Opinion ID: 1022861
Heading Depth: 1
Heading Rank: 1

Heading: Existence of Valid Agreement to Arbitrate

Text: The district court denied Appellants’ motion to compel arbitration because it determined that, since the arbitration provision left the decision whether to arbitrate entirely to Appellants’ discretion, the provision was “illusory and unenforceable.” We conclude the district court erred because North Carolina law does not require mutuality of obligation in arbitration agreements. Under the FAA, a party may compel arbitration if it can demonstrate: “(1) the existence of a dispute between the parties, (2) a written agreement that includes an arbitration provision which purports to cover the dispute, (3) the relationship of the transaction, which is evidenced by the agreement, to interstate commerce, and (4) the failure, neglect or refusal of the [other party] to arbitrate the dispute.” Adkins v. Labor Ready, Inc., 303 F.3d 496, 500-01 (4th Cir. 2002). The issue of whether an arbitration agreement exists between the parties, however, is a question of state contract law. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995); see also Hill v. Peoplesoft USA, Inc., 412 F.3d 540, 543 (4th Cir. 2005) (holding that although federal law governs the - 5 - arbitrability of disputes, ordinary state-law principles resolve issues regarding the formation of contracts). Thus, state law determines questions “concerning the validity, revocability, or enforceability of contracts generally.” Perry v. Thomas, 482 U.S. 483, 492 n.9 (1987). North Carolina law provides that so long as the contract as a whole is supported by adequate consideration, there is no requirement that an arbitration provision in the contract place an obligation to arbitrate on all parties to the contract. See Tillman v. Commercial Credit Loans, Inc., 629 S.E.2d 865, 874-75 (N.C. Ct. App. 2006) (“Under North Carolina law, ‘mutuality’ merely requires consideration on each side of a contract. Mutuality does not require that each of the contract terms must apply equally to both parties to be enforceable.”); see also Strategic Outsourcing, Inc. v. Stacks, 625 S.E.2d 800, 803 (N.C. Ct. App. 2006) (holding that provision allowing one party to exempt its claims from arbitration is not unreasonable and unconscionable for want of mutuality). Despite the foregoing, Plaintiffs claim that because they were fraudulently induced into entering the agreements, this court should separately view the arbitration provision to determine if that provision is supported by consideration. They cite Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), to support this assertion. Plaintiffs’ argument is meritless. - 6 - In Prima Paint, the Supreme Court held that when considering whether an issue of fraud should be determined by an arbitrator or the district court, the district court must determine whether the claim is “fraud in the inducement of the entire contract” or fraud in the inducement to enter the arbitration provision. If the plaintiff asserts fraud in the inducement of the contract as a whole, the district court must defer the matter to an arbitrator to determine the validity of the claim. If the plaintiff asserts fraud in the inducement to enter the arbitration provision, the district court may adjudicate the claim. Id. at 403-04. Plaintiffs’ assertions to the contrary, Prima Paint does not stand for the proposition that the district court may look to an arbitration provision in isolation to determine if that provision is independently supported by consideration. See Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996) (holding that federal courts must not singl[e] out arbitration provisions for suspect status but should evaluate arbitration agreements with the same standards as other contracts); Tillman, 629 S.E.2d at 874 (“[A] single consideration may support several promises; it is not necessary that each promise have a separate consideration. Hence, a covenant which imposes obligations upon one party only may be enforceable if it is part of an entire contract which is supported by a sufficient consideration.”). - 7 - Because Appellants agreed to secure commercial loans in exchange for non-refundable processing fees, the agreements as a whole were supported by adequate consideration. Accordingly, we conclude the district court erred in holding the arbitration provisions were invalid. Prima Paint is instructive of the outcome of this appeal, however. Because Plaintiffs assert they were fraudulently induced by Appellants to enter the agreements, but do not specifically assert they were fraudulently induced to enter into the arbitration provisions contained therein, the district court lacks authority to determine the validity of Plaintiffs’ claims against Appellants. Rather, the district court must defer Plaintiffs’ claims against Appellants to arbitration. See Prima Paint, 388 U.S. at 403-04.