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A New York federal court determined that a boat owner's allegations that a maritime salvage company misrepresented the scope of services described in an agreement the boat owner signed at most constituted fraud in the inducement to be decided in arbitration and could not constitute fraud in the execution of the contract, which is an issue that would be decided by the court.
In McCaddin v. Southeastern Marine Inc., No. 07-CV-4303 (JFB), 2008 WL 2890876 (E.D.N.Y. July 22, 2008), McCaddin went boating in his 42-foot motor pleasure craft, the Pandonna. While near the Long Island Sound, the Pandonna's engines lost power and unexpectedly caught fire.
After the fire had subsided, Southeastern, a towage and salvage services provider, arrived on the scene. Southeastern and McCaddin entered into a contract for the care of the Pandonna, but the parties later disagreed over the scope of services. Southeastern contended that the contract was for towing and salvage, while McCaddin contended that it was exclusively for towing.
McCaddin sued Southeastern for a declaratory judgment to determine the parties' rights and liabilities under the agreement. Southeastern moved to compel arbitration under the contract's arbitration agreement. McCaddin argued that due to fraud in the execution of the contract, the contract was void and all provisions therein, including the agreement to arbitrate, were unenforceable.
The Court noted that arbitrators determine whether a contract is voidable, but that courts may decide issues of contract formation such as capacity, authority of an agent, whether the agreement was ever signed, or fraud in the execution. See Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444 n.1 (2006). The Court further explained that fraud in the inducement involves a misrepresentation that relates to the subject matter of the contract, but does not challenge contract formation.
In contrast, fraud in the execution occurs when there is a misrepresentation of the essential terms of a putative contract and a party is excusably ignorant of the putative contract's actual terms. McCaddin argued fraud in the execution, alleging that he signed a contract for salvage because he was induced by Southeastern's representation that the contract was for towing. However, the Court held that McCaddin's assertion that he could not read the document because his glasses had been lost was insufficient to constitute the lack of a reasonable opportunity to discover the contract's terms.
The Court found that McCaddin had not submitted any facts or evidence showing fraud in the execution. McCaddin presented no evidence that Southeastern switched the contract or forged his signature or that McCaddin was mentally incompetent or under duress. In fact, McCaddin admitted that he signed the contract.
According to the Court, McCaddin "[wa]s simply trying to cloak a fraudulent inducement claim in the language of fraud in the execution." Under Buckeye, a claim of fraudulent inducement must be decided by the arbitrator, not the court. Accordingly, the Court granted Southeastern's motion to compel arbitration.
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