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March 30, 2020 Practice Points

Fourth Circuit Remands Question of Contract Formation for Trial

Where the facts of contract formation are disputed, a trial may be necessary.

By Serhiy Kiyasov

The Fourth Circuit held that Section 4 of the Federal Arbitration Act (FAA) requires that the court—rather than an arbitrator—decide whether the parties have formed a valid agreement to arbitrate. Accordingly, it remanded the case to the district court to make this determination and indicated that a trial was necessary due to the many facts in dispute. Berkeley Cty. Sch. Dist. v. Hub Int'l. Ltd., 944 F.3d 225 (4th Cir. 2019).

The Berkeley County School District in South Carolina (the School District) asserted several federal and state claims against an insurance company and two of its employees. Id. at 227-28. “The claims were predicated on a massive insurance contract steering and kickback fraud conspiracy that spanned the period from 2001 to 2016, and that was perpetrated by the [insurance company] and [School District CFO, Thomas].” Id. at 228.

In the district court, Defendant Hub International, Ltd. (Hub) moved to compel arbitration of the School District’s claims and, in support, referred to six purported Brokerage Service Agreements (BSAs) between Hub and the School District each of which contained an arbitration clause. The first two of the six BSAs were signed by the School District CFO, Thomas. The last four BSAs were unsigned. However, the School District had paid invoices to Hub for services provided pursuant to the four unsigned BSAs. Hub argued that the School District had thus accepted the unsigned BSAs by performance and consequently agreed to the arbitration clauses contained therein.

In assessing Hub’s motion, the district court “accepted the factual representations made by Berkeley Schools’ lawyer that the School District had no prior knowledge of the unsigned Agreements.” It also stated that the School District’s “lawyer’s representations were supported by the lack of signatures” on four of the agreements. 232. The district court also found that the School’s CFO “had not acted within ‘the scope of his employment’” when he signed the first two BSAs that caused Berkley Schools to pay unreasonable insurance premiums and fees. Id. at 233. Finally, the district court found that the School District had not accepted an offer by performance in these “most unusual set of facts.”

The Fourth Circuit reviewed the district court’s denial of Hub’s arbitration motion de novo. It held that the FAA required the district court, not the arbitrator, to decide whether the parties formed an agreement to arbitrate. The court added that “the court is obliged to conduct a trial when a party unequivocally denies ‘that an arbitration agreement exists.’” Id. at 234.

Using the applicable state law that governs the formation of contracts, the Fourth Circuit then proceeded to identify the factual disputes that the lower court needed to decide. First, “there [was] a significant factual dispute regarding [the School District’s] knowledge of the [BSAs] purportedly formed during the period encompassed by the Operative Complaint, i.e., the four unsigned Agreements.” Id. at 238. There were also factual disputes concerning whether the School District’s CFO had the actual or apparent authority to agree to the BSAs on the School District’s behalf.  Id. at 239. The Circuit Court held that those factual questions, which concern the formation of the BSAs and their arbitration clauses, could be resolved only by a trial. Id. at 241.

Practice Tip

Although arbitrators often are given the authority to decide their own jurisdiction, the courts have the responsibility to determine in the first instance whether the parties have entered into a valid arbitration agreement. And, where the facts of contract formation are disputed, a trial may be necessary.  

Serhiy Kiyasov is a J.D. 2020 candidate at DePaul University College of Law in Chicago, Illinois.

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