Arizona Court of Appeals Division One holds that separability doctrine requires court to consider whether alleged fraud induced individual to agree to arbitrate their claims, separate from whether individual was included to enter contract as a whole.

Three renters contracted with a storage company for storage space.  Each of their rental contracts contained an arbitration clause that stated the parties agreed to “arbitrate any and all disputes or claims . . . relating to . . . the relationship between” the individual and the storage company.  The renters alleged that the storage company advertised on its website and repeated to them in person that no other person would have a key to their storage unit.  A thief ended up stealing the items in each renters’ unit because he had a master key or key obtained through the internet.

The three individuals filed lawsuits against the storage company for consumer fraud and negligence.  The storage company filed a motion to compel arbitration, and the superior court denied that motion.  The superior court held that the storage company fraudulently induced the individuals to agree to the rental contracts by representing there was only a single key, and so the arbitration agreement was invalid.  On appeal, the storage company argued that the superior court erred because it misconstrued the separability doctrine, and erred when it found the arbitration clause was fraudulently induced or unconscionable. 

The Court of Appeals agreed with the storage company, vacated the superior court’s decision, and remanded the case to the superior court for reconsideration under the separability doctrine.  The Court explained that under that doctrine, an arbitration clause is a separate agreement independent from the principal contract, and its validity must be considered separately.  The question at issue on remand, then, is whether the storage company’s misrepresentations as to the existence of other keys fraudulently induced the individuals to agree to arbitrate their claims.   

Judge Gass authored the opinion for the Court; Judges McMurdie and Paton concurred.

Disclosure: Osborn Maledon attorneys were involved in this case.