SCHWELB, Associate Judge:
Hercules & Co. (Hercules), appeals from the confirmation of an arbitration award issued in favor of Shama Restaurant Corp., et al. (Shama).
This is the second time that Hercules has asked this court to resolve a dispute arising out of an ill-fated renovation project in Old Town, Alexandria, Virginia, which began in the summer of 1986. The circumstances underlying the dispute were set forth in detail in our first disposition of this case, Hercules & Co. v. Shama Restaurant Corp., 566 A.2d 31, 33-34 (D.C.1989) (Hercules I), and will only be reiterated here to the extent necessary to dispose of the issues on appeal.
Briefly, Hercules alleged in its complaint that it had contracted with Shama in 1986 to renovate Shama's restaurant in Old Town. The contract contained both a general arbitration clause, stating that the parties agreed to have all disputes arising out of the project resolved by independent arbitrators, and a general integration clause, stating that the contract "constitute[s] the entire agreement between" the parties. Throughout this litigation, Hercules has maintained that during the contract negotiations Shama and its architect, Darrell Downing Rippeteau (Rippeteau), made a number of material misrepresentations on which Hercules claims to have relied in deciding to execute the contract and in specifically agreeing to the arbitration clause; the most important of these alleged misrepresentations was that Shama had the financial wherewithal to satisfy fully its obligations under the contract. Neither this nor any of Shama's other alleged parol
Hercules then filed a suit against Shama and Rippeteau in our Superior Court, seeking a variety of remedies including damages and rescission of the contract on the grounds, inter alia, of fraud and breach of contract. Shama responded with a motion to stay all judicial proceedings pending arbitration of the dispute pursuant to the terms of the contract. Hercules countered by claiming that the dispute was not properly arbitrable in that both the contract as a whole and its arbitration clause in particular had been fraudulently induced by intentional misrepresentations on the parts of Shama and Rippeteau. On September 4, 1987, the trial court, per Judge Bowers, dismissed with prejudice Hercules' claim that the arbitration clause itself had been fraudulently induced, on the grounds that Hercules' allegations as to that claim were insufficient as a matter of law to entitle it to relief or to a hearing. The court referred many of Hercules' remaining claims, including the question whether the contract as a whole had been fraudulently induced, to arbitration. Hercules filed an appeal from Judge Bowers' order, but this court, in Hercules I, ruled that an order staying litigation pending arbitration was not immediately appealable. 566 A.2d at 38-39. We therefore dismissed Hercules' appeal without ruling on the merits of its fraudulent inducement claims.
Prior to our dismissal of Hercules' original appeal, the dispute between Hercules and Shama proceeded to arbitration. The arbitral panel, after rejecting Hercules' claim that the entire contract had been fraudulently induced, ruled in favor of Shama in the amount of $150,015. Shama subsequently filed a petition in the Superior Court for judicial confirmation of the arbitral award pursuant to D.C.Code § 16-4313 (1989). Hercules responded with a motion to dismiss Shama's petition on jurisdictional grounds.
THE WAIVER ISSUE
As a preliminary matter, we consider Shama's contention that, in order to preserve for review the question of arbitrability, Hercules was required to reassert its claim of fraudulent inducement in a timely
First, Shama's reliance on our holding in Moylan is misplaced. Moylan stands for the proposition that a party seeking to modify or set aside an arbitration award under §§ 16-4311 or 4312 is required to file an application urging grounds for such relief within ninety days of the award. The purpose of this rule is to ensure that a decision by an arbitrator becomes final without undue delay. It requires a party who challenges an arbitral award to put the opponent on notice as early as possible of the nature of the challenge. In the present case, however, Hercules raised the issue of fraudulent inducement in pre-award proceedings commenced under § 16-4302,
After Shama moved to stay the lawsuit Hercules had originally brought against it, Hercules filed a memorandum in opposition in which it alleged that the arbitration clause had been fraudulently induced and was therefore unenforceable. Hercules repeated this allegation in Count XI of its amended complaint. This was sufficient to put Shama on timely notice of Hercules' objections to the arbitration clause and to preserve those objections for appeal.
Secondly, to adapt Gertrude Stein's famous line about a rose, a dismissal with prejudice is a dismissal with prejudice. In Glick v. Ballentine Produce, Inc., 397 F.2d 590, 593 (8th Cir.1968), the court stated that
When Judge Bowers concluded on September 4, 1987, that Hercules had failed sufficiently to allege in its complaint fraudulent inducement of the arbitration clause, and when he dismissed that claim with prejudice, he effectively barred Hercules from relitigating that issue after the arbitrators issued their award. Shama correctly argues that the losing party in an arbitration case is ordinarily permitted to raise a post-award fraudulent inducement claim, either
Finally, this appeal is before us for the second time. When Hercules initially sought to appeal from the order dismissing with prejudice Count XI of its complaint, we held that the question whether Hercules had alleged facts sufficient to state a claim of fraudulent inducement and to avoid arbitration was not ripe for review, because an order staying litigation pending arbitration is not immediately appealable; we expressly reserved the merits of that question for possible resolution in the event of an appeal from a final decision. Hercules I, 566 A.2d at 39-40 & n. 16. Now that the dispute has been arbitrated, the sufficiency of Hercules' allegations of fraud is squarely before us. See Haynes v. Kuder, supra note 6, 591 A.2d at 1287 n. 1 ("To challenge the ... order compelling arbitration, appellant properly appeals from the ... order ... confirming the eventual arbitration decision."); cf. FirsTier Mortgage Co. v. Investors Mortgage Ins. Co., 498 U.S. 269, ___, 111 S.Ct. 648, 652, 112 L.Ed.2d 743 (1991) (under federal law, premature appeal from order that lacked finality automatically ripens once final judgment is entered). We therefore proceed to consider the merits of that challenge.
