Citing United States Supreme Court dicta, the Montana Supreme Court has held that challenges to an entire contract containing an arbitration agreement based on the failure of a condition precedent to formation should be resolved by the court rather than the arbitrator.

In Thompson v. Lithia Chrysler Jeep Dodge of Great Falls, Inc., NO. DA 07-0066, 2008 WL 2139567 (Mont. May 20, 2008), Thompson agreed to buy a truck from Lithia by trading in his old truck and financing the balance of the purchase at a 3.9 percent interest rate. As part of the transaction, Thompson signed a financing contract containing an arbitration agreement.

After Thompson had possession of the truck for a week, Lithia notified Thompson that the financing contract was rejected, but that it could obtain financing at 4.9 percent for Thompson. Lithia told Thompson he must either return the truck or sign the new financing contract. Thompson returned the truck, but Lithia did not return Thompson’s trade-in.

Thompson sued Lithia for fraud, conversion, and other assorted claims. Lithia moved to compel arbitration, and the trial court granted the motion. The trial court held that Thompson was challenging the validity of overall contract, not the arbitration agreement, and that such a challenge was arbitrable under the holding in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 449 (2006).

On appeal, the Court observed that Thompson was challenging the existence of the contract based on the failure of a condition precedent to contract formation – namely, the approval of financing. The Court found that the nature of the challenge distinguished the case from the controversy in Buckeye, where a consumer sought to have a contract declared void after formation. According to the Court, dicta in Buckeye supported a clear distinction between contracts never formed and contracts formed but invalid. Id. at 444 n. 1 (opining in dicta that the issue of contract validity is different from the issue of contract formation).

While the Court acknowledged a distinction between conditions precedent to contract formation and conditions precedent to contract performance, the Court characterized financing approval as a condition precedent to formation of Thompson’s purchase contract. Since the contract clearly and explicitly stated that the "order is not a binding contract to the dealer… until approval of the terms hereof is given by a bank or finance company," the contract’s formation was dependent on approval of financing upon the terms stated in the contract.

Lithia argued that the contract only made formation contingent on financing approval "to the dealer" and not to the purchaser. The Court rejected this argument, noting that an essential term – the purchase price – was calculated based on the 3.9 percent financing rate. Because the contract required both parties to approve in writing any changes to the contract, the contract could not be formed without approval of financing at the rate originally designated in the contract.

However, the Court found the record incomplete as to whether the condition precedent was ultimately satisfied and remanded the matter to the trial court for further proceedings.

In adopting the United States Supreme Court’s dicta in Buckeye that there is an arbitrability distinction between challenges to the contract as a whole based on validity and those based on existence, the Montana Supreme Court becomes the first highest state court to adopt this rule. However, other lower state and federal courts have previously applied this distinction with approval. See, e.g., Sanford v. Memberworks, Inc., 483 F.3d 956, 962 (9th Cir. 2007) (adopting this distinction where party opposing arbitration claimed that no contract was ever formed); Foss v. Circuit City Stores, Inc., 477 F.Supp.2d 230, 235 (D. Me. 2007) (adopting this distinction where party opposing arbitration invoked the "infancy doctrine" as a bar to contract formation); Operis Group, Corp. v. E.I. at Doral, LLC, 973 So.2d 485, 488-89 (Fla. Dist. Ct. App. 2007) (adopting this distinction where party opposing arbitration alleged forgery).