Federal District Court Finds General Allegations of Fraud, Duress, and Overreaching Insufficient to Invalidate Contract Dispute Resolution Provisions

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Dispute resolution provisions, such as forum-selection clauses, arbitration clauses, and choice-of-law clauses, are commonly included in modern business and employment contracts.   A recent opinion in Zaklit v. Global Linguist Solutions, LLC[1] from the United States District Court in Alexandria, Virginia addresses a novel issue under Virginia law regarding the validity of these provisions; namely, whether a choice-of-law clause providing that the court ought to apply Virginia law is rendered unenforceable where the plaintiff has alleged that the contract as a whole is unenforceable due to a “formation defense” such as fraud or duress.

The court held that, under Virginia law, a claim of fraud or duress will not defeat a dispute resolution provision unless “the party resisting the clause establish[es] by clear and convincing evidence that the clause itself, as opposed to the contract as a whole, was the product of impropriety.” In reaching this decision the court was persuaded by the Supreme Court of Virginia’s opinion in Paul Business Systems, Inc. v. Canon U.S.A., Inc.,[2] which endorsed the more hospitable “modern view” in holding dispute resolution provisions are presumed to be enforceable.

The plaintiffs in Zaklit are linguists allegedly employed by the defendant to provide linguist services to the U.S. Army. They allege to have been “virtual prisoners” of the defendant, prohibited from leaving very cramped and uncomfortable living conditions in Camp Arifjan, Kuwait. It is alleged (among other things) that the defendant presented new contracts to the plaintiffs at a time when they were stationed at Camp Arifjan; that the contracts removed significant benefits existing in their previous contracts; and that the defendant instructed the plaintiffs not to read the contract prior to signing it.

Applying the principles discussed above, the court found the choice-of-law provision to be valid and enforceable, noting that the plaintiffs’ defenses of fraud, duress, and overreaching “go to the entire contract rather than the choice-of-law provision in particular,” and finding that the plaintiffs had presented “no evidence to support their claim that the choice-of-law provision is invalid.” The court explained, “While the amount of evidence needed to satisfy this burden may be debatable, one thing is certain, it takes more than conclusory allegations in the pleadings, none of which are directed specifically at the choice-of-law provision, as is the case here.”

For lawyers and businesspersons accustomed to reviewing and signing contracts, the Zaklit opinion is a reminder that, in Virginia, contracts are typically enforced strictly, even where one party seeks to avoid the contract entirely. The Zaklit opinion further illuminates the need for careful scrutiny of contract terms, and, if the meaning and effect of a contract is unclear, the engagement of experienced counsel.

[1] No. 1:14cv314 (E.D. Va. July 8, 2014) (Alexandria Division) (Cacheris, J.), available at http://docs.justia.com/cases/federal/district- courts/virginia/vaedce/1:2014cv00314/304242/100/ 0.pdf?1404930384.

[2] 240 Va. 337, 342 (1990).

 

Topics:  Breach of Contract, Choice-of-Law, Duress, Fraud

Published In: Alternative Dispute Resolution (ADR) Updates, Civil Procedure Updates, General Business Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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