THE FRAUDULENT INDUCEMENT CLAIM
In Count XI of its complaint, Hercules alleged that the arbitration clause itself had been induced by fraud. In dismissing Count XI without leave to amend, Judge Bowers found that Hercules had not pleaded facts sufficient as a matter of law to support that claim. He concluded in substance that even though the complaint adequately alleged that Shama had intentionally misrepresented facts relating specifically to the arbitration clause, Hercules' allegations were inadequate to show that those misrepresentations were material or that its reliance on those representations had been reasonable. Hercules maintains that this ruling was error and that the judge should have held an evidentiary hearing on its fraudulent inducement claim. We do not agree.
A. The Requirement of an Evidentiary Hearing.
Hercules is correct in stating that the threshold question whether an arbitration clause was validly concluded or fraudulently induced is one which the court must initially decide before referring a dispute to arbitration. Haynes v. Kuder, supra note 6, 591 A.2d at 1289-90; American Fed'n of Gov't Employees, Local 3721 v. District of Columbia, 563 A.2d 361, 362 (D.C.1989); Poire v. Kaplan, supra note 6, 491 A.2d at 532-33. We do not agree, however, with Hercules' contention that Judge Bowers failed adequately to consider this threshold question or that he was required to conduct a trial on the merits of Count XI before dismissing it with prejudice.
Because the trial court in Haynes had the benefit of affidavits and other material outside the pleadings, we applied the standard for summary judgment under Super.Ct.Civ.R. 56 in evaluating the dismissal of Ms. Haynes' claim. 591 A.2d at 1290. Judge Bowers' decision, on the other hand, was based strictly on the submitted pleadings; our proper analogue on review of his dismissal of Count XI is therefore not Rule 56 but Super.Ct.Civ. Rules 12(b)(6) & 12(c). See Bell v. Jones, 566 A.2d 1059, 1060 (D.C.1989); American Ins. Co. v. Smith, 472 A.2d 872, 873-74 (D.C.1984). Under Rules 12(b)(6) and 12(c), a plaintiff is entitled to a trial of an issue of law or fact— including the issue whether an arbitration clause was fraudulently induced—only if the complaint alleges facts sufficient to support a claim upon which relief may be granted. Vicki Bagley Realty, Inc. v. Laufer, 482 A.2d 359, 362-64 & n. 7 (D.C. 1984); Healey v. Barker Found., 469 A.2d 1244, 1246 (D.C.1983); Cole, Raywid & Braverman v. Quadrangle Dev. Corp., 444 A.2d 969, 972 (D.C.1982). Therefore, in determining whether the trial court erred in granting Shama judgment on Count XI of Hercules' complaint without conducting an evidentiary hearing on that claim, we must consider whether Hercules alleged facts in its complaint sufficient to withstand a motion to dismiss under Rules 12(b)(6) or 12(c). To do that, we first examine the legislative and judicial authority for enforcing agreements to arbitrate. We then consider the elements of common law fraud in the inducement and evaluate the adequacy of Hercules' pleadings against those elements.
B. Judicial Enforcement of Commercial Arbitration Agreements.
The questions presented by Hercules are before us in a legislative and judicial climate in which the judiciary's past parochial prejudice against enforcing arbitration agreements, see Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 219-20 & n. 6, 105 S.Ct. 1238, 1241-42 & n. 6, 84 L.Ed.2d 158 (1985), has been consigned to well-earned historical oblivion. Following "centuries of judicial hostility to arbitration agreements," Scherk v. Alberto-Culver Co., 417 U.S. 506, 510, 94 S.Ct. 2449, 2453, 41 L.Ed.2d 270 (1974), the "federal courts have recognized a strong ... policy in favor of voluntary commercial arbitration, as embodied in the United States Arbitration Act." Hanes Corp. v. Millard, 174 U.S.App.D.C. 253, 265, 531 F.2d 585, 597 (1976). This policy is a "fundamental and powerful" one which "favors arbitration of disputes and narrowly constricts the scope of judicial intervention." Id. at 267, 531 F.2d at 599. The District has a statute similar to the United States Arbitration Act, compare D.C.Code §§ 16-4301 et seq. (1989) with 9 U.S.C. §§ 1 et seq. (1988), and we find the federal courts' application of the federal statute instructive as to how we should construe our own.
We have held that where there is ambiguity as to whether a matter is within the scope of an arbitrator's authority, any doubts are to be resolved in favor of arbitration. Friend v. Friend, 609 A.2d 1137, 1139 (D.C.1992); Sindler v. Batleman, 416 A.2d 238, 242 (D.C.1980). Indeed, "an order to arbitrate the particular [dispute] should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute. Doubts should be resolved in favor of coverage." United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582-83, 80 S.Ct. 1347, 1352-53, 4 L.Ed.2d 1409 (1960). Where an arbitration
Arbitration provides parties with a speedy, private, and relatively inexpensive method of resolving their disputes and consequently helps to decongest the court system. Hanes Corp., supra, 174 U.S.App. D.C. at 265, 531 F.2d at 597; Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402, 410 (2d Cir.1959), cert. denied, 364 U.S. 801, 81 S.Ct. 27, 5 L.Ed.2d 37 (1960). It is fundamentally a creature of contract, Dean Witter Reynolds, supra, 470 U.S. at 219-20, 105 S.Ct. at 1241-42, and parties to a contract should be held to the terms to which they have agreed. Indeed, arbitration often allows disputes to be resolved by experts in the field who are more familiar than most courts are with industry practices and who can therefore tailor procedures specifically suited to the circumstances of the particular industry. Pearce v. E.F. Hutton Group, Inc., 264 U.S.App.D.C. 246, 249, 828 F.2d 826, 829 (1987).
