Appeal from the Superior Court of the District of Columbia; (Hon. Shellie F. Bowers, Trial Judge); (Hon. Robert A. Shuker, Trial Judge)
Before Ferren, Schwelb, and Farrell, Associate Judges. Opinion for the court by Associate Judge Schwelb. Concurring opinion by Associate Judge Farrell.
The opinion of the court was delivered by: Schwelb
SCHWELB, Associate Judge: Hercules & Co. (Hercules), appeals from the confirmation of an arbitration award issued in favor of Shama Restaurant Corp., et al. (Shama). *fn1 Hercules contends that its dispute with Shama was not arbitrable (and therefore that the award was not properly confirmed) because both its contract with Shama and the arbitration clause contained therein had been fraudulently induced. It further argues that Judge Shellie F. Bowers erred on September 4, 1987, when he referred much of the dispute to arbitration and when he failed to conduct a trial on the merits before dismissing with prejudice Hercules' claim that the arbitration clause had been fraudulently induced. We affirm.
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 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 representations, however, was included in the terms of the written contract, which was prepared on a standard form prescribed by the American Institute of Architects (AIA). When it later appeared to Hercules that some or all of these representations may not have been true, and when a number of other problems arose in the precarious relationship that had evolved among Hercules, Shama, and Rippeteau, Hercules walked off the construction site, leaving the project far from complete.
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. *fn2
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. *fn3 On October 5, 1989, Judge Robert Shuker denied Hercules' motion and entered an order confirming the arbitral award in favor of Shama. Hercules filed a motion for reconsideration, *fn4 and on March 29, 1990, Judge Bowers denied that motion. *fn5 We consider Hercules' instant appeal to be at once a reinstatement of its earlier appeal, which had been dismissed as premature in Hercules I, and a fresh challenge to the confirmation of the arbitral award. *fn6
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 post-award motion to vacate, *fn7 even though the claim had earlier been raised and dismissed with prejudice. As support for its position, Shama cites the District of Columbia Uniform Arbitration Act, D.C. Code § 16-4311 (b) (1989), under which a party seeking to vacate an arbitration award must apply to the Superior Court "within ninety days after delivery of a copy of the award to the applicant." Shama also cites this court's decision in Walter A. Brown, Inc. v. Moylan, 509 A.2d 98, 100 (D.C. 1986), according to which a party who fails "to urge grounds for vacation of [an arbitration] award within the ninety-day statutory limit . . . waive any right to challenge the award." In the present case, the decision of the arbitration panel was made final and delivered to the parties involved on December 6, 1988. Shama argues that because Hercules did not file a motion to vacate the award or otherwise raise any substantive defenses to its confirmation within ninety days of this date, Hercules waived any right it may have had to challenge the award. For three reasons, we find this contention to be without merit.
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, *fn8 which are not governed by the 90-day time limit, rather than under § 16-4311 or § 16-4312, and the reasoning of Moylan thus has no application.
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
a dismissal of an action with prejudice is a complete adjudication of the issues presented by the pleadings and bars further action between the parties. Additionally, a dismissal for failure to state a cause of action is a final judgment on the merits sufficient to raise the defense of res judicata in a subsequent action between the parties.
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 by filing a motion to vacate the award on that ground or by raising that issue in an answer to the prevailing party's motion to confirm. *fn9 For Hercules to have done so in this case, however, would have been futile in light of Judge Bowers' prior dismissal of that claim with prejudice; that decision was the law of the case. Hercules' failure to raise a timely post-award challenge therefore could not operate as a waiver of its right to oppose the award on the grounds of fraudulent inducement. Simply stated, "the law does not require the doing of a futile act." Ohio v. Roberts, 448 U.S. 56, 74 (1980), noted in Stack v. United States, 519 A.2d 147, 156 (D.C. 1986).
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 Ins. Co., 111 S. Ct. 648, 652 (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 FRAUDELENT 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.
In Haynes, the plaintiff had alleged, in moving to stay arbitration, that the arbitration clause in her retainer agreement with her former attorney, Kuder, had been fraudulently induced. The trial court rejected that allegation and compelled arbitration without holding an evidentiary hearing on the issue of fraudulent inducement. On appeal, Ms. Haynes contended that this was error in that she was entitled to such a hearing. We affirmed, concluding that "the procedure to resolve 'denials of the existence of agreement to arbitrate' under [D.C. Code § 16-4302 (a) (1989)] mirrors the familiar summary judgment procedure." 591 A.2d at 1290.
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 & 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 (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 (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, A.2d , , No. 91-FM-133, slip op. at 6 (D.C. July 10, 1992); Sindler v. Batleman, 416 A.2d 238, 242 (D.C. 1980). Indeed, "an order to arbitrate the particular 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 Steelwork of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582-83 (1960). Where an arbitration clause in a contract, on its face, covers all disputes involving the interpretation or application of a contract, the Court has held that "in the absence of any express provision excluding a particular grievance from arbitration, we think only the most forceful evidence of a purpose to exclude the claim from arbitration can prevail . . . ." Id. at 584-85.
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 (1960). It is fundamentally a creature of contract, Dean Witter Reynolds, supra, 470 U.S. at 219-20, 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 (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 (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 religiose 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. Sidle & 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 ...