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Arbitration: Fraudulent Inducement/Unconscionability/Separability Doctrine

Posted by Ted A. Schmidt | Mar 14, 2022 | 0 Comments

Duncan v. Public Storage, Inc., No. 1 CA-CV 21-0283 (App. Div. I, March 8, 2022) (J. Gass)

Separability doctrine requires treating arbitration clause in contract as a separate contract and defenses to enforcing contract must apply too the arbitration clause alone and not the contract as a whole.

Plaintiffs are three different renters of storage units at defendant's storage facility. A thief was able to access their units and steal all their stuff with a master key. Defendant's website stated only the renters would have a key to their storage unit and one of the three renters claimed a representative of the defendant made the same promise. All three plaintiffs sued defendant for negligence and consumer fraud. The defendant moved to dismiss each of the three cases based upon a clause in their contract which required disputes be resolved by arbitration.  The trial court consolidated all three cases and denied the motions to dismiss finding the plaintiff renters were fraudulently induced to sign the agreement. The Arizona Court of Appeals vacated the trial court's decision and remanded the case.  

Under the separability doctrine an arbitration clause is considered “an agreement independent and separate from the principal contract.” Typical contract defenses including fraud, duress and unconscionability may defeat an arbitration clause. Plaintiffs argued they were fraudulently induced to rent the storage units based upon promises the units would be secure and only they would have a key.  The defendant argued plaintiffs failed to prove they were fraudulently induced to agree to arbitration of any dispute regardless of terms outside the arbitration clause. The trial court did not hold an evidentiary hearing so the record provides no evidence to support that the plaintiffs' were indeed fraudulently induced to agree to arbitration.  The case is remanded to the trial court to hold a hearing and determine if the arbitration agreement as a separate agreement was fraudulently induced. 

Similarly, as to any claim the contract was substantively unconscionable the trial court must analyze whether any term in the arbitration agreement, standing alone, was unconscionable. Terms elsewhere in the contract cannot establish unconscionability. ”In the arbitration context, substantive unconscionability focuses on whether parties can ‘effectively vindicate [their] rights in the arbitral forum.'”

About the Author

Ted A. Schmidt

Ted's early career as a trial attorney began on the other side of the fence, in the offices of a major insurance defense firm. It was there that Ted acquired the experience, the skills and the special insight into defense strategy that have served him so well in the field of personal injury law. Notable among his successful verdicts was the landmark Sparks vs. Republic National Life Insurance Company case, a $4.5 million award to Ted's client. To this day, it is the defining case for insurance bad faith, and yet it is only one of several other multi-million dollar jury judgments won by Ted during his career. He is certified by the State Bar of Arizona as a specialist in "wrongful death and bodily injury litigation".


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