It is true, however, that no party may be compelled to arbitrate a dispute which it has not agreed to arbitrate. Hercules I, supra, 566 A.2d at 43 n. 21; A.T. & T. Technologies, Inc. v. Communications Workers of Am., 475 U.S. 643, 648-49, 106 S.Ct. 1415, 1418-19, 89 L.Ed.2d 648 (1986). Moreover, a party which has been fraudulently induced into agreeing to an arbitration clause has not given its valid consent to this method of resolving disputes. But when the "fundamental and powerful ... policy that favors arbitration of disputes and narrowly constricts the scope of judicial intervention," Hanes Corp., supra, 174 U.S.App.D.C. at 267, 531 F.2d at 599, is considered together with the requirement that fraud be pleaded with particularity and proved by clear and convincing evidence, see infra, parties to arbitration agreements should not be readily permitted to avoid them simply by invoking in their pleadings the pejorative cry of fraud.
C. The Elements of Fraud in the Inducement.
As we explained in Hercules I, 566 A.2d at 39-40 n. 16, common law fraud is never presumed, and a plaintiff alleging it must do so with particularity and must prove it by clear and convincing evidence. Super.Ct.Civ.R. 9(b); Bennett v. Kiggins, 377 A.2d 57, 59 (D.C.1977), cert. denied, 434 U.S. 1034, 98 S.Ct. 768, 54 L.Ed.2d 782 (1978). To be entitled to a trial on the merits of a fraud claim, a plaintiff must allege "such facts as will reveal the existence of all the requisite elements of fraud. Allegations in the form of conclusions on the part of the pleader as to the existence of fraud are insufficient." Bennett, 377 A.2d at 59-60; Higgs v. Higgs, 472 A.2d 875, 876-78 (D.C.1984).
At common law, the requisite elements of fraud were (1) a false representation (2) made in reference to a material fact, (3) with knowledge of its falsity, (4) with the intent to deceive, and (5) an action that is taken in reliance upon the representation. Bennett, supra, 377 A.2d at 59. At least in cases involving commercial contracts negotiated at arm's length, there is the further requirement (6) that the defrauded party's reliance be reasonable. Hercules I, 566 A.2d at 39 n. 16; Isen v. Calvert Corp., 126 U.S.App.D.C. 349, 353, 379 F.2d 126, 130 (1967); Day v. Sidley & Austin, 394 F.Supp. 986, 990 (D.D.C.1975).
Moreover, in order to obtain an evidentiary hearing on a claim of fraud in the inducement, a party seeking to avoid arbitration must allege in its pleadings facts that establish all the elements of fraud with respect to the arbitration clause in particular. A complaint alleging only that the entire contract was fraudulently induced is insufficient as a matter of law to avoid referral of the issue of fraud to arbitration. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 402-04, 87 S.Ct. 1801, 1805-06, 18 L.Ed.2d 1270 (1967).
D. Fraud in the Inducement of the Contract or Fraud in the Inducement of the Arbitration Clause.
In connection with the judicial policy which favors voluntary commercial arbitration and which seeks to constrain the ability of parties to circumvent arbitration agreements, the Supreme Court has held that a party seeking to avoid arbitration by raising a claim of fraudulent inducement must allege that the arbitration clause itself—rather than the contract as a whole— was fraudulently induced. Prima Paint, supra, 388 U.S. at 402-04, 87 S.Ct. at 1805-06. Hercules seems to contest this proposition. It argues, based on Moseley v. Electronic & Missile Facilities, 374 U.S. 167, 171-72, 83 S.Ct. 1815, 1817-18, 10 L.Ed.2d 818 (1963), that an allegation in its complaint that the arbitration clause was part and parcel of a "fraudulent scheme" perpetrated by Shama and Rippeteau with respect to the contract as a whole is sufficient to avoid referral of the entire case to arbitration. We disagree.
In Prima Paint, supra, the Supreme Court construed Moseley and "the plain meaning" of the United States Arbitration Act, as requiring a party who seeks to avoid arbitration on the grounds of fraudulent inducement to challenge the "making" of the arbitration clause itself, and not merely the making of the contract in which the arbitration clause is contained or the "scheme" by which both were allegedly negotiated. Prima Paint thus stands for the proposition that where a party to a contract containing a broad arbitration clause claims fraud in the inducement both of the arbitration clause itself and of the entire contract containing the arbitration clause, the court is to consider only the former claim. If the claim of fraud in the inducement of the arbitration clause proves meritless, then the court is foreclosed from considering the question of fraud in the inducement of the contract as a whole, but must leave that issue to be decided by the arbitrators. See CBS Employees Fed. Credit Union v. Donaldson, Lufkin & Jenrette Sec. Corp., 912 F.2d 1563, 1566-67 (6th Cir.1990); Rush v. Oppenheimer & Co., 681 F.Supp. 1045, 1048, 1050 n. 9 (S.D.N.Y.1988).
This point was effectively made in Robert Lawrence Co., supra, 271 F.2d at 410-11:
(Emphasis added). Similarly, in Haynes v. Kuder, supra note 6, 591 A.2d at 1290 & n. 6, we indicated that such a "bifurcated" proceeding is both obvious from and inherent in the structure and content of the District's Uniform Arbitration Act, D.C.Code § 16-4302 (1989) (quoted in full, supra note 8).
