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Fourth Circuit Finds No Agreement to Arbitrate in Digital Age Contract Formation

Mary Catherine Zinsner


  • The Fourth Circuit affirmed a district court's decision that no agreement to arbitrate claims was formed due to variations between two versions of a contract.
  • The Fourth Circuit emphasized the importance of identical and agreed-upon terms in contracts, especially in the digital age, and concluded that no contract and agreement to arbitrate were formed in this case.
  • Parties should ensure proper execution and a meeting of the minds in contracts to protect their interests.
Fourth Circuit Finds No Agreement to Arbitrate in Digital Age Contract Formation
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The Fourth Circuit recently affirmed a district court’s finding that no agreement to arbitrate claims was ever formed, holding that because the evidence showed two versions of a contract and there were variations between the agreements, no meeting of the minds as to the material terms of the contract occurred. See Rowland v. Sandy Morris Fin. & Estate Planning Servs., LLC, 993 F.3d 253 (4th Cir. 2021).

Between 2015 and 2018, Sandy Morris and Sandy Morris Financial LLC (collectively, SMF) served as financial advisors to Barry and Donna Rowland, communicating largely by email because the Rowlands resided in North Carolina and SMF’s business was located in Florida. In 2015, SMF sold the Rowlands two annuity contracts as part of their retirement planning. Then in 2017, the Rowlands moved assets in a retirement account to SMF for management. At this time, the Rowlands virtually completed the documentation to facilitate this expansion of the relationship, which included an Asset Management Agreement (AMA), new account forms from TD Ameritrade, an addendum to the AMA, and a Risk Profile Questionnaire. The AMA included an arbitration provision, which required the parties to use arbitration to settle “any controversy or dispute which may arise between Client and Sandy Morris Financial concerning any transaction or the construction, performance or breach of this Agreement.” The AMA stated that the rules of the American Arbitration Association would govern any arbitration and included, above the signature line, a disclaimer stating in bold and all capital letters: “This Agreement contains a pre-dispute arbitration clause.” SMF combined these documents electronically into one PDF and emailed them to the Rowlands. On October 2, 2017, Barry Rowland signed the documents via DocuSign using wireless internet while at a grocery store and returned the PDF by email to SMF. Once received by SMF, the AMA was signed by the chief compliance officer and Sandy Morris. The SMF version also included handwritten notations on the Risk Profile Questionnaire regarding the Rowlands’ investment experience and risk tolerance and identified an additional account that was set up but never used. The SMF version of the AMA was never sent back to the Rowlands; the Rowlands only had the version Barry Rowland signed via DocuSign, which did not contain the signatures of SMF or the handwriting on the Risk Profile Questionnaire.

After working with SMF, the Rowlands became unsatisfied with the investment advice they received and sued SMF in the Western District of North Carolina, asserting contract and fraud claims. SMF filed motions to compel arbitration, transfer, and dismiss. The parties submitted different versions of the AMA to the court. The Rowlands’ version was the document signed via DocuSign, which included only one account for management by SMF. The Risk Profile Questionnaire did not have indicia of investor selection for risk tolerance or investment objective. SMF’s version included a second account for management by SMF, the additional signatures of SMF, and the Risk Profile Questionnaire and investment experience questions contained handwritten notations. The district court denied the motion to compel arbitration, finding that the parties had not formed an agreement to arbitrate due to the submission of the conflicting versions of the AMA.

SMF appealed. In its brief, SMF argued that the district court erred by determining that no agreement to arbitrate acclaims was ever formed and by failing to compel issues of validity or enforceability to the arbitrator. The Rowlands argued that, as a matter of law, an agreement to arbitrate was never formed as the parties did not assent to the same AMA. Specifically, they asserted that a contract could not be formed because Mr. Rowland had not assented to the terms regarding risk tolerance and investment objectives.

The Fourth Circuit agreed with the Rowlands and affirmed the ruling of district court. In ruling, the Fourth Circuit went through the legislative history and motive behind the enactment of the Federal Arbitration Act (FAA). While the FAA established a national policy favoring arbitration, the parties cannot be forced into arbitration. Instead, the parties must contract to arbitrate the disputes that arise between them. The Fourth Circuit noted the distinction between disputes over arbitrability and disputes over contract formation. When there is a question as to whether the parties agreed to arbitrate, the FAA grants courts authority to determine whether a contract was formed. Before upholding an arbitration provision, the court has an obligation to first determine “the threshold issue of contract formation.”

Section 4 of the FAA requires a court to conduct a trial of the issue if there are “sufficient facts” supporting a party’s denial of an agreement to arbitrate. The Fourth Circuit noted, however, that a district court may employ the summary judgment standard as a gatekeeper, so a trial will occur only if there are genuine issues of material fact. In applying that standard, the burden is on the defendant to establish the existence of a binding contract to arbitrate the dispute.

In construing the issue of whether a valid contract and agreement to arbitrate were formed, the Fourth Circuit focused on electronic signatures in the digital age. “Long gone are the days when two parties might sit down across a wooden table and sign with their own pens the same sheet of paper.” The court stated that although electronic tools like DocuSign have provided new ways through which contracting parties can communicate, they have not fundamentally changed the principles of contract law. “The electronic age has not made the formalities of contract less crucial, but more so—it is imperative that parties turn square corners and ensure that the documents on which signatures are affixed are as identical as possible and certainly identical as to all material terms.”

The Fourth Circuit found that SMF had not sustained its burden of proving a meeting of the minds. The two AMAs submitted by the parties differed with respect to several terms. Specifically, the evidence showed that an unknown employee at SMF added an extra account to be managed on SMF’s version and filled in the Rowlands’ investment objectives and risk preferences, which were used to govern how SMF managed their money; but there was no evidence in the record that the Rowlands instructed SMF to do this or that the Rowlands were even informed that SMF made these changes. The Rowlands never received the version signed by SMF. The court noted that “[e]ither one of the above omissions was sufficient to make for a material difference defeating the formation of the contract. Together they undoubtedly did so.” The Fourth Circuit found that these changes were material differences in the AMA that prevented a meeting of the minds and that a contract and agreement to arbitrate were not formed. “Based on the undisputed evidence submitted by both parties, there was no such meeting of the minds—and thus no contract—because both parties did not agree to the same terms.”

In the current digital age, parties must pay close attention to the formalities. Businesses must make sure agreements are fully signed and all changes initialed and agreed upon. Failure to ensure a contract is properly executed and document a meeting of the minds between the parties may vitiate important protections that inure to both businesses and consumers.