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Media Alerts - SBRMCOA v. Bayside Resort, Inc
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February 13, 2013
  SBRMCOA v. Bayside Resort, Inc
Headline: Challenges to the formation of a contract must be judicially determined.

Area of Law: Contract Law.

Issue(s) Presented: Where a plaintiff challenges the formation of the contract by claiming that the signatory was unauthorized to enter into the agreement, does the matter have to be arbitrated if the contract contains an arbitration clause or should the district court decide the challenge to the formation of the contract?

Brief Summary: The Sapphire Beach Resort and Marina Condominium Association, LLC ("Association") was originally sponsored by Bayside Resort, Inc. ("Bayside") in 1998. The condominium declaration required Bayside to provide fresh water services to the Association at a reasonable rate that worked out to be $.02 per gallon. Sometime later, Bayside contracted with TSG Technologies, Inc. ("TSG") to provide those water services to the Association. By 2001, Bayside became delinquent on its payments to TSG and others. Bayside made a deal with TSG to sell its rights to supply water services to the Association with a raise in prices to $.05 per gallon. In order to finalize the deal, they had to get the Association to agree to the change. Bayside and TSG threatened to turn off the water supply if the Association did not accept the new agreement. The Association's board crumbled to the pressure and signed the agreement.

Later, the Association backed off from paying the higher price which led to the water being shut off briefly. The Association eventually filed suit, alleging, among other things, that the contract was void because of coercion and lack of authority on behalf of the board to sign the contract. The defendants filed motions to dismiss because the contract contained an arbitration clause. Finding that all of the claims were within the scope of the arbitration clause, the district court dismissed the complaint and entered an order compelling arbitration. The Third Circuit vacated, in part, the order of the district court and held that questions concerning the formation of a contract require a judicial determination and are outside the scope of the arbitration clause. In so holding, the Court relied on its own settled law, which provides that any claim that a contract is beyond a signatory's authority to enter into is a challenge to the formation of the contract and must be decided by a court even if the contract contains an arbitration clause.

Significance, if Any: Challenges to the formation of a contract, rather than to its validity, must be decided by a court even if the agreement otherwise contains an arbitration clause.

Extended Summary (if applicable):

For the entire opinion please visit: http://www.ca3.uscourts.gov/opinarch/072436p.pdf
Panel (if known): SMITH, HARDIMAN and ROTH, Circuit Judges.

Argument Date: 12/06/2012

Argument Location:

Date of Issued Opinion: 02/11/2013

Docket Number: No. 07-2436; No. 07-2678

Decided: Affirmed in part, vacated in part, remanded in part.

Case Alert Author: Daniel Robert Hess

Counsel: James M. Derr - Counsel for Appellant/Cross-Appellee; Neil D. Goldman and Gregory H. Hodges - Counsel for Appellee/Cross-Appellants

Author of Opinion: HARDIMAN, Circuit Judge:

Circuit: 3rd Circuit

Case Alert Circuit Supervisor: Professor Mary E. Levy

    Posted By: Susan DeJarnatt @ 02/13/2013 02:00 PM     3rd Circuit  

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