In the present case, Hercules alleged in its complaint that the "arbitration clause was a vehicle by which Rippeteau sought to perpetrate his fraud on Hercules and Shama.
The complaint thus does not contain an allegation that Shama made a misrepresentation to Hercules about the content of the arbitration clause. Hercules did allege, however, that the arbitration clause was a specific subject of its dealings with Shama, that it wanted the clause out, and that but for the fraudulent representations by Shama, it would not have agreed to a contract containing such a clause (even though it might have accepted the same contract if it were judicially enforceable). Hercules further alleged that it opposed the inclusion of an arbitration clause because, by insisting on resolution of disputes through arbitration, Shama could take advantage of the limitations on discovery to negate Hercules' opportunity to prove Shama's unfair dealings.
Shama suggests, and Judge FARRELL in his concurring opinion concludes, that under any reasonable construction of Hercules' pleadings, the rule of Prima Paint effectively disposes of the case, because Hercules' only claim of fraud in the inducement applies to the contract as a whole and only incidentally to the arbitration clause itself. Hercules claims, on the other hand, that its complaint not only alleges fraud in the inducement of the entire agreement, but also contains sufficient independent averments focused on the arbitration clause in particular to entitle Hercules to an evidentiary hearing. Indisputably, under Prima Paint, if the claim of fraud in the inducement reaches the arbitration clause only insofar as that clause is alleged to be a part of the contract as a whole, then the entire case, including the issue of fraud, must be referred to arbitration. The question whether Hercules' pleading is sufficiently specific is not dispositive, however, for even if, as Hercules contends, the claim of fraud in the inducement is viewed as sufficiently focused on the arbitration clause,
E. Hercules' Pleadings.
To determine whether the trial court erred in concluding that Hercules had failed to allege facts sufficient to entitle it to an evidentiary hearing on the question of fraudulent inducement, we must further review the details of Hercules' complaint. Hercules alleged that on or about May 19, 1986, in the course of a discussion with Shama and Rippeteau about the terms of the renovation contract, its representative, one Tsintolas, specifically requested that Shama delete or modify the arbitration clause, as well as other provisions of the contract. Hercules claims to have been concerned, based on its experience with a prior project, that Shama would not have adequate financing for this one. Hercules apprehended that if it agreed to the arbitration clause, it might be left out in the cold without a full range of remedies in the event that Shama's financial resources failed. According to Hercules, Shama and Rippeteau refused to delete the arbitration clause, insisting that the bank financing the project would not permit any such changes in the standard form contract. Shama and Rippeteau allegedly attempted to assuage Hercules' fears concerning the arbitration clause by assuring Hercules that Shama had adequate financing for the project. Specifically, Shama and Rippeteau are alleged to have made the following representations:
Hercules also alleged that these representations were false and that Shama knew they were false when it made them. Hercules averred, for instance, that the construction loan was not approved until August, 1986, some two months after construction began. If this allegation is true, then Shama must have known on May 19, 1986, that it had not yet obtained the loan in question. Hercules also argued that Shama is presumed to know the state of its own finances, and that it therefore knew or should have known that it lacked adequate funds to pay for this project. Moreover, Hercules claimed that Shama knew or should have known that it had not deposited the $200,000 in the money market account and that the money being obtained from the bank could be used for items other than construction.
We are satisfied that the allegations in Hercules' complaint were legally sufficient with respect to four of the six requisite elements of fraud in the inducement of the arbitration clause. See page 923, supra. Although, as we have seen, the question is not free of difficulty, we are prepared to assume for present purposes that Hercules has adequately alleged that Shama made misrepresentations going "to the `making' of the agreement to arbitrate." Prima Paint, supra, 388 U.S. at 404, 87 S.Ct. at 1806. Hercules has also sufficiently alleged that Shama knew those representations to be false, that Shama made them with the intent to deceive Hercules into signing the contract in spite of the presence of the arbitration clause,
F. The Arbitration and Integration Clauses and Their Consequences.
Hercules contends that Shama's alleged oral misrepresentations regarding its financial resources, made during the negotiations which preceded execution of the contract, were material to the agreement between them, even though none of Shama's statements was included in the contract as signed. In order to evaluate this contention, as well as Hercules' related claim that its reliance upon these oral statements was justified, we must first assess the significance of that exclusion. If the contract was not a completely integrated instrument, additional assurances and promises made by one party to another during their negotiations are surely relevant if the trier of fact is to understand the entire arrangement. If, on the other hand, the parties intended the written contract to settle everything, such promises and assurances have far less, if any, significance. We must therefore determine whether or not the contract between the parties was integrated and, if it was, whether it was completely or only partially integrated.
The first and most important step in ascertaining that intent is examination of the contract itself. We have held that "if [a] document is facially unambiguous, its language should be relied upon as providing the best objective manifestation of the parties' intent." 1010 Potomac Assocs. v. Grocery Mfrs. of Am., Inc., 485 A.2d 199, 205 (D.C.1984); Bolling Fed. Credit Union v. Cumis Ins. Soc'y, 475 A.2d 382, 385 (D.C.1984).
