Sunshine Shopping Center, Inc. v. LG Electronics Panama, S.A. et al

DISTRICT COURT OF THE VIRGIN ISLANDS
DIVISION OF ST. CROIX
SUNSHINE SHOPPING CENTER, INC. 	)
d/b/a SUNSHINE MALL, 	)
)
Plaintiff, 	)
) 	Civil Action No. 2015-0041
v. 	)
)
LG ELECTRONICS PANAMA, S.A., and 	)
ENGINEERING SYSTEMS & SALES, INC. 	)
d/b/a ENSYSA, 	)
)
Defendants. 	)
_________________________________________ )
Attorneys:
Edward L. Barry, Esq.,
St. Croix, U.S.V.I.
For Plaintiff
Michael C. Quinn, Esq.,
St. Thomas, U.S.V.I.
For Defendant LG Electronics Panama, S.A.
Anna Washburn, Esq.,
St. Croix, U.S.V.I.
Orlando Fernandez-Carmona, Esq.,
Guaynabo, P.R.
For Defendant Engineering Systems & Sales, Inc.
MEMORANDUM OPINION
Lewis, Chief Judge
THIS MATTER comes before the Court on the Notice of Objection to Magistrate Order
(“Objection”) (Dkt. No. 48) filed by Plaintiff Sunshine Shopping Center, Inc., d/b/a Sunshine Mall
(“Plaintiff” or “Sunshine”). Plaintiff objects to the Magistrate Judge’s Order (Dkt. No. 47) granting
Defendant LG Electronics Panama, S.A.’s (“LG Panama”) “Motion for an Order Compelling
Arbitration and Dismissing Plaintiff’s Complaint or Staying these Proceedings” (“Motion to
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Compel Arbitration”) (Dkt. No. 20). LG Panama filed a Response to Plaintiff’s Objection
(“Response”) (Dkt. No. 55), to which Plaintiff filed a Reply (“Reply”) (Dkt. No. 56). For the
reasons that follow, the Court will (1) vacate the Magistrate Judge’s Order in light of Plaintiff’s
Objection; (2) deny without prejudice LG Panama’s Motion to Compel Arbitration; and (3) grant
Plaintiff’s request for limited discovery on the issue of arbitrability.
I. 	BACKGROUND
This action arose out of a dispute among the parties related to the installation of a
commercial air conditioning system at the Sunshine Mall in St. Croix, which is operated by
Plaintiff. The complaint advances breach of contract and negligent misrepresentation claims
against Defendants LG Panama, Engineering Systems & Sales, Inc., d/b/a ENSYSA (“ENSYSA”),
and Jacques Etienne (“Etienne”), following Defendants’ alleged failure to install commercial air
conditioning systems as agreed by contract. (Dkt. No. 1). Plaintiff’s claims against Etienne were
dismissed without prejudice by stipulation. (Dkt. Nos. 39, 41). Accordingly, only LG Panama and
ENSYSA remain as Defendants in this matter.
A. 	Motion to Compel Arbitration
LG Panama filed a Motion to Compel Arbitration pursuant to Federal Rule of Civil
Procedure 12(b)(3), and a corresponding Memorandum of Law in Support (Dkt. Nos. 20, 21). In
support of its Motion to Compel Arbitration, LG Panama asserted that this Court is not the proper
venue for Plaintiff’s action, and requested the entry of an order compelling Plaintiff to arbitrate its
claims against LG Panama in Panama City, Panama, as allegedly required by the parties’ contract.
(Dkt. No. 21 at 1-2). LG Panama further argued that only Plaintiff and ENSYSA are parties to the
contract upon which Plaintiff’s claims are based, and that LG Panama’s liability under that contract
is therefore a legal impossibility. Id. at 2-4. LG Panama maintained that a separate contract—titled
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a Master Supply Agreement (“MSA”)—is the controlling contract between LG Panama and
Plaintiff. Id. at 4-5. Because the MSA contains an arbitration provision in which the parties agree
that disputes arising out of the contract shall be resolved by arbitration, LG Panama argued that
the Court should enforce the arbitration provision and compel Plaintiff to arbitrate its claims
against LG Panama as provided by the MSA. Id. at 4-13.
In opposition to LG Panama’s Motion to Compel Arbitration, Plaintiff argued, inter alia,
that the MSA is a “sham agreement creating a fictitious and meaningless distributorship
relationship,” and that “there was never a meeting of the minds on any agreement to arbitrate.”
(Dkt. No. 27 at 1). Plaintiff claimed that the sole purpose of the MSA was to enable LG Panama
to register Plaintiff as a customer in its internal system, and that the parties never intended the
MSA as a binding agreement covering LG Panama’s sale of goods to Plaintiff. Id. at 6. In support
of its argument, Plaintiff relied on a declaration by its representative, Hatim Yusuf, along with
email 	communications 	between 	Plaintiff 	and 	LG 	Panama purportedly demonstrating that
execution of the MSA was strictly intended for purposes of registering Plaintiff on LG Panama’s
internal sales system. Id. at 7-8.
B. 	Magistrate Judge’s Order and Plaintiff’s Objection
In ruling on LG Panama’s Motion to Compel Arbitration, the Magistrate Judge found that:
(1) LG Panama was not a party to the contract between ENSYSA and Plaintiff upon which
Plaintiff’s claims are based; (2) the MSA is an enforceable contract; (3) the MSA’s clear and
unambiguous arbitration provision is binding on the parties; and (4) Plaintiff may not introduce
extrinsic evidence to “create an ambiguity” in its terms. (Dkt. No. 47 at 2-4). The Magistrate Judge
therefore granted LG Panama’s Motion to Compel Arbitration and stayed proceedings against LG
Panama in this matter pending arbitration of Plaintiff’s claims against it. Id. at 4-5.
