the court found that, although the customer contended that he was deceived into signing the contract, the arbitration provision would be enforced. The provision included a delegation of issues involving arbitrability to the arbitrator. Upon review of New Jersey and federal case law, the court held that unless a plaintiff challenges the validity of the arbitration provision itself, the dispute over the validity of the contract as a whole must be arbitrated. The court found that "precedent compels only one conclusion," namely, that the arbitrator must decide the validity of their sales contracts and the arbitrability of the dispute.

The court also rejected the argument that the court should permit discovery on the issue of whether the signing customer was fraudulently induced into signing the contract. The court observed, "Importantly, [the customer] is arguing he was fraudulently induced into entering the entire contract, and not just the arbitration provision. A challenge based on fraud in the inducement of the whole contract (including the arbitration clause) is for the arbitrator, while a challenge based on the lack of mutuality of the arbitration clause would be for the court."

Last, the court stayed the second customer's claims that were not subject to arbitration because if "the arbitrator finds that the contract, including the arbitration agreement, is invalid, then he will likely return to litigate in this Court, where his action is stayed. In the event that this occurs, it would be sensible for [the two customers] to litigate their claims together, as they initially attempted to do, to avoid inconsistent rulings." The court therefore stayed the entire case.

Lomonico v. Foulke Management Corp., No. 1:18-cv-11511 (D.N.J. Feb. 20, 2020).