In the present case, we have no difficulty in ascertaining the parties' intent from the terms of the agreement they executed. First of all, the agreement to arbitrate which Hercules signed was unconditional. Article 13 of the contract provides that
This clause does not say that disputes will be sent to arbitration only if Shama is financially sound, or if Shama deposits money into a certain bank account, or if Shama uses its construction loan exclusively to pay Hercules. On its face, the arbitration clause is complete and unambiguous. It specifies how disputes are to be settled (by arbitration) and does not provide for any exceptions or envisage any conditions.
The written document also contains a merger clause which states that the parties intended to enter into a single completely integrated agreement regarding the renovation project. Article 6 of the standard AIA contract between Hercules and Shama provides that
(Emphasis added). After this clause, nine specific documents are enumerated: the Agreement, the General Conditions of the Agreement (which are actually Articles 7-20
Article 7 of the contract further elaborates on the meaning of the term "contract documents" as it is used in Article 6:
(Emphasis added.) When coupled with the specific enumeration of which extrinsic items are part of the contract documents,
A completely integrated contract may not be supplemented with prior representations not ultimately included therein, even if those representations are not expressly contradicted by the contract itself. Ozerol, supra, 545 A.2d at 642. According to the parol evidence rule, "when the parties to a contract have reduced their entire agreement to writing, the court will disregard and treat as legally inoperative parol evidence of the prior negotiations and oral agreements." Giotis v. Lampkin, 145 A.2d 779, 781 (D.C.Mun.App.1958). In other words, when a court makes a determination that a contract is completely integrated, one consequence is that "no evidence may be introduced of prior (or contemporaneous) agreements or terms, whether consistent or inconsistent, within the scope of the written agreement." Ozerol, supra, 545 A.2d at 642; see also Flippo Constr. Co. v. Mike Parks Diving Corp., 531 A.2d 263,
G. The Materiality of Shama's Alleged Misrepresentations.
Hercules claims that it considered Shama's representations regarding its financial wherewithal so important that it made them a regular subject of discussion in the contract negotiations and based its agreement to the contract on its reliance on them. None of these assurances of financial soundness made it into the written contract, however, while an integration clause effectively saying that "this is all there is" was included. As Hercules complains and therefore alleges, Shama and Rippeteau offered the form contract to it on a "take it or leave it" basis.
This court has held that evidence of negotiations conducted prior to the execution of a completely integrated contract is to be excluded because it is "immaterial to a decision on the merits." 1010 Potomac Assocs., supra, 485 A.2d at 211. Moreover, we held in Luther Williams, Jr., Inc. v. Johnson, 229 A.2d 163, 165-66 (D.C. 1967), that if a judge concludes that a particular representation was superseded by the writing, "he does not decide that the excluded negotiations did not take place, but merely that if they did take place they are nevertheless legally immaterial." (Emphasis in original; citations omitted).
In applying the parol evidence rule, we have also held that, by definition, a completely integrated contract contains all the terms which the parties consider material and essential to the agreement. Ozerol, 545 A.2d at 641-42. This court has deemed it "well established" that such a contract "must state all the promises of the parties with sufficient clarity and definiteness as to render the essential terms of the agreement clear without resort to parol testimony." Easter v. Kass-Berger, Inc., 121 A.2d 868, 870 (D.C.Mun.App.1956).
The parol evidence rule does not apply when a party to a contract alleges that parol representations were fraudulently made. Flippo, 531 A.2d at 269; Stamenich, 462 A.2d at 455; Giotis, 145 A.2d at 781; RESTATEMENT (SECOND) OF CONTRACTS § 214(d). Courts have recognized, however, that this fraud exception would swallow up the rule if representations made during negotiations, but not included in the contract as executed, could be characterized as fraud and then used to undo an otherwise complete agreement. There is authority for the proposition that, at least in the absence of a showing that a parol representation made during negotiations by a party to a completely integrated contract was omitted from the contract by fraud, mistake, or accident, see Bardwell v. The Willis Co., Inc., 375 Pa. 503, 506-507, 100 A.2d 102, 104 (1953), the opposing party is barred from relying on such a representation as material to its acceptance of the deal and from claiming that its reliance on it was reasonable.
The United States Court of Appeals for this Circuit recently adopted this approach in One-O-One Enters. v. Caruso, 270 U.S.App.D.C. 251, 848 F.2d 1283 (1988). In that case, the parties had executed a contract for the sale of a chain of restaurants. The contract contained an integration clause stating that the written agreement "superseded any and all previous understandings and agreements." Id. at 254, 848 F.2d at 1286. One-O-One claimed that, during the contract negotiations, Caruso
Id. See also Tonn v. Philco Corp., 241 A.2d 442, 445 (D.C.1968) (plaintiff who received an oral offer containing certain terms followed by a written offer which did not mention these terms, and who signed the written offer containing an integration clause, was bound by the contract and could not claim fraudulent inducement); Jackvony v. RIHT Fin. Corp., 873 F.2d 411, 415-16 (1st Cir.1989); Robinson v. Cupples Container Co., 513 F.2d 1274, 1277-78 (9th Cir.1975) (when plaintiff asked defendant to include in the written agreement specific representations defendant had made during negotiations, and when defendant refused to do so, the representations were not material for the purposes of plaintiff's fraud claim).
In Bardwell, supra, concededly a decision which has generated its fair share of controversy,
Id. 375 Pa. at 507, 100 A.2d at 104 (emphasis in original). See also Contractor Utility Sales Co. v. Certain-Teed Prods. Corp., 638 F.2d 1061, 1080-81 (7th Cir.1981); Nicolella v. Palmer, 432 Pa. 502, 505-509, 248 A.2d 20, 22-23 (1968). There is no evidence in the present case that assurances regarding Shama's financial condition were omitted from the agreement by fraud, accident, or mistake; rather, they were excluded because, as Hercules alleges and thus acknowledges, it was given a form contract and invited to take it or leave it.
