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.