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In its Objection to the Magistrate Judge’s Order, Plaintiff focuses on the narrow issue of
whether the Magistrate Judge’s determination that extrinsic evidence related to the formation of
the MSA was barred by the parol evidence rule constitutes clear legal error. (Dkt. No. 48 at 3).
Plaintiff maintains that Virgin Islands law recognizes the common law concept of a “sham
contract”—one which, although held up as an enforceable contract, was not intended or understood
by either party to constitute a binding legal agreement because it was entered into with an ulterior
purpose. Id. at 8-9. Plaintiff contends that the MSA was a sham because its ulterior purpose—
which Plaintiff maintains is explicitly recognized in the parties’ written statements with respect to
the MSA—“was merely to set Sunshine up as a customer in LG-Panama’s accounting system.”
Id. at 13. Plaintiff also argues that further negotiations between LG Panama and Plaintiff following
ENSYSA’s failure to perform demonstrate that neither LG Panama nor Plaintiff considered the
MSA a binding contractual agreement. Id. at 14. Plaintiff maintains that where “the existing factual
record is inadequate to resolve the fact issues surrounding the formation of [an] agreement [to
arbitrate] . . . the party resisting arbitration ‘must be given the opportunity to conduct limited
discovery on the narrow issue concerning the validity of the arbitration agreement.’” Id. at 14-15
(quoting Guidotti v. Legal Helpers Debt Resolution, L.L.C., 716 F.3d 764, 774 (3d Cir. 2013)).
Plaintiff therefore urges the Court to vacate the Magistrate Judge’s Order granting LG Panama’s
Motion to Compel Arbitration, and to (1) deny LG Panama’s Motion to Compel Arbitration on the
record developed in the parties’ filings, or (2) deny LG Panama’s Motion to Compel Arbitration
without prejudice and allow Plaintiff an opportunity for limited discovery on the issue of
arbitrability. Id. at 16.
LG Panama responds that the Magistrate Judge’s Order contains no legal error, and that
the 	clear 	and 	unambiguous 	terms 	of 	the 	MSA 	prevent 	the 	introduction 	of 	parol
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evidence. (Dkt. No. 55 at 8). LG Panama also maintains that because Plaintiff’s representative—
Hasim Yusuf—signed the MSA, intent to be bound by the terms of the agreement is presumed,
and parol evidence is not admissible to show otherwise. Id. at 13. Finally, LG Panama argues that
the existence of an integration agreement in the MSA precludes the admission of parol evidence
under the circumstances here. Id. at 14-16.
II. 	APPLICABLE LEGAL PRINCIPLES
A. 	Standard of Review
Because a decision to compel arbitration and stay litigation pending its resolution has been
recognized as a non-dispositive matter in the Third Circuit, the Court reviews the Magistrate
Judge’s determination under a “clearly erroneous or contrary to law” standard. See 28 U.S.C. §
636(b)(1)(A) (“A judge of the court may reconsider any [non-dispositive] pretrial matter . . . where
it has been shown that the magistrate judge’s order is clearly erroneous or contrary to law”); FED.
R. C IV. P. 72(a) (providing that a district judge “must consider timely objections and modify or set
aside any part of [an] order [on a non-dispositive matter] that is clearly erroneous or is contrary to
law”); see also Virgin Islands Water & Power Auth. v. Gen. Elec. Int'l Inc., 561 F. App’x 131, 134
(3d Cir. 2014) (“A ruling on a motion to compel arbitration does not dispose of the case, or any
claim or defense found therein. Instead, orders granting this type of motion merely suspend the
litigation while orders denying it continue the underlying litigation.”) (citing PowerShare, Inc. v.
Syntel, Inc., 597 F.3d 10, 14 (1st Cir. 2010)).
A factual finding “is clearly erroneous ‘when although there is evidence to support it, the
reviewing court on the entire evidence is left with the definite and firm conviction that a mistake
has been committed.’” Lo Bosco v. Kure Eng'g Ltd., 891 F. Supp. 1035, 1037 (D.N.J. 1995)
(quoting United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948)). “In reviewing a
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magistrate judge’s factual determinations [on a non-dispositive matter], a district court may not
consider any evidence which was not presented to the magistrate judge.” Lithuanian Commerce
Corp. v. Sara Lee Hosiery, 177 F.R.D. 205, 213 (D.N.J. 1997) (citing Haines v. Liggett Group.
Inc., 975 F.2d 81, 92 (3d Cir. 1992)).
On the other hand, district courts conduct a de novo review of a magistrate judge’s legal
conclusions on non-dispositive matters where a party objects on the basis that those conclusions
were contrary to law. Equal Employment Opportunity Comm'n v. City of Long Branch, 866 F.3d
93, 99 (3d Cir. 2017) (for a non-dispositive motion referred to a magistrate judge, district courts
“review[] findings of fact for clear error and [] review matters of law de novo”) (citation omitted).
“A ruling is contrary to law if the magistrate judge has misinterpreted or misapplied applicable
law.” Kounelis v. Sherrer, 529 F. Supp. 2d 503, 518 (D.N.J. 2008) (quoting Gunter v. Ridgewood
Energy Corp., 32 F. Supp. 2d 162, 164 (D.N.J. 1998)). Thus, the Court will review the Magistrate
Judge’s factual findings for clear error—considering only that evidence which was before the
Magistrate Judge when he made his ruling—and will conduct a de novo review of his conclusions
of law.