It is true that some courts are more permissive vis-a-vis such claims of fraud in the inducement, especially in cases brought pursuant to anti-fraud securities statutes. It has been held that, even when a contract contains a merger clause, a party to it may successfully base a fraudulent inducement claim on prior oral representations not included in the contract. See, e.g., Astor Chauffeured Limousine Co., supra note 17, 910 F.2d at 1546-47; Rowe v. Maremont Corp., 850 F.2d 1226, 1233-36 (7th Cir.1988).
We need not, however, decide whether we should follow cases like One-O-One and Bardwell in the generality of "fraud in the inducement" disputes. The present controversy presents circumstances in which the policies against circumventing the parol evidence rule are especially compelling. Hercules is seeking to avoid an arbitration clause. If a party to an arbitration agreement, like Shama here, must litigate extensively in order to avail itself of this simplified method of resolving disputes, the purposes of arbitration are substantially undermined. A strict application of the concept of materiality is therefore appropriate, lest arbitration be thwarted at the outset "upon the mere cry of fraud in the inducement." Robert Lawrence Co., supra, 271 F.2d at 410.
Accordingly, Hercules' invocation of fraud to force an evidentiary trial before arbitration can proceed should be judged against a very high standard. Under that standard, once Hercules signed its name to an instrument which did not contain the assurances which it says it considered critical, it must be precluded (at least in the absence of evidence that the representations were omitted from the agreement by fraud, mistake, or accident) from thereafter claiming that those representations were "material" in the sense required to support a claim of fraudulent inducement
This is not a case in which a powerful party forced a helpless supplicant into submission. We have no reason to doubt that Hercules and Shama, like the parties in One-O-One, were sophisticated business institutions dealing with each other on a level playing field. In attempting to explain why it did not see to it that Shama's assurances were included in the contract, however, Hercules told the trial court that it was "browbeaten" into accepting what it characterizes as the one-sided terms of Shama's proposed contract, and that it was not accorded an opportunity to incorporate any of its desired changes into the form contract. The judge responded to this argument quite appropriately:
We agree with the judge's view that, in light of the commercial context in which these two corporations were dealing, Hercules and Shama are presumed to have been negotiating with each other from equal bargaining positions. Hercules' complaint contains no allegation to the contrary. As the trial court held in One-O-One Enters. v. Caruso, 668 F.Supp. 693, 698 (D.D.C.1987), the decision later affirmed by the Court of Appeals in One-O-One, supra,
As in One-O-One, the parties in the present case, each concededly represented by competent counsel, engaged in arm's length negotiations before reaching agreement. Each side presumably had the opportunity to make a variety of representations, promises, and offers. The parties ended up with a contract which did not include the representations which Hercules now says Shama made. If Hercules considered these assurances important enough to induce it to agree to the contract (including the arbitration clause), it could have conditioned its agreement on the explicit inclusion of those representations in the contract. If Shama or Rippeteau refused to go along, Hercules could have walked away from the deal. Since Hercules did
Hercules concedes that it "did not make the unequal bargaining position argument that the subcontractors in Moseley did." It contends, however, that this is not "crucial to Hercules' right to a trial on the merits of Hercules' claim of fraud in the inducement of the arbitration clause." We cannot agree. In order to be entitled to an evidentiary hearing on its claim of fraudulent inducement, Hercules must plead facts capable of establishing each of the requisite elements of fraud, including that of materiality. Bennett, supra, 377 A.2d at 59-60. The lack of any allegation that Hercules and Shama were negotiating from unequal bargaining positions effectively disposes of Hercules' claim of materiality, and is therefore crucial to the question whether Hercules has a right to an evidentiary hearing.
H. The Reasonableness of Hercules' Reliance on Shama's Alleged Statements.
We likewise conclude that the trial court properly ruled that Count XI of Hercules' complaint insufficiently alleged the final element of fraud, that of reasonable reliance. As Hercules concedes in its brief to this court, a party alleging that it was defrauded, at least in the context of commercial dealings at arm's length,
In dismissing Count XI, Judge Bowers ruled that Hercules had failed sufficiently to allege that its reliance on Shama's alleged misrepresentations had been reasonable. As he pithily stated, "the one that really hangs me up is the reasonable reliance." Hercules, in alleging that it had actually relied on Shama's representations, stated only that if it had "known of the true financial arrangements between Shama and [American Savings Bank], Hercules might still have entered into the contract, but would not have agreed to arbitrate its disputes. In fact, Hercules might have agreed to do the contract in phases, depending on the availability of money." We
Reasonableness of reliance is closely related to materiality. As Professor Williston has succinctly put it, "reliance is only justifiable if the fact misrepresented is material." 12 WILLISTON, supra note 26, § 1515C at 493.
