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Contract Formation

Mississippi Supreme Court Affirms Denial of Motion to Compel Arbitration of Wrongful Death Suit

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Noting that the Federal Arbitration Act applies to nursing home admission agreements that include a mandatory arbitration provision, the Mississippi Supreme Court affirmed the trial court’s order denying Belhaven Senior Care LLC’s motion to compel arbitration of a wrongful death and negligence suit brought by the administrator and estate of a former patient. The court agreed with the trial court that the party who signed the admission agreement on behalf of the patient lacked the legal authority to bind the patient to the agreement.

When Mary Hayes was admitted to the Belhaven nursing home in November 2018, her daughter, Betty Smith (the administrator of her mother’s estate), executed an admission agreement on behalf of her mother that included a provision for binding arbitration of all claims related to Hayes’ residency at the nursing home. Hayes died in June 2020, and Smith filed a complaint against Belhaven in state court alleging claims for wrongful death, negligence, gross negligence, medical malpractice, and a statutory survival claim. Belhaven moved to compel arbitration, relying on the arbitration clause in the admission agreement. The trial court declined to compel arbitration because Smith did not have the legal authority to bind her mother to the admission agreement.

On appeal, Belhaven argued that under the Health-Care Decisions Act, Smith acted as a “statutory health care surrogate” for her mother when she signed the admission agreement and is estopped from denying the validity of the arbitration clause because she and Hayes benefited from the agreement, and Hayes was a third-party beneficiary. In rejecting Belhaven’s arguments, the court noted that it applies a two-prong inquiry in evaluating arbitration clauses, which includes first determining if there is a valid arbitration agreement, and if so, if the parties’ dispute is within the scope of the arbitration agreement. The court made clear that its focus in this case “rests wholly on the arbitration agreement’s validity.” The court concluded that the capacity to make health care decisions is presumed under the act, and a health care surrogate may only make health care decisions when the adult patient has been determined by the primary physician to lack capacity. Since Hayes was not evaluated by a physician when admitted, and was not found to lack capacity, Belhaven failed to prove the requirements of the act. The court then found that because Smith did not qualify as her mother’s health care surrogate, there was no valid contract. The court further found that Smith was not estopped from contesting the validity of the arbitration clause in the admission agreement. The court affirmed the trial court’s decision not to compel arbitration and remanded the matter.

Belhaven Senior Care, LLC v. Smith, No. 2022-CA-00050-SCT (Miss. Apr. 6, 2023).

Arizona Permits Unilateral Modifications of Standard Consumer Contracts Upon Reasonable Notice and Opt-Out Opportunity

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In October 2018, Eva Cornell opened checking and savings accounts with Desert Financial Credit Union. In so doing, Cornell agreed to terms and conditions, including an agreement that Desert Financial could “change those terms and conditions from time to time.” In addition, Cornell also consented to the electronic delivery of all future communications from Desert Financial, including all disclosures, notices, and account statements. Notably, at the time Cornell opened the accounts, the parties’ contract did not include an arbitration clause.

In February 2021, Desert Financial updated its terms, adding a mandatory arbitration clause. The updated terms specified that agreement to the arbitration clause was not a mandatory condition of the customer maintaining an account with Desert Financial and that clients could opt out by providing notice by April 30, 2021, or 30 days after opening their account, whichever was later. Desert Financial did not directly contact its account holders regarding these updated terms. Rather, it posted on monthly account statements an orange-and-blue banner stating Desert Financial was making a “change-in-terms” and providing a link to the complete updated terms. Cornell received a notification from Desert Financial that her account statement was available for viewing but would only see the notice of the changed terms if and when she accessed the digital account statement.

Ultimately, Cornell never viewed or opted out of the updated terms. On May 5, 2021, Cornell filed a class action suit against Desert Financial alleging ambiguous and misleading language concerning overdraft fees. Desert Financial moved to compel arbitration. Cornell argued she never agreed to the updated terms and thus her agreement with Desert Financial did not include an arbitration clause. The District Court of Arizona certified a question to the Arizona Supreme Court as to whether Arizona law permits the unilateral modification of standard consumer contracts, and if so, what conditions must be satisfied to do so.

