# Ericksen, Arbuthnot, McCarthy, Kearney & Walsh, Inc. v. 100 Oak Street

> California Supreme Court · December 29, 1983 · 35 Cal. 3d 312

URL: https://www.frixlaw.com/law-library/cases/9588039

## Case

- **Full name:** ERICKSEN, ARBUTHNOT, McCARTHY, KEARNEY & WALSH, INC., Plaintiff and Respondent, v. 100 OAK STREET Et Al., Defendants and Appellants
- **Court:** California Supreme Court
- **Decided:** December 29, 1983
- **Citations:** 35 Cal. 3d 312; 197 Cal. Rptr. 581; 673 P.2d 251; 1983 Cal. LEXIS 272
- **Precedential status:** Published
- **Opinion:** Dissent by Mosk
- **Judges:** Grodin, Mosk
- **Cited by:** 141 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/9588039

## How later opinions describe it (automated extraction)

- noting the “state’s strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution”

## Opinion text

MOSK, J.
I dissent.
The majority establish a rule that earns a high rank in the cart-before-the-horse category. Instead of first requiring determination of whether the entire agreement was induced by fraud and then, if it was not, proceeding to arbitrate the issue of compliance with its terms, my colleagues order arbitration first and then sometime in the vague future the underlying validity of the very agreement which provided, among other matters, for the arbitration, is to be ascertained. This is resupination: logic and procedure turned upside down.
Code of Civil Procedure section 1281.2 provides that the court shall order arbitration “unless it determines that: ... [¶] (b) Grounds exist for the revocation of the agreement.” It seems obvious that the “it” refers to the *325 court, and that the Legislature intended the court, not the arbitrator, to determine if grounds exist for revocation of the agreement.
The majority rather curiously admit that the statute calls for determination by the court whether a valid agreement exists, and then they announce that “manifestly no such determination has been made.” Obviously. Nor will it be made if the matter must proceed to arbitration before a court can ascertain whether the agreement was induced by fraud.
Another paragraph in Code of Civil Procedure section 1281.2 makes clear the legislative intent in a situation comparable to that before us. The statute declares: “If the court determines that there are other issues between the petitioner and the respondent which are not subject to arbitration and which are the subject of a pending action or special proceeding between the petitioner and the respondent and that a determination of such issues may make the arbitration unnecessary, the court may delay its order to arbitrate until the determination of such other issues or until such earlier time as the court specifies” (italics added).
Here again, the Legislature refers to “the court determines,” not the arbitrator. It seems to cover our case: if the court finds there was fraud in the inducement of the underlying contract “a determination of such issues may make the arbitration unnecessary”; therefore the court may delay any order for arbitration until the fraud issue is heard and decided. As Justice Black said in another context, the language raises no doubts about its meaning “except to someone anxious to find doubts.” (Prima Paint v. Flood & Conklin (1967) 388 U.S. 395, 412 [ 18 L.Ed.2d 1270, 1282 , 87 S.Ct. 1801 ] (dis. opn.).)
Pursuant to that section, the Court of Appeal in Gustafson v. State Farm Mut. Auto. Ins. Co. (1973) 31 Cal.App.3d 361 [ 107 Cal.Rptr. 243 ], held that the trial court should have determined the issue of waiver before ordering arbitration—that it was a matter for the court, not the arbitrator.
I cannot quarrel with federal decisions relied on by the majority, since they are based on provisions of the federal arbitration act, which in turn is bottomed on admiralty and the commerce clause of the federal Constitution. I must concede, however, that I find the decisions unpersuasive, for the federal act specifically exempts from arbitration all contracts that are invalid “upon such grounds as exist at law or in equity for the revocation of any contract.” ( 9 U.S.C. § 2 .) This would certainly seem to embrace fraud in the inducement, as alleged in the instant case.