We find especially persuasive, with respect to this issue, the court's opinion in Management Assistance, Inc. v. Computer Dimensions, Inc., 546 F.Supp. 666, 672 (N.D.Ga.1982) (applying Georgia common law and quoting Invest Air, Inc. v. Swearingen Aviation Corp., No. C77-1841A (N.D.Ga. Apr. 11, 1979)), aff'd mem. sub nom. Computer Dimensions, Inc. v. Basic Four Corp., 747 F.2d 708 (11th Cir. 1984):
Similarly, in a case in which the court decided that the plaintiff could not have reasonably relied on oral assurances which were not included in the final written contract, it was held that if the text of an agreement could be undermined on the basis of allegations of what took place during negotiations,
In light of these authorities, we agree with Judge Bowers' conclusion, based on the pleadings before him, that Hercules had failed adequately to allege the reasonableness of its continued reliance on Shama's parol representations after those representations were not included in the terms of the completely integrated contract. Moreover, Hercules is seeking to set aside an arbitration clause on the grounds of fraudulent inducement. Given the readiness of modern courts to enforce arbitration agreements, and their vigilance against maneuvers designed to circumvent them, a strict application of the concept of
In 1986 Hercules and Shama entered into an agreement which provided that all disputes would be resolved by arbitration. The idea was to provide a relatively speedy, private, and inexpensive alternative forum which would avoid the travail of the judicial process. See Hanes Corp., supra, 174 U.S.App.D.C. at 265, 531 F.2d at 597; Robert Lawrence Co., supra, 271 F.2d at 410.
Shama's legitimate expectations of simplicity, privacy, and modest expense have already been thwarted. We have had six years of litigation before at least three trial judges, as well as two complicated trips to this court. The parties have doubtless spent many thousands of dollars and have spread their mutual recriminations throughout the record for all to see. Although Shama has been successful before the trial court, before this court, and before the arbitration panel, the simplified alternative dispute resolution to which the parties agreed has not yet disposed of the case.
Now, with all of that behind us, Hercules wants to have a trial on its claim of fraud before the arbitration award is given effect. If we were to accept its contentions, the parties undoubtedly would continue to litigate this case both in this court and in the Superior Court for the foreseeable future (if not beyond), with the Holy Grail of finality many many moons away. Moreover, Hercules demands such a result on the basis of what Shama is supposed to have promised orally in the negotiations which preceded the execution of the agreement, but which Shama refused to include in the agreement itself. If Hercules were permitted to avoid its obligation to arbitrate simply upon this "mere cry of fraud in the inducement," the reliability of agreements to arbitrate would be seriously undermined.
We therefore hold that Judge Bowers properly referred the dispute to arbitration. Similarly, Judge Shuker correctly confirmed the ensuing arbitration award.
FARRELL, Associate Judge, concurring in the result.
In my judgment, appellant's claim failed as a matter of law not because, as I think my colleagues hold, fraud can never be pleaded successfully in the face of a completely integrated commercial contract with an arbitration clause, but rather because— under Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967)—Hercules failed to allege facts that if proven would have established that it actually relied on material misrepresentations in agreeing to the arbitration clause specifically, as opposed to the contract as a whole. Prima Paint thus requires that appellant's claim be submitted to arbitration.
Hercules alleged that "had [it] known of the true financial arrangements between Shama and ASB [the financing bank], [it] might still have entered into the contract, but would not have agreed to arbitrate its disputes"; and that "[it] was induced by the fraudulent representations made by Shama and Rippeteau to forego [its] desire to modify the arbitration clause in the contract and agree to the arbitration clause as it existed in the contract." The facts alleged in support of these contentions, however,
Nowhere does Hercules contend that the financing bank, ASB, would have agreed to changes in the contract's General Conditions and thus that the italicized representation by Baudrand and Rippeteau was false and fraudulent. Nor does it allege that the contract was anything other than what these men represented it to be—a take it or leave it proposition. Thus, Hercules' own proof would have shown that it had to take the entire contract with its arbitration clause or no contract at all. Absent an element of overreaching or allegations of fact that relate the alleged misrepresentations directly to the arbitration clause, Hercules could not in these circumstances have been fraudulently induced to agree to the arbitration clause apart from the rest of the contract by the alleged misrepresentations of Shama and its agents. If it relied on their statements, it did not do so specifically in relation to the arbitration clause. At best, its evidence might have shown that it relied on them in agreeing to the arbitration clause and every other clause in the contract.
Thus Hercules' attempt to plead fraudulent inducement of the arbitration clause fails because the facts alleged would only prove fraudulent inducement of the entire contract—an arbitrable claim already decided in favor of Shama. As Hercules alleged no facts justifying the conclusion that it relied on any misrepresentation in agreeing to the arbitration clause in particular, under Prima Paint, supra, it cannot avoid its contractual obligation to arbitrate. See Schacht v. Beacon Ins. Co., 742 F.2d 386, 390 (7th Cir.1984) (under Prima Paint, where claim of fraud applies equally to all provisions of a contract containing an arbitration clause, court is precluded from addressing that claim); accord Bitkowski v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 866 F.2d 821 (6th Cir.1987); Bhatia v. Johnston, 818 F.2d 418 (5th Cir.1987); Driscoll v. Smith Barney, Harris, Upham & Co., 815 F.2d 655 (11th Cir.), cert. denied, 484 U.S. 914, 108 S.Ct. 261, 98 L.Ed.2d 218 (1987); Russo v. Simmons, 723 F.Supp. 220 (S.D.N.Y.1989).