B. 	Other Legal Principles
1. 	General Arbitration Principles
LG Panama advances its Motion to Compel Arbitration pursuant to the Convention on the
Recognition and Enforcement of Foreign Arbitral Awards (“CREFAA”), which is enforced in the
United States under Chapter Two of the Federal Arbitration Act, 9 U.S.C. § 201, et seq. (“FAA”).
See Sandvik AB v. Advent Inter. Corp., 220 F.3d 99, 102, 104-05 (3d Cir. 2000) (recognizing that
the United States is a signatory to the CREFAA and that the CREFAA is implemented
domestically through the FAA). “The CREFAA commits the courts of signatory states to refer
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parties to arbitration when the parties have agreed to arbitrate disputes.” Id. at 104-5; see also 9
U.S.C. § 206 (providing that a district court “may direct that arbitration be held in accordance with
the agreement at any place therein provided for, whether that place is within or without the United
States”). “The domestic FAA applies to actions brought under the [CREFAA] to the extent that
the two are not in conflict.” Century Indem. Co. v. Certain Underwriters at Lloyd’s, London, 584
F.3d 513, 523 (3d Cir. 2009) (citing 9 U.S.C. § 208; China Minmetals Materials Imp. & Exp. Co.
v. Chi Mei Corp., 334 F.3d 274, 280 (3d Cir. 2003)).
In passing the FAA, Congress “expressed a strong federal policy in favor of resolving
disputes through arbitration.” Century Indem. Co., 584 F.3d at 522 (citations omitted). Where a
party petitions to enforce an arbitration agreement, “[t]he court shall hear the parties, and upon
being satisfied that the making of the agreement for arbitration or the failure to comply therewith
is not in issue, the court shall make an order directing the parties to proceed to arbitration in
accordance with the terms of the agreement.” Sandvik, 220 F.3d at 104 (quoting 9 U.S.C. § 4). “The
presumption in favor of arbitration carries ‘special force’ when international commerce is
involved.” Id. (citing Mitsubishi Motors Corp. v. Soler Chrysler Plymouth, Inc., 473 U.S. 614, 631
(1985)).
However, the strong presumption in favor of arbitration “does not lead automatically to the
submission of a dispute to arbitration upon the demand of a party to the dispute.” Century Indem.
Co., 584 F.3d at 523. Rather, before granting a motion to compel arbitration, a district court “must
determine that (1) there is an agreement to arbitrate and (2) the dispute at issue falls within the
scope of that agreement.” Id. (citations omitted). With respect to the validity of an arbitration
agreement, the FAA provides, in pertinent part, that “[a] written provision in . . . a contract . . . to
settle by arbitration an existing controversy arising out of such a contract . . . shall be valid,
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irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation
of any contract.” 9 U.S.C. § 2.
2. 	Validity Challenges to Arbitration Contracts
Where an arbitration provision is contained within a larger contract, the arbitration
provision itself is severable from the remainder of the contract. Buckeye Check Cashing, Inc. v.
Cardegna, 546 U.S. 440, 445 (2006). The severability of arbitration provisions is of particular
consequence where a court is considering a party’s opposition to a motion to compel arbitration.
As the Supreme Court has explained:
There are two types of validity challenges under [9 U.S.C.] § 2: “One type challenges
specifically the validity of the agreement to arbitrate,” and “[t]he other challenges the
contract as a whole, either on a ground that directly affects the entire agreement (e.g., the
agreement was fraudulently induced), or on the ground that the illegality of one of the
contract’s provisions renders the whole contract invalid.” Buckeye, 546 U.S., at 444 []. . . .
[O]nly the first type of challenge is relevant to a court’s determination whether the
arbitration agreement at issue is enforceable. See Prima Paint Corp. v. Flood & Conklin
Mfg. Co., 388 U.S. 395, 403-404 [] (1967); Buckeye, supra, at 444-446 []; Preston v.
Ferrer, 552 U.S. 346, 353-354 [] (2008). That is because § 2 states that a “written
provision” 	“to 	settle 	by 	arbitration 	a 	controversy” 	is 	“valid, 	irrevocable, 	and
enforceable” without mention of the validity of the contract in which it is contained. Thus,
a party’s challenge to another provision of the contract, or to the contract as a whole, does
not prevent a court from enforcing a specific agreement to arbitrate.
Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 70 (2010) (footnote omitted) (emphasis in the
original). As such, a district court must consider a party’s challenge to the validity of an arbitration
agreement where a party makes a specific attack on the arbitration provision. Rent-A-Center, 561
U.S. at 71. On the other hand, where a party attacks the validity of a contract as a whole rather
than its arbitration provision specifically, the determination of the validity of the contract is an
issue to be determined in the first instance by the arbitrator. Buckeye, 546 U.S. at 445–46
(“[U]nless the challenge is to the arbitration clause itself, the issue of the contract’s validity is
considered by the arbitrator in the first instance.”). The Buckeye Court also made clear that a
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challenge to the validity of a contract—regardless of whether the contract is challenged as void or
voidable under state law—is a matter for determination by the arbitrator.1
While the Supreme Court in Buckeye eliminated any distinction between void and voidable
contracts, it recognized a distinction between the issue of a contract’s validity and “the issue
whether any agreement between the alleged obligor and oblige was ever concluded.” Id. at 445
n.1. The Buckeye Court noted that its opinion was addressing only the former issue (contract
validity) in concluding that it was an arbitrator’s decision, and was not speaking to the issue
addressed in a series of cases holding that:
[I]t is for courts to decide whether the alleged obligor ever signed the contract, Chastain v.
