A challenge to the formation of a contract on agency grounds is not an arbitrable matter, according to a federal district court in Washington.

In Peterson v. Allen, No. C07-1866MJP, 2008 WL 2891078 (W.D. Wash. July 23, 2008), Peterson’s yacht was grounded on rocks. Before attempting a rescue of the yacht’s occupants, Allen presented one of the occupants with a salvage contract containing an arbitration agreement. After some initial objections, an occupant signed the agreement. Peterson – who was not on board at the time of the grounding – later objected to Allen’s motion to compel arbitration and challenged the formation of any contract between the parties.

The Court held that Peterson’s challenge to the existence of a contract had to be resolved by a court and could not be referred to arbitration. "While an arbitrator may determine whether a contract is voidable," the Court observed that the arbitrator could not "determine whether the contract itself is void ab initio." Characterizing the issue of agency as a legal matter to be decided by a court, it held that issue of whether Peterson was bound by the occupant was not arbitrable.

The Court noted that if the existence of a contract was established, Peterson would be compelled to arbitrate any challenge to the validity of the contract based on unconscionability or duress.