The Arizona Supreme Court answered the question in the affirmative, adopting Restatement Consumer Contracts § 3 in the process. The court found the Restatement “offers an effective modification procedure that fairly balances the public policies of economic efficiency and consumer protection.” The court summarized the requirements of Restatement § 3 as follows: “Consumers must (1) receive express and reasonable notice of the business’s right to unilaterally modify the agreement; (2) receive reasonable notice of new terms and the opportunity to opt out without penalty; and (3) upon receiving actual or constructive notice of new terms, continue the business relationship past a reasonable opt-out period.”

Per the court, adoption of the Restatement’s approach permits businesses to readily update their terms, facilitating economic efficiency in the context of standardized contracts, while simultaneously subjecting such changes to several safeguards designed to protect consumers from unfair exploitation.

Cornell v. Desert Financial Credit Union, No. CV-22-0071-CQ (Ariz. Mar. 2, 2023).

Fifth Circuit Refuses to Vacate Arbitration Award, Holds That Party’s Arguments Merely Ask for Merits Review

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The Fifth Circuit Court of Appeals recently rejected a claim that an arbitration award should be vacated by holding that the challenging party’s arguments improperly asked the court to review the merits of the arbitration panel’s decision and noting that proving fraudulent inducement to sign a contract is not enough to evade arbitration because the fraud must relate to the arbitration clause itself.

Brendan Church of Old South Trading Company LLC and Joseph Agresti of Dream Medical Group LLC entered into a business arrangement whereby Old South supplied Dream Medical with personal protective equipment that Dream Medical then distributed. Dream Medical subsequently sent Old South a resolution agreement that contained an arbitration clause. Church initially refused to sign the agreement but later did so after Agresti purportedly told him that Dream Medical would never enforce the agreement. Dream Medical later sought to enforce the agreement to obtain a refund on a transaction, which led to arbitration when Old South refused to provide the full refund. Old South argued that it had been fraudulently induced to enter the agreement, but the arbitration panel rejected that argument and concluded in relevant part that Old South breached the agreement. Dream Medical applied to confirm the award and Old South moved to vacate it.

The district court confirmed the award and Old South appealed. It argued that the arbitrators violated section 10(a)(3) of the FAA “by not fully considering its fraudulent inducement claim” and violated section 10(a)(4) of the FAA “by failing to fully review Old South’s evidence of, and the applicable law regarding, fraudulent inducement.” The Fifth Circuit concluded that neither of these arguments warranted reversal. It explained that both arguments “functionally invite[d] [it] to reassess the merits of [the arbitration panel’s] fraudulent inducement claim and reach a different conclusion than the” panel, which was “not something [the court could] do.” Old South also argued “that it didn’t voluntarily consent to arbitration because it was fraudulently induced to sign the … Agreement,” but the Fifth Circuit rejected that claim, noting that “even if a contract had been induced by fraud, the arbitration clause is enforceable unless the plaintiffs were fraudulently induced into agreeing to the arbitration clause itself.”

Dream Medical Group, LLC v. Old South Trading Co., No. 22-20286 (5th Cir. Mar. 6, 2023).

Ninth Circuit Affirms District Order Refusing to Compel Arbitration

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In City of Laurel, Mississippi v. Cintas Corp. No. 2, the Ninth Circuit Court of Appeals addressed the issue whether a valid arbitration agreement existed between the plaintiff City of Laurel, Mississippi, and defendant Cintas Corporation No. 2. The court affirmed the district court’s order denying Cintas’ motion to stay proceedings and compel arbitration, concluding that “there is no valid arbitration agreement between Cintas and the City.”

The case involved two contracts. The first contract, referred to as the “master agreement,” was between Cintas and “the lead public agency” and included an arbitration clause. The second contract was between Cintas and the city, and included provisions establishing how Cintas would deal with the city and other “participating public agencies.” The parties did not dispute that there was a valid arbitration agreement between Cintas and the “lead public agency” as stated in the first contract. Rather, the dispute focused on whether “the same [arbitration] agreement exists between Cintas and the City.”