Robinson–Humphrey Co., 957 F.2d 851 (C.A.11 1992), whether the signor lacked
authority to commit the alleged principal, Sandvik AB v. Advent Int'l Corp., 220 F.3d 99
(C.A.3 2000); Sphere Drake Ins. Ltd. v. All American Ins. Co., 256 F.3d 587 (C.A.7 2001),
and whether the signor lacked the mental capacity to assent, Spahr v. Secco,330 F.3d 1266
(C.A.10 2003).
Id.
The scope of this exception to the arbitrability of challenges to the contract as a whole has
not been entirely clear in the wake of Buckeye. However, courts and commentators have pointed
to the Supreme Court’s subsequent pronouncement in Granite Rock Co. v. Int'l Bhd. of Teamsters,
561 U.S. 287 (2010)—that “[i]t is [] well settled that where the dispute at issue concerns contract
formation, the dispute is generally for courts to decide”—for the proposition that, even where an
1 Before the Supreme Court’s opinion in Buckeye, a number of courts—including the Third
Circuit—held that a challenge to a contract as “void” was a challenge to the contract’s existence,
and thus a matter for determination by a district court even where an attack was made on the
contract as a whole rather than on an arbitration provision in particular. See Sandvik AB v. Advent
Int'l Corp., 220 F.3d 99, 107 (3d Cir. 2000) (noting that in the analysis of whether the existence of
an underlying contract is at issue, “we draw a distinction between contracts that are asserted to be
‘void’ or non-existent, as is contended here, and those that are merely ‘voidable’ . . . .). The
Supreme Court in Buckeye rejected such a distinction. Buckeye, 546 U.S. at 447-48 (holding that
the term “contract” for purposes of the FAA includes contracts that later prove to be void, such
that a challenge to a contract as void is a question for the arbitrator).
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attack goes to the contract as a whole, a district court must resolve issues of contract formation in
the first instance. Granite Rock, 561 U.S. at 296; see also SBRMCOA, LLC v. Bayside Resort, Inc.,
707 F.3d 267, 271 (3d Cir. 2013) (holding that a “challenge to a contract on the grounds that the
signatory was unauthorized to sign it” constituted “a challenge to a contract’s formation rather
than its validity” and as such was a matter to be determined by the district court in the first instance)
(citing Sandvik, 220 F.3d at 100-01).
3. 	Legal Standards in Resolving a Motion to Compel Arbitration
The Third Circuit has provided specific guidance with regard to “the standard for district
courts to apply when determining whether, in a specific case, an agreement to arbitrate was actually
reached.” Guidotti v. Legal Helpers Debt Resolution, L.L.C., 716 F.3d 764, 771 (3d Cir. 2013).
The standard varies depending on the circumstances presented.
The first scenario arises “‘when it is apparent, based on ‘the face of a complaint, and
documents relied upon in the complaint,’ that certain of a party’s claims ‘are subject to an
enforceable arbitration clause . . . .’” Id. at 776 (quoting Somerset Consulting, LLC v. United
Capital Lenders, LLC, 832 F. Supp. 2d 474, 482 (E.D. Pa. 2011)). In these cases, the motion to
compel arbitration should be considered under a motion to dismiss standard pursuant to Federal
Rule of Civil Procedure 12(b)(6), and no further discovery should be permitted. Id.
The second scenario arises where either “the complaint and its supporting documents are
unclear regarding the agreement to arbitrate, or if the plaintiff has responded to a motion to compel
arbitration with additional facts sufficient to place the agreement to arbitrate in issue . . . .” Id.
(citing Somerset, 832 F. Supp. 2d. at 482). Under these circumstances, “the parties should be
entitled to discovery on the question of arbitrability,” after which the district court “may entertain
a renewed motion to compel arbitration, this time judging the motion under a summary judgment
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standard” pursuant to Federal Rule of Civil Procedure 56(a). Id. (quoting Somerset, 832 F. Supp.
2d. at 482). Where a genuine dispute of material fact regarding the formation of an arbitration
agreement remains following this limited discovery, a “court may then proceed summarily to a
trial regarding ‘the making of the arbitration agreement or the failure, neglect, or refusal to perform
the same,’ as Section 4 of the FAA envisions.” Id. (quoting Somerset, 832 F. Supp. 2d at 482
(citing 9 U.S.C. § 4)).
With these legal principles in mind, the Court turns to its analysis of Plaintiff’s Objection
to the Magistrate Judge’s Order granting LG Panama’s Motion to Compel Arbitration.
III. 	DISCUSSION
Although Plaintiff’s Objection is limited to the narrow issue whether the Magistrate Judge
committed clear error by refusing to examine extrinsic evidence related to the formation of the
MSA, the Court’s analysis must begin by addressing the threshold question of whether Plaintiff’s
challenge to the MSA presents a question of contract validity or contract formation.
Plaintiff’s opposition to LG Panama’s Motion to Compel Arbitration presents an attack on
the MSA as a whole. Plaintiff maintains:
The 2012 Master Supply Agreement (the agreement containing the arbitration clause
relied upon) was a sham, and set forth a purely fictitious distributor/product reseller
relationship between LG-Panama and Sunshine Mall that was never in fact contemplated,
and [was] executed for the sole stated purpose of registering Plaintiff as a “customer” in
[LG-Panama’s] internal system; the parties never intended [the MSA] as a final agreement
covering specific goods sold to Sunshine Mall and ancillary engineering services.
