The “Queen of All Threshold Issues” in Arbitration Law

MZM Construction Co., Inc. v. New Jersey Building Laborers Statewide Benefit Funds, 974 F.3d 386 (3d Cir. 2020). Decisions about arbitration just keep on coming, from both New Jersey and federal courts. This latest opinion, by Judge Restrepo, addresses what he called (quoting a law review article) “‘the queen of all threshold issues’ in arbitration law”: who decides ‘whether an agreement exists, when the putative agreement includes an arbitration provision empowering an arbitrator to decide whether an agreement exists?” Judge Restrepo rightly referred to this as a “mind-bending” question.

In a lengthy and scholarly opinion, the Third Circuit, affirming Judge McNulty’s ruling below, held that a court, not an arbitrator, was to make that decision in the circumstances of this case. Among many other authorities, Judge Restrepo went through the Supreme Court’s key decisions in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), and Rent-A-Center, Inc. v. Jackson, 561 U.S. 63 (2010). After Prima Paint, the rule has been that “a claim of fraud in the inducement of the arbitration clause is for the court to decide, but a claim of fraud in the inducement of the container contract is for the arbitrator” (emphases by Judge Restrepo).

Between Prima Paint and Rent-A-Center, the Third Circuit held in Sandvik AB v. Advent Int’l Corp., 220 F.3d 99 (3d Cir. 2000), that it is for a court to decide “questions about the formation or existence of an arbitration agreement, namely the element of mutual assent.” Rent-A-Center, Judge Restrepo said, ruled that unless the party opposing arbitration challenges an arbitration agreement’s provision that delegates to the arbitrator the power to decide arbitrability issues, “the district court ‘must treat it as valid’ and ‘must enforce it’ by sending ‘any challenge to the validity’ of the underlying arbitration agreement to the arbitrator” (emphasis by Judge Restrepo).

Though the issue was somewhat difficult, the panel concluded that Sandvik was still to be followed even after Rent-A-Center. Judge Restrepo cited several cases from other Circuits, post-Rent-A-Center, that had likewise “declined to enforce delegation provisions when the formation or existence of the container contract was at issue.” Thus, the court held that “unless the parties clearly and unmistakably agreed to arbitrate questions of contract formation in a contract whose formation is not in issue, those gateway questions are for the courts to decide.”

Judge Restrepo then turned to whether MZM had put the formation of the arbitration provision “in issue.” MZM claimed that there was fraud in the execution (that is, that it signed the agreement in reliance on an “assurance that it was a single-project agreement without any mention of arbitration”). Fraud in the execution overrides the general rule that a party’s signature on a contract is normally binding. Under New Jersey law, “[c]ontracting parties have a right to trust each other to draw up paperwork that accurately memorializes the oral understanding between them, and the presentation of the paper for signature is itself a representation that the terms of such oral agreement have been or will be embodied in the writing.”

Defendant, however, asserted that MZM had pled fraud in the inducement, not fraud in the execution. Judge Restrepo noted that if that were so, the issue would have to go to the arbitrator rather than being decided by the court. But he concluded that MZM had pled fraud in the execution.

This was a layered issue that required a detailed opinion to parse it and make it understandable. Judge Restrepo delivered.