The city brought breach of contract claims against Cintas, and the district court denied Cintas’ motion to stay the action and compel arbitration. In affirming the district court’s decision, the Ninth Circuit first noted that under the FAA, “the court is limited to determining (1) whether a valid agreement to arbitrate exists, and, if it does, (2) whether the agreement encompasses the dispute at issue.” The court found the contract between Cintas and the city did not include an arbitration clause, and instead provided that Cintas and the city would resolve disputes “directly between them in accordance with and governed by the laws of the State in which [the City] exits.” The court found that if this language compelled arbitration, “it would be superfluous in light of the arbitration agreement incorporated into the Master Agreement,” noting that courts “must avoid interpreting a contract in a way that would render provisions ‘redundant and superfluous.’” The court also rejected Cintas’ argument that the court should “harmonize” the two contracts by applying the arbitration agreement contained in the contract between Cintas and the lead public agency, citing Morgan v. Sundance Inc., which stated that “a court may not devise novel rules to favor arbitration over litigation.”

In a dissenting opinion, one of the circuit judges concluded that the underlying agreement between the parties compels arbitration of the dispute, and he would reverse the judgment of the district court and remand the case with instructions to compel arbitration.

City of Laurel, Mississippi v. Cintas Corp. No. 2, No. 22-15476 (9th Cir. Mar. 6, 2023).

Arbitrability Is Question for Court in Case Alleging Fraud Regarding Agreement Between Parties

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The Court of Appeals of Maryland recently held that the question of arbitrability was for a court, not an arbitrator, to decide where the plaintiffs alleged that the defendants had fraudulently induced them to enter agreements they did not understand contained arbitration clauses.

Several Maryland residents obtained structured settlements to compensate them for injuries allegedly caused by their purported exposure to lead-based paint. Access Funding, LLC and Assoc, LLC (collectively the “Factoring Companies”) entered into agreements with those residents whereby the Factoring Companies paid them a discounted lump sum and the residents assigned their rights to periodic future payments to the Factoring Companies. The agreements contained arbitration clauses that stated “[o]nce your transaction has closed any claim or dispute . . . shall be resolved by mandatory binding arbitration.” Under Maryland law, the agreements were contingent on court approval, which the parties obtained.

The residents subsequently filed a putative class action complaint alleging, among other things, that the Factoring Companies engaged in fraud and other misconduct in inducing them to execute the agreements. To make a procedurally complex story much more simple, the Factoring Companies moved to compel arbitration. The Maryland trial court granted the motion to compel, reasoning that arbitrability was for the arbitrator to decide, but Maryland’s intermediate appellate court reversed. The Court of Appeals of Maryland reviewed the case and agreed with the intermediate appellate court that the motion to compel should have been denied.

The court held that “the question of whether a valid arbitration agreement exists is a question for the court to determine” where a plaintiff alleges that the “approval of the transfer of their structured settlement payment rights was procured through fraud and deceit” and the plaintiff denies “the existence of a valid agreement to arbitrate.” The court explained, “a plaintiff’s alleged inability to understand the terms of an arbitration clause in a written agreement, on the ground that the other party procured the agreement through fraud and deceit, places the existence of a valid agreement to arbitrate at issue and raises an issue to be decided by the court, not the arbitrator.” In this case, the court explained that the plaintiffs allegedly suffered from cognitive deficiencies and had pleaded that the Factoring Companies and other defendants had colluded to “interfere with their ability to obtain independent professional advice and sought to prevent them from fully understanding and appreciating the agreement’s provision with respect to binding arbitration.” The court found these allegations sufficient to place the existence of a valid agreement in question.

Alternatively, the court also held that because “the plain language of the arbitration clause expressly conditions arbitration on closure of the transaction” the plaintiffs “challenge[d] the existence of an agreement to arbitrate, which is an issue for the court” not the arbitrator.

Of note, the court also explained that the Maryland Uniform Arbitration Act, which governed the arbitration issues in this case, was meant to mirror the FAA.

Access Funding, LLC, et al. v. Chrystal Linton, et al., No. 5, September Term 2022 (Ct. App. Md. Dec. 1, 2022).