(Dkt. No. 27 at 6) (emphasis added). Based on its assertion that the MSA as a whole was a sham
contract, Plaintiff argues that “there was never a meeting of the minds on any agreement to
arbitrate.” Id. at 1. In other words, it is Plaintiff’s contention that the contract as a whole is a sham
that provides the basis for its attack on the MSA’s arbitration provision.
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Accordingly, Plaintiff’s attack in this case fits squarely into that class of challenges that
target “the contract as a whole . . . on a ground that directly affects the entire agreement.” Buckeye,
546 U.S. at 444. Thus, if the sham contract argument raised by Plaintiff presents a question of
contract validity, the Magistrate Judge should not have entertained Plaintiff’s arguments at all as
contract validity is a question for the arbitrator in the first instance. On the other hand, if the
argument presents a question of contract formation, the Court must determine whether the MSA
(and thus, the arbitration provision contained therein) was ever formed.
A. 	Formation or Validity
In this case, Plaintiff does not dispute that its representative—Hasim Yusuf—signed and
executed the MSA. It also does not dispute that the MSA contains both an arbitration and an
integration provision.2 Rather, Plaintiff contends—pointing to a series of email communications
2 The arbitration provision of the MSA reads:
All disputes, controversies or disagreements which may arise between the parties, in
relation to or in connection with this Agreement, or for the breach hereof shall be finally
settled by means of arbitration in Law according to the Rules of the Center for Conciliation
and Arbitration of the Panama Chamber of Commerce and Industries. The language of the
arbitration shall be Spanish and it shall be done in the main offices of the Center for
Conciliation and Arbitration in Panama City. The arbitration panel shall be composed of
three (3) arbitrators.
(Dkt. No. 21-1 at 2). The merger clause appears at section 15 of the MSA, which is titled “Entire
Agreement” and provides:
This Agreement constitutes the final agreement between the parties. It is the complete and
exclusive representation of the parties’ agreement on the matters contained in this
Agreement. All prior and contemporaneous negotiations and agreements between the
parties on the matter contained in this Agreement are expressly merged into and superseded
by this Agreement. The provisions of this Agreement may not be explained, supplemented,
or qualified through evidence of trade usage or a prior course of dealings. In entering into
this Agreement, neither party has relied upon any statement, representation, warranty, or
agreement of the other party except for those expressly contained in this Agreement. There
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between Mr. Yusuf and alleged representatives of LG Panama—that although the MSA appears
to be a valid binding contract on its face, the parties never intended the MSA to serve as a legally-
binding contract. Plaintiff therefore refers to the MSA as a sham contract, and asserts that because
the parties never intended the MSA to be binding, a threshold question concerning whether the
parties ever formed a contract is present here. (Dkt. No. 56 at 5-7).
Under Virgin Islands law, the formation of “a valid contract requires a ‘bargain in which
there is a mutual assent to the exchange, and consideration.’” Valentin v. Grapetree Shores, 2015
WL 13579631, at *3 (V.I. Super. June 30, 2015) (quoting Morales v. Sun Constructors, Inc., 541
F.3d 218, 221 (3d Cir. 2008)) (additional citations omitted). A party’s assent to a bargain “is not
measured by subjective intent, but by outward expression.” Id. (citing Morales, 541 F.3d at
221; Fitz v. Islands Mech. Contractor, Inc., 53 V.I. 806, 820 (D.V.I. 2010)). However, the Virgin
Islands Supreme Court has recognized in dicta that, under certain circumstances, “extrinsic
evidence may be admissible to demonstrate an intent different from that expressed in the contract.”
Phillip v. Marsh-Monsanto, 66 V.I. 612, 625 n.7 (2017). The Phillip Court noted that such a
circumstance may arise where a party alleges that a contract was a sham. Id. (quoting Tangren
Family Trust v. Tangren, 182 P.3d 326, 330–31 (Utah 2008) (“[E]xtrinsic evidence is appropriately
considered, even in the face of a clear integration clause, where the contract is alleged to be a
forgery, a joke, a sham, lacking in consideration, or where a contract is voidable for fraud, duress,
mistake, or illegality.”) (emphasis added)).
are no conditions precedent to the effectiveness of this Agreement other than those
expressly stated in this Agreement.
Id.
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American Law Reports defines a “sham contract” as one which is “not intended to create
any legal relations between the parties, and is made for an ulterior purpose not disclosed in nor
deducible from the terms of the agreement.” 71 A.L.R. 2d 382. Further, the Restatement (Second)
of Contracts (“the Restatement”) discusses sham contracts in the context of the requirement of
mutual assent to the formation of a contract, and provides: “Where all the parties to what would
otherwise be a bargain manifest an intention that the transaction is not to be taken seriously, there
is no such manifestation of assent to the exchange as is required” for formation of a contract.
R ESTATEMENT (S ECOND) OF C ONTRACTS § 18, Comment C.
Plaintiff argues that, because it confirmed with LG Panama that execution of the MSA was
merely a matter of procedure necessary to register Plaintiff as an LG Panama customer in its
database, neither party intended the MSA to be binding upon it. Rather, Plaintiff contends that the
parties executed the MSA solely for the “ulterior purpose” of registering Plaintiff in LG Panama’s
system. Plaintiff therefore contends that an issue of contract formation—the parties’ intent to be
bound by the MSA—is present here.
LG Panama argues that Plaintiff’s purported sham contract argument is, in reality, an
allegation that LG Panama induced Plaintiff to execute the MSA through fraud. (Dkt. No. 40 at 9).
Because an allegation of fraud in the inducement is an issue for determination by an arbitrator in
the first instance, LG Panama asserts that Plaintiff has failed to raise an issue of contract formation
for the Court’s resolution. (Dkt. No. 55 at 9).