My colleagues are unwilling to rest decision on this basis because they apparently find merit in a narrower interpretation of Prima Paint. See ante at 925-926 n. 12. As stated by the court in Rush v. Oppenheimer, 681 F.Supp. 1045 (S.D.N.Y.1988) (twice cited by the majority): "[A] court may order arbitration only when the party opposed to arbitration has not claimed that the arbitration agreement itself was fraudulently procured." Id. at 1049 (emphasis added). That is, only when the plaintiff has not taken care (through what can only be inadvertence) to ensure that its "allegations of fraud are directed at the contract as a whole and at the arbitration clause in particular," id. (emphasis added), is judicial consideration of the fraud claim barred in favor of arbitration. This reading of Prima Paint seems to me quite inconsistent with the broad preference for enforcing arbitration clauses under modern law; and it places a premium on artful— even mechanical—pleading. Neither Prima Paint nor Moseley v. Electronic & Missile Facilities, 374 U.S. 167, 83 S.Ct. 1815, 10 L.Ed.2d 818 (1963), requires it. Prima Paint held that "in passing upon [an] application for a stay while the parties arbitrate, a federal court may consider only issues [such as fraud] relating to the making and performance of the agreement to arbitrate," 388 U.S. at 404, 87 S.Ct. at 1806; it did not imply that when a plaintiff is
There is irony in the majority's shying from my reading of Prima Paint (shared by at least four federal courts of appeals) and instead letting the court decide appellant's claim of fraud, because the majority ends up relying on the same principles favoring enforcement of arbitration agreements that underlie Prima Paint to uphold dismissal here—though by a more circuitous and problematical route. The court engages in lengthy consideration of principles of integration, merger clauses, the parol evidence rule, materiality and reasonable reliance, only to suggest in the end that these principles may not be dispositive outside the particular context of an agreement to arbitrate and the unwillingness of courts to let arbitration "be thwarted at the outset `upon the mere cry of fraud in the inducement.'" Ante at 924, 925 (citation omitted). My concern about this discussion is that the court's reliance on the integration clause in this agreement and the parol evidence rule will be cut loose in the future from the narrow arbitration context here and be used to cast doubt on substantial precedent in this jurisdiction regarding claims of fraudulent inducement. It has long been the law that, despite the parol evidence rule, "false and fraudulent representations made to induce a contract, evidenced by a written agreement, may be introduced to defeat its enforcement." First Nat'l Bank v. Fox, 40 App. D.C. 430, 436, cert. denied, 231 U.S. 751, 34 S.Ct. 322, 58 L.Ed. 466 (1913).
I am afraid the majority's opinion may be read to upset these principles whenever there is a completely integrated contract, even one evidenced by an integration clause as "wimpy" as this one, Astor Chauffeured Limousine Co. v. Runnfeldt Inv. Corp., 910 F.2d 1540, 1545 (7th Cir. 1990), entered into by "sophisticated business institutions dealing with each other on a level playing field." Ante at 932. Since I regard the court's entire analysis of the integration clause and parol evidence principles as unnecessary to decide this case, I respectfully concur in the judgment.
In Moseley, the plaintiff, a party to an agreement to arbitrate, had alleged that both the arbitration clause and the agreement as a whole had been secured by the same set of fraudulent representations. The United States Court of Appeals held that, under these circumstances, the claim of fraud must be submitted to arbitration, for "arbitration is not barred by an assertion that the entire contract was induced by fraud; there must be a specific claim that the arbitration provision itself was fraudulently procured." Electronic & Missile Facilities v. United States, 306 F.2d 554, 558 (5th Cir.1962). The Supreme Court reversed, however, because "the petitioner has attacked not only the subcontracts, but also the arbitration clauses contained therein, as having been procured through fraud." Moseley, supra, 374 U.S. at 170-71, 83 S.Ct. at 1817-18.
In Prima Paint, 388 U.S. at 403-04, 87 S.Ct. at 1805-06, the Supreme Court held that where the alleged fraud goes to the agreement as a whole, and the making of the agreement for arbitration is not in issue, the question of fraud must be decided by the arbitrator rather than by the court. The Court recognized, however, that "if the claim is fraud in the inducement of the arbitration clause itself—an issue which goes to the `making' of the agreement to arbitrate—the federal court may proceed to adjudicate it." Id. at 403-04, 87 S.Ct. at 1805-06. The Court explicitly stated that "[t]his position is consistent both with Moseley and with the statutory scheme." Id. at 404 n. 12, 87 S.Ct. at 1806 n. 12. See also Scherk, supra, 417 U.S. at 519 n. 14, 94 S.Ct. at 2457 n. 14; Rush, supra, 681 F.Supp. at 1049 (explicating interaction, in similar context, between Moseley and Prima Paint).
We recognize that several decisions cited by Judge FARRELL in his concurring opinion apparently support the proposition that when a party has alleged that both the contract and its arbitration clause have been induced by the same fraudulent conduct, the allegations must be heard by the arbitrators rather than by the court. See, e.g., Bitkowski v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 866 F.2d 821, 823 (6th Cir.1987); Bhatia v. Johnston, 818 F.2d 418, 421-22 (5th Cir.1987); Driscoll v. Smith Barney, Harris, Upham & Co., 815 F.2d 655, 659 (11th Cir.1987); Schacht v. Beacon Ins. Co., 742 F.2d 386, 389-90 (7th Cir.1984). The opinions in these cases all focused on Prima Paint, however, and the writers did not discuss Moseley, in which the Supreme Court apparently rejected the very proposition for which these decisions are supposed to stand.
2 E. ALLAN FARNSWORTH, CONTRACTS § 7.3 at 198 (1990).
Rowe was also a case brought pursuant to the securities laws. The court held, in that context, that the plaintiffs' failure to put into the written contract oral assurances by the defendants could raise an inference that the plaintiffs were not concerned about the subject matter of the representations, but that while this "may show poor judgment ... it does not necessarily preclude reliance." 850 F.2d at 1237.
Nevertheless, as Judge FARRELL points out in his concurring opinion, some courts and commentators would recognize a broader exception to the parol evidence rule for fraud in the inducement than cases like One-O-One and Bardwell would.
Robinson, supra, 513 F.2d at 1278.