Claim of Fraudulent Inducement of a Construction Contract Does Not Invalidate Arbitration Clause in That Same Contract

Koudela v. Johnson & Johnson Custom Builders, LLC, 2017 Ohio App. Lexis 5800 (December 29, 2017)

In this case, Nicolas and Monica Koudela (the “Koudelas”) entered into a construction contract with “Johnson & Johnson Builders” (the “Agreement”), whereby Johnson & Johnson Builders agreed to construct a single family home for the Koudelas in Ohio.  However, Johnson & Johnson Builders was a fictitious name for Johnson & Johnson Custom Builders, LLC (“J&J”), and was not an entity registered with the Ohio Secretary of State.

In the Agreement, the parties agreed to submit all disputes to binding arbitration in Cleveland, Ohio.  The arbitration clause further provided that the cost of the arbitration would be borne by the party initiating the claim.

After disputes arose on the project regarding the work performed by J&J, the Koudelas filed suit in the State Court of Ohio against J&J and its principals, alleging claims for fraud in the inducement, breach of contract, negligence, conversion, unjust enrichment/detrimental reliance, and a declaratory judgment that the arbitration clause in the Agreement was unenforceable.  J&J moved for an order dismissing the complaint, or, in the alternative, staying the litigation pending binding arbitration.  The trial court granted J&J’s motion and stayed the litigation pending binding arbitration. 

On appeal, the Koudelas argued that the arbitration provision in the Agreement was void because J&J did not properly register the trade name (“Johnson & Johnson Builders”) with the Ohio Secretary of State, and that the effect of fraud and the fictitious nature of the contracting party negated the arbitration clause.  The Koudelas further argued that section 1329.10 (B) of the Revised Code prohibited J&J from relying upon the arbitration clause in the Agreement.  Section 1329.10 (B) of the Revised Code provides:

No person doing business under a trade name or fictitious name shall commence or maintain an action in the trade name or fictitious name in any court in this state or on account of any contracts made or transactions had in the trade name or fictitious name until it has first complied with section 1329.01 of the Revised Code and, if the person is a partnership, it has complied with section 1777.02 of the Revised Code, but upon compliance, such an action may be commenced or maintained on any contracts and transactions entered into prior to compliance.”

The Court of Appeals disagreed and affirmed the trial court’s decision to stay the litigation pending arbitration.  The Court observed that the Koudelas’ reliance on section 1329.10 (B) of the Revised Code was misplaced because J&J did not initiate the action, but was merely defending it.  Instead, the relevant section of the Revised Code was section 1329.10 (C), which provides:

An action may be commenced or maintained against the user of a trade name or fictitious name whether or not the name has been registered or reported in compliance with section 1329.01 of the Revised Code.

The Court further reasoned that the arbitration clause in the Agreement should be enforced because J&J remained liable for any obligations incurred while doing business under its trade name, the Koudelas did not allege that the arbitration clause itself was fraudulently induced in either its complaint or in its briefs in opposition to J&J’s motion, and the Koudelas clearly knew who to sue since they named the correct entity in the litigation.  The Court also noted that the Koudelas did not perform any searches beforehand to see if any lawsuits had been filed against J&J’s trade name nor did they perform a routine search of the Ohio Secretary of State website, which, in the Court’s opinion, was further proof that the Koudelas were not fraudulently induced to enter into the Agreement.

To view the full text of the court’s decision, courtesy of Lexis®, click here.

Emily D. Anderson

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