LG Panama is correct that if Plaintiff’s argument is based on a theory that LG Panama
fraudulently induced Plaintiff to enter into the MSA, that question is reserved for the arbitrator.
See S. Jersey Sanitation Co., Inc. v. Applied Underwriters Captive Risk Assurance Co., Inc., 840
F.3d 138, 144-45 (3d Cir. 2016) (noting that where a contract contains a clear arbitration provision,
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“the [FAA] does not permit the federal court[s] to consider claims of fraud in the inducement of
the contract generally”) (quoting Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395,
403-04 (1967)) (internal quotation marks omitted). Accordingly, the Court must determine
whether Plaintiff’s challenge to the MSA is properly viewed as grounded in a sham contract or a
fraudulent inducement theory.
Black’s Law Dictionary defines fraud in the inducement as:
Fraud occurring when a misrepresentation leads another to enter into a transaction with a
false 	impression 	of 	the 	risks, 	duties, 	or 	obligations 	involved; 	an 	intentional
misrepresentation of a material risk or duty reasonably relied on, thereby injuring the other
party without vitiating the contract itself, esp. about a fact relating to value or the ability to
perform.
FRAUD, Black’s Law Dictionary (10th ed. 2014). The Third Circuit has recognized that a claim
for fraud in the inducement is made where one party’s misrepresentation “induces a party to assent
to something he otherwise would not have . . . .” Connors v. Fawn Min. Corp., 30 F.3d 483, 490
(3d Cir. 1994). In the Virgin Islands, the elements of a fraudulent inducement claim are: “(1) a
false representation, (2) in reference to [a] material fact, (3) made with knowledge of its falsity,
(4) with the intent to deceive, and (5) detrimental reliance, or action taken in reliance upon the
representation.” 	Kiskidee, 	LLC 	v. 	Certain 	Interested 	Underwriters 	at 	Lloyd's 	of 	London
Subscribing To Policy No. NB043060b, 2012 WL 952752, at *2 (D.V.I. Mar. 21, 2012) (internal
quotations and quotation marks omitted).
In the Court’s view, the distinguishing feature, for present purposes, between the allegation
of a sham contract and the allegation of fraudulent inducement is the question of whether the
parties intended to be bound by an agreement. Where a party alleges fraudulent inducement, it is
not alleging that it never intended to be bound by an agreement. Rather, the party claims that it
intended to be bound by an agreement, but that its assent to certain aspects of the agreement was
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procured by the other party’s misrepresentation. In other words, the party was misled as to a risk,
duty, or obligation of the particular agreement. See, e.g., Ross v. Hodge, 58 V.I. 292, 313 (2013)
(claim that one party deliberately misled another “into believing that his signature on the quitclaim
deed was needed for her to acquire a small loan . . . when in actuality his signature on the document
effectuated a transfer . . . [of property] interest” sounded in fraudulent inducement).
On the other hand, where a party alleges that a contract was a sham it is claiming that—
despite the outward appearance of assent to an agreement—no such assent ever existed because
the parties understood that their putative agreement was not to be taken seriously or not meant to
be legally binding. In other words, the parties never intended to be bound by an agreement at all.
On the record here, the Court concludes that Plaintiff has sufficiently alleged a sham
contract theory. Plaintiff asserts that—although the MSA has the outward appearance of a legally
binding contract—neither Plaintiff nor LG Panama intended the MSA to be legally binding.
Rather, Plaintiff alleges that both parties understood the MSA to be a mere procedural formality
necessary for the ulterior purpose (not expressed in the MSA) of registering Plaintiff in LG
Panama’s internal sales system. Crucially, as discussed further below, Plaintiff has come forward
with some evidence to support its assertion that both parties recognized this ulterior purpose and
that neither party intended the MSA to be legally binding. Accordingly, the Court concludes that
Plaintiff has attacked the MSA on a sham contract—as opposed to a fraudulent inducement—
theory.
The Court further concludes that Plaintiff’s sham contract argument presents a question of
contract formation. An allegation that a contract was a sham raises an issue as to whether the
parties ever intended to be bound by a contract—i.e., whether there was an intent to enter into a
contractual agreement at all. Such an allegation goes to the very heart of “the issue whether any
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agreement . . . was ever concluded.” Buckeye, 546 U.S. at 445 n.1. Plaintiff’s sham contract
argument thus strikes at the core of the formation of the MSA and, as such, is a question for this
Court in the first instance.
B. 	The Parol Evidence Rule
Having determined that the question presented is one of contract formation, which is
properly before this Court, the Court now turns to Plaintiff’s argument that the Magistrate Judge
erred in rejecting extrinsic evidence relevant to the formation of the MSA.
The 	Virgin 	Islands 	Supreme 	Court 	recently 	reviewed 	the 	principles 	of 	contract
interpretation as applicable in the Territory in the case of Phillip v. Marsh-Monsanto, 66 V.I. 612
(2017). The Phillip Court explained that a court’s primary objective in contract interpretation “is
to ascertain and give effect to the parties’ objective intent.” Id. at 624-25 (citations omitted). In
general, “[w]here the language of a contract is clear and unambiguous, the parties’ intent must be
derived from the plain meaning of its terms.” Id. at 625. Further, “[i]f the language of a clear and
unambiguous contract includes a merger clause, that clause precludes consideration of extrinsic
evidence ‘used to demonstrate an intent that contradicts or adds to the intent expressed in the
contract.’” Id. (internal citations and parenthesis omitted).
