Court Holds That Judiciary, Not The Arbitrator, Must Determine Whether An Enforceable Contract Exists

The North Dakota has overruled a lower court’s order compelling arbitration of a consumer’s claim against a time share provider. The consumer alleged high pressure sales tactics, as follows:

“she attended a sales meeting with a Diamond Resorts representative, the sales meeting lasted approximately five hours, and she asked to leave the meeting on at least one occasion and Diamond Resorts refused to allow her to leave. She claimed Diamond Resorts knew she was a diabetic and experienced fatigue and confusion, Diamond Resorts knew she was a vulnerable adult subject to a durable power of attorney for financial management, and Diamond Resorts would not allow her to leave the sales meeting until she signed the timeshare agreement. [She] asserted she lacked the capacity to enter into the agreement, Diamond Resorts used high-pressure and abusive sales tactics and knowledge of her medical condition to unduly influence and coerce her into signing the agreement, and any consent was obtained by duress and menace.”

Recognizing that applicable law provides for the arbitrator to determine “the validity of the contract as a whole,” the court noted “that the issue of a contract’s validity is different from the issue of whether an agreement was ever formed and a contract exists.” Thus, “[b]ecause [the consumer] claimed she lacked the capacity to consent to the timeshare agreement at the time it was executed, and provided an affidavit supporting her argument, we conclude the district court erred in ordering arbitration without holding an evidentiary hearing and
deciding whether a contract exists.”

As the court continued, “if the district court determines that a contract exists and arbitration is appropriate,” then the arbitrator will decide the consumer’s fraud, duress, menace and undue influence claims, which “are arguments about the validity of the entire contract” but “do not challenge the validity of the arbitration agreement itself.”

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