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 Services, LLC, 2021 U.S. App. LEXIS 10028 at *1 (4th Cir. April 7, 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 due to the Rowlands residing in North Carolina and SMF’s business location 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 section, which required the parties to use arbitration to settle “any controversy or dispute which may arise between [the Rowlands] and [SMF] concerning any transaction or the construction, performance or breach of this Agreement.” These documents were electronically combined into one PDF. 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 regarding the Rowlands’ investment experience and risk tolerance, and it identified an additional account that was set up but never used. The SMF version of the AMA was never sent to the Rowlands; the Rowlands only had the version Barry Rowland signed via Docusign, which did not contain the signatures of SMF.
After working with SMF, the Rowlands were unsatisfied with their investments and sued SMF in the Western District of North Carolina. 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, and 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 question 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 and the Fourth Circuit affirmed. In ruling, the court 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. When there is a question as to whether the parties agreed to arbitrate, the FAA grants courts authority to determine whether a contract was actually formed in these scenarios. Before upholding an arbitration provision, the court has an obligation to first determine whether a valid contract was formed in the first place.
In construing the issue of whether a valid contract and agreement to arbitrate was 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 commutate, it has 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 signature are affixed are as identical as possible and certainly identical as to all material terms.”
The Fourth Circuit found that there was not a meeting of the minds. “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.” The court found that because the parties did not assent to all of the material terms of the agreement, a contract did not exist. Specifically, the evidence showed that an unknown employee at SMF added an extra account to be managed and filled in the Rowland’s 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 Fourth Circuit found these changes were material differences in the AMA that prevented a meeting of the minds, and a contract and agreement to arbitrate was not formed.
In the current digital age, parties must pay close attention to the formalities. Financial institutions must make sure the agreement is fully signed, and all changes initialed and agreed upon. Failure to ensure a contract is properly executed and document a meeting of the minds may vitiate important protections that inure to both businesses and consumers.