As applied to this case, the foregoing principles suggest that the parties should be
prohibited from relying on extrinsic evidence with respect to the interpretation of the MSA. The
Court agrees with the Magistrate Judge’s conclusion that the language of the MSA is clear and
unambiguous—particularly as it relates to the settlement of disputes arising in relation to or in
connection with the MSA by arbitration. The MSA also contains a merger clause, which normally
would preclude the consideration of extrinsic evidence of the parties’ intent in entering into the
contract where it conflicts with the intent as expressed in the contract.
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Nonetheless, as discussed above, the Virgin Islands Supreme Court noted in dicta that
“extrinsic evidence may be admissible to demonstrate an intent different from that expressed in
the contract” under certain circumstances. Phillip, 66 V.I. at 625 n.7. The Phillip Court also
observed that “numerous courts recognize that a merger clause does not bar the introduction of
extrinsic evidence amounting to fraud, among other circumstances.” Id. (emphases added). Among
the “other circumstances” noted by the Virgin Islands Supreme Court were those instances where
a “contract is alleged to be a forgery, a joke, a sham, lacking in consideration, or where a contract
is voidable for fraud, duress, mistake, or illegality.” Id. (quoting Tangren Family Tr. v. Tangren,
182 P.3d 326, 330-31 (Utah 2008) (emphasis added)).3
As Plaintiff points out in its Objection, the proposition that extrinsic evidence may be
considered where a sham contract is alleged appears to be generally accepted. The Restatement
(Second) of Contracts provides that “[a]greements and negotiations prior to or contemporaneous
with the adoption of a writing are admissible in evidence to establish . . . illegality, fraud, duress,
mistake, lack of consideration, or other invalidating cause . . . .” R ESTATEMENT (S ECOND ) OF
C ONTRACTS § 214. Comment C to Section 214 provides that “[w]hat appears to be a complete and
binding integrated agreement may be a forgery, a joke, a sham, or an agreement without
consideration . . . . Such invalidating causes need not and commonly do not appear on the face of
the writing. They are not affected even by a ‘merger’ clause.” R ESTATEMENT (S ECOND ) OF
C ONTRACTS § 214, Comment C. The authors of the treatise American Jurisprudence note that
“parol evidence is admissible to show that a writing which apparently constituted a contract was
not intended or understood by either party to be binding as such.” 29A Am. Jur. 2d Evidence §
3 While the Virgin Islands Supreme Court’s dicta does not, of course, constitute the law of the
Territory, it does, however, serve to forecast that Court’s approach to an issue.
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1120. American Law Reports—collecting cases analyzing the treatment of alleged “sham
agreements” by various courts—identifies the generally accepted rule that “parol evidence is
always competent to show the nonexistence of a contract.” 71 A.L.R. 2d 382 at § 1 (citations
omitted);4 see also generally, Weldon v. Great White N. Distribution Servs., L.L.C., 197 F. Supp.
2d 893, 906–07 (E.D. Mich. 2002) (recognizing the consideration of “extrinsic evidence to show
[] that the writing was a sham, not intended to create legal relations” as one of four main exceptions
to the parol evidence rule) (citations omitted); Happy Dack Trading Co. v. Agro-Indus., Inc., 602
F. Supp. 986, 992 (S.D.N.Y. 1984) (recognizing that the parol evidence rule does not bar
consideration of extrinsic evidence “offered to show that a writing which purports to be a contract
is not a contract at all, but merely a sham”) (citations omitted); Boeing Co. v. U.S.A.C. Transp.,
Inc., 539 F.2d 1228, 1230 (9th Cir. 1976) (“[Al]though parol evidence would be inadmissible to
vary the terms of a valid written contract, such evidence is nevertheless admissible to show the
nonexistence or invalidity of an alleged contract or that it is not a full integration of the agreement
between the parties.”) (citations omitted).
Given the generally recognized principle that extrinsic evidence may be considered where
a party alleges that a contract was a sham—and in light of the Virgin Islands Supreme Court’s
acknowledgment of this principle in Phillip—the Court concludes that extrinsic evidence may be
considered under ordinary state-law contract principles to evaluate Plaintiff’s claim that no
contract was formed under the circumstances here.
4 An exception to the introduction of extrinsic evidence to demonstrate a sham agreement has been
recognized by some authorities “where the purpose of the agreement is to defraud or mislead a
third person in an illegal or immoral way”—a circumstance which is not present here. 71 A.L.R.
2d 382 at § 2.
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C. 	The Parties’ Evidence
As an initial matter, the Court observes that Plaintiff’s Complaint neither references the
MSA nor incorporates the MSA as an attachment. Rather, LG Panama first presented the MSA to
the Court through its Motion to Compel Arbitration, arguing that the MSA was in fact the
controlling contract between LG Panama and Plaintiff and that the MSA’s arbitration provision
should be enforced. Accordingly, the circumstances of this case do not fit the first scenario
envisioned by the Third Circuit in Guidotti, 716 F.3d 764, wherein “it is apparent, based on the
face of a complaint, and documents relied upon in the complaint, that certain of a party’s claims
are subject to an enforceable arbitration clause.” Id. at 776 (quotation omitted). Instead, this case
arises under the second scenario envisioned by the Guidotti Court, which requires a district court
to consider whether “the plaintiff has responded to a motion to compel arbitration with additional
facts sufficient to place the agreement to arbitrate in issue . . . .” Id. (quotation omitted).
LG Panama’s evidence with respect to the MSA is fairly straightforward. LG Panama
presents the MSA—which is signed by Hatim Yusuf on behalf of Plaintiff and by Jin Suk Son on
behalf of LG Panama—as the sole and controlling contract between LG Panama and Plaintiff.