*326 That was the view expressed in the irrefutable dissent by Justices Black, Douglas and Stewart in Prima Paint v. Flood & Conklin, supra, 388 U.S. 395, 412-413 [ 18 L.Ed.2d 1270, 1282 ]: “Let us look briefly at the language of the Arbitration Act itself as Congress passed it. Section 2, the key provision of the Act, provides that ‘[a] written provision in ... a contract . . . involving commerce to settle by arbitration a controversy thereafter arising out of such contract . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. ’ (Emphasis added.) Section 3 provides that ‘[i]f any suit ... be brought . . . upon any issue referable to arbitration under an agreement in writing for such arbitration, the court. . . upon being satisfied that the issue involved in such suit ... is referable to arbitration under such an agreement, shall . . . stay the trial of the action until such arbitration has been had . . . .’ (Emphasis added.) The language of these sections could not, I think, raise doubts about their meaning except to someone anxious to find doubts. They simply mean this: an arbitration agreement is to be enforced by a federal court unless the court, not the arbitrator, finds grounds ‘at law or in equity for the revocation of any contract. ’ Fraud, of course, is one of the most common grounds for revoking a contract. If the contract was procured by fraud, then, unless the defrauded party elects to affirm it, there is absolutely no contract, nothing to be arbitrated. Sections 2 and 3 of the Act assume the existence of a valid contract. They merely provide for enforcement where such a valid contract exists. These provisions were plainly designed to protect a person against whom arbitration is sought to be enforced from having to submit his legal issues as to validity of the contract to the arbitrator. The legislative history of the Act makes this clear.” (Fn. omitted.)
Justice Fortas’ prevailing opinion in Prima Paint observes that the First Circuit in Lummus Company v. Commonwealth Oil Refining Co. (1st Cir. 1960) 280 F.2d 915 , certiorari denied, 364 U.S. 911 [ 5 L.Ed.2d 225 , 81 S.Ct. 274 ], held that if the arbitration clause is regarded by a state as an inseparable part of the contract, a claim of fraud in the inducement must be decided by the court. The high court did not disapprove Lummus; it merely went on to distinguish federal court proceedings, based as they were in Prima Paint on a maritime contract.
The recent case of Moses H. Cone Memorial Hosp. v. Mercury Const. (1983) 460 U.S. 1 [ 74 L.Ed.2d 765 , 103 S.Ct. 927 ], is not relevant. While the majority there appear to reaffirm Prima Paint , they make it abundantly clear they do so pursuant to the terms of the federal arbitration act, and that “questions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration.” (Id. 460 U.S. at p. 24 [ 74 L.Ed.2d at *327 p. 785 , 103 S.Ct. at p. 941 .) Nothing in that opinion declares a rule preventing states from deciding that under state law fraud in the inducement renders an entire contract, including the arbitration clause, invalid and unenforceable. Indeed, the court based its decision on the “probable inadequacy of the state court proceeding” in North Carolina. (Id., 460 U.S. 1 [ 74 L.Ed.2d at p. 786 , 103 S.Ct. at p. 942 .) I would not expect the high court to declare California judicial proceedings to be inadequate.
With due respect for the court of a sister state, I believe the opinion in Weinrott v. Carp (1973) 32 N.Y.2d 190 [ 344 N.Y.S.2d 848 , 298 N.E.2d 42 ], reaches an untenable result. That court declares flatly (at p. 47): “the agreement to arbitrate would be ‘valid’ even if the substantive portions of the contract were induced by fraud.” Incredible! What the court did, in effect, was to reward fraud by proceeding to process an agreement that by any known standards of contract law was an absolute nullity.
While there are a number of other state courts that support the conclusion of the majority here, I am persuaded by the Louisiana court. In George Engine Co., Inc. v. Southern Shipbldg. Corp. (La. 1977) 350 So.2d 881, 884-885 , the court held that the issue of misrepresentation in the inducement of a contract is not to be submitted to arbitration even though the contract contains an arbitration clause. The court observed that under the Louisiana arbitration act an arbitration agreement was to be judicially enforced unless a court, not an arbitrator, found grounds at law or in equity for revocation of the contract. It reasoned that courts historically have had jurisdiction over legal issues presented by a petition to rescind a contract because of error in its inducement. Fraud in the inducement therefore was to be decided by the courts. The function of arbitrators, the court declared, is to resolve factual controversies arising out of valid contracts. It added that the courts are much better equipped than arbitrators to determine the legal question of misrepresentation or of fraud in the inducement of a contract.
It is one of the essential elements of a contract that the parties enter into it knowingly and consensually, not through fraud, duress, menace, undue influence or mistake. If consent to entering into a contract is obtained by any of the foregoing elements, a court may declare the entire contract to be unenforceable—the entire contract, without exception for any single provision. I can see no reason for selecting one provision of a potentially unenforceable contract, the arbitration clause, and stamping it with our imprimatur.
*328 I would affirm the judgment.
Bird, C. J., concurred.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/9588039. Public record. Not legal advice.