Court, Not Arbitrator, Decides Contract Formation Question in the Arbitration Context
JANIGA v. QUESTAR CAPITAL CORP. (August 2, 2010)
Alfred Janiga has lived and worked in the United States for over 20 years since his arrival from Poland. However, he still understands very little English. His brother, Weislaw Hessek, operates Hessek Financial Services and is a registered representative of Questar Capital Corp. After much prodding from Hessek, Janiga agreed to open a Questar account. He signed one piece of paper and claims that he never saw any of the documents related to his account. Just above his signature, however, in large letters, was a reference to an arbitration agreement in the contract and an admission that he had received a copy. Janiga was originally content with his investment. In fact, he increased his investment after a few months. After about a year, Janiga filed a complaint against his brother and Questar. His complaint included counts of securities violations, negligence, fraud, and others. The defendants moved to stay the proceedings and order arbitration. Judge Shadur (N.D. Ill.) denied the motions without prejudice until he determined whether a contract had even been formed. The defendants appeal.
In their opinion, Judges Wood, Evans, and Sykes reversed and remanded. The Court first commented on its appellate jurisdiction. Although the decision of the district court was not a final decision, the Federal Arbitration Act allows for an interlocutory appeal of the district court's refusal to stay and order arbitration. The Court turned to the merits -- whether the threshold question of the existence of a contract is a question for the court or the arbitrator. The Supreme Court has distinguished between challenges to the validity of an arbitration agreement and challenges to the validity of a contract. A court decides the former; the arbitrator decides the latter. At the time of the district court’s opinion (and even oral argument), the Supreme Court had not decided which decided the contract formation issue. On June 24, 2010, in the Granite Rock Co. case, the Supreme Court held that a courts, not an arbitrator, should decide issues of contract formation. The district court was therefore correct in not referring that issue to arbitration. The Court did take issue with the lower court's hesitation to decide the issue. The district court focused on issues such as Janiga's language barriers, whether he understood or read or even saw the contract, and whether the contract was valid under state law. But these are enforceability issues, said the Court. The fundamental point is that Janiga signed the contract and both parties performed under it for a year. Janiga clearly intended to open a brokerage account and his admittedly voluntary signature is evidence of his assent to the agreement. Contract formation has been established -- other questions may remain for the arbitrator. The Court was less confident of the resolution of the formation issue with respect to Hessek. If Hessek is an agent of Questar and the claims asserted are within the scope of that agency, he may receive the benefit of the arbitration agreement. Since the district court never addressed that issue, the Court remanded for further consideration.