(Dkt. No. 21 at 4-5; Dkt. No. 21-1 at 3). Through the declaration of Joonwoo Kim—LG Panama’s
former Business Director for Commercial Air Conditioning, Solar and Lighting for the Central
America Region—LG Panama explains that, as a matter of policy, every customer must sign an
MSA before LG Panama will sell the customer equipment, whether or not the customer is
purchasing equipment for resale. (Dkt. No. 40-1 at ¶ 6). LG Panama represents that “[t]his
requirement was fully explained to Plaintiff and its principal, Hatim Yusuf,” and that Mr. Yusuf
executed the MSA “with full understanding of its purpose and validity.” Id. LG Panama also
maintains that Mr. Yusuf never indicated to LG Panama that he did not understand the MSA, and
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that he “executed the MSA without comment or suggested editing.” Id. at ¶ 9. LG Panama therefore
argues that Plaintiff should not be permitted to claim that the MSA—which Mr. Yusuf reviewed
and executed as Plaintiff’s representative—was never intended by the parties to represent a final
agreement, particularly given the definitive integration clause contained in the MSA. (Dkt. No. 40
at 2).
Plaintiff, on the other hand, represents through the declaration of Hatim Yusuf—Plaintiff’s
Managing Director—that it was informed by LG Panama representatives that Plaintiff had to be
“registered as a customer” in LG Panama’s system before the terms of any contract for the sale of
air conditioning equipment could be negotiated, and that “signing the Master Supply Agreement
would facilitate that process.” (Dkt. No. 27-1 at 2). Plaintiff also maintains that Mr. Yusuf
“carefully confirmed” through emails to LG Panama representative Juan Macia that the MSA was
“strictly ‘procedural’” and that it was “not intended to create any contractual obligations.” (Dkt.
No. 27 at 7).
The email exhibits accompanying Plaintiff’s Opposition to the Motion to Compel
Arbitration show a series of alleged communications between Mr. Macia and Mr. Yusuf on August
9, 2012. According to the emails, Mr. Macia wrote Mr. Yusuf at 5:37 p.m. and requested that he
complete forms attached to the email so that “we [LG Panama] can create you as a customer in
Panama.” (Dkt. No. 28-2 at 2). Mr. Macia represented that completion of the forms was “necessary
to complete the order.” Id.5 Mr. Yusuf responded shortly thereafter: “We will do so if you confirm
5 Mr. Macia’s email to Mr. Yusuf contains what appears to be an internal email from LG Panama
employee Maria Medina to Mr. Macia and others. That email, which is addressed “Dear
Customer,” explains:
Effective April 9th , 2012, LG Electronics Panama, SA requires that all customers have a
Customer Number. The Customer Account allow [sic] us to register all your purchases and
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that this in no way creates a contractual obligation and merely procedural [sic]. We still need to
get information from LG in order to make an informed decision.” Id. Mr. Macia then wrote back:
“Filling out these forms does not compromise your company with anything. This is only to create
your company as a customer in our accounting department.” Id. at 1. Plaintiff relies on these
emails—along with subsequent correspondence between Plaintiff and LG Panama—to advance its
argument that the intent of the parties in executing the MSA was simply to register Plaintiff in LG
Panama’s customer database, and neither party intended the MSA to create contractual obligations.
(Dkt. No. 27 at 7-9).
In light of this evidence, the Court concludes that Plaintiff has put forth sufficient facts to
place in issue whether the parties intended to be bound by the MSA. If there was no such intent,
then the MSA was a sham, and—despite outward appearances—a contract (including the
arbitration agreement contained therein) was never formed.
IV. 	CONCLUSION
In sum, the Court concludes that the Magistrate Judge erred in refusing to examine extrinsic
evidence related to the MSA in ruling on LG Panama’s Motion to Compel Arbitration. Having
considered this extrinsic evidence and the record before it, the Court finds that Plaintiff has
payments direct [sic] to your account. Purchase will be Pre-Paid, unless a formal Credit
Application was completed and approved by LGE.
Please, find attached the documents that you need to complete and return as soon as
possible, in order to create your Customer Number. It is very important to include copy
[sic] of your Company Business Registration and Identification.
….
(Dkt. No. 28-2 at 2-3). It appears that a copy of a Master Supply Agreement in English is attached
to the bottom of the email.
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responded to LG Panama’s Motion to Compel Arbitration with sufficient facts to place the
formation of the MSA in issue. The Court may not compel Plaintiff to arbitrate its claims absent a
determination by the Court that the parties entered into a binding agreement to arbitrate those
claims. Therefore, the Court will vacate the Magistrate Judge’s Order granting LG Panama’s
Motion to Compel Arbitration and will deny LG Panama’s Motion without prejudice.
Because the Court concludes that a question of contract formation—whether the parties
intended the MSA to be a legally-binding contract—has been raised here, the Court will grant
Plaintiff’s request for limited discovery on that issue. See Guidotti, 716 F.3d at 776 (establishing
that a district court should permit discovery on the question of arbitrability where a plaintiff has
responded to a motion to compel arbitration with facts sufficient to place the agreement to arbitrate
in question). Following the limited discovery, LG Panama may renew its Motion to Compel
Arbitration. If at that point a genuine dispute of material fact regarding the parties’ intent to be
bound by the MSA exists, this matter will proceed to trial on that question.
An appropriate Order accompanies this Memorandum Opinion.
Date: September 21, 2018 	_______/s/_______
WILMA A. LEWIS
Chief Judge
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