The Ninth Circuit, in an unpublished opinion, has found that a contract, and therefore an arbitration clause within it, was unenforceable due to fraud in the inception, despite the fact that both parties had ample opportunity to review the contract in its entirety. This result was required, the court found, because, assuming the allegations of the complaint to be true, the plaintiff did not know that by signing the contract it was agreeing to be a victim of defendants’ scheme.
In the complaint, plaintiff alleged that it was misled into agreeing to a consulting agreement that the defendants used as part of a wide-ranging scheme of fraud, involving forging financial documents, destroying plaintiff’s relationships with clients and creditors, and falsely representing that an employee of one of the defendants had been hired for a non-existent position in order to get plaintiff to issue paychecks for that position. The dissent argued that such fraudulent conduct in the performance of the agreement did not constitute fraud in the inception because plaintiff did not allege that plaintiff signed the contract based on a misunderstanding of its contents or that the arbitration clause was fraudulently induced. The majority disagreed, however, citing a California Court of Appeals decision for the proposition that it was enough that defendants, as the party drafting the contract, drafted the contract “‘in such a way as to not apprise’ the other party of its intentions.” DKS, Inc. v. Corporate Business Solutions, Inc., 15-16589 (9th Cir. Jan. 17, 2017)
