A recent case, All State Home Mortgage, Inc. v. Daniel, makes this point. In that case, Francis and Eulene Daniel applied for a loan with All State to refinance their home in Rockville, MD. The loan was approved, and as part of the contract, the Daniel's were required to sign an arbitration clause which provided that, should the parties later dispute any parts of the agreement, such a matter would be settled only by arbitration. The agreement stated that it would be effective and binding "when both parties signed it." Though both of the Daniels signed the agreement, no representative from All State counter-signed the agreement. When All State later rejected the Daniels' loan request, they sued in circuit court to enforce the contract. While initially ruling in favor of All State's request to compel arbitration, the Circuit Court later reversed on a motion to reconsider. The court determined that the contract lacked mutuality because it was not signed by both parties. Therefore, the arbitration clause was not enforceable. All State later appealed, and after hearing the case, the Maryland Court of Special Appeals affirmed.

In affirming the lower court's decision, the Court of Special Appeals first explained that the issue of whether an agreement to arbitrate exists is governed by contract principles. Maryland adheres to the principle of the objective interpretation of contracts. In other words, courts must give effect to the plain meaning of a contract and not contemplate what the parties may have subjectively intended. Nova Research, Inc. v. Penske Truck Leasing Co., 405 Md. 435, 448 (2008). Thus, the Court looked directly at the language of the contract.

The Court of Special Appeals determined that the language, "this agreement is effective and binding…when both parties sign it," created a condition precedent. A condition precedent is defined as a fact or other occurrence which, unless excused, must exist or occur before a duty arises. Chirichella v. Erwin, 270 Md. 178, 182 (1973). While a signature is not always necessary to enforce an agreement between parties, the unmistakable language of the contract in this particular case compelled both parties to sign the contract before being bound.

The Court of Special Appeals was not persuaded by All State's argument that "both parties" referred only to Francis and Eulene Daniel. First, as the Court explained, "both parties" intuitively refers to parties on opposing sides of a contract. Furthermore, All State admitted to using the same arbitration clause for contracts between All State and single individuals. That being the case, where there is only one other person, "both parties" was clearly meant to include All State. Therefore, under the express terms of the arbitration clause that All State drafted, the agreement was to become effective and binding only when both parties signed it. Because that never occurred, All State could not compel the Daniels to arbitrate.

All State Home Mortgage, Inc. reminds us that, while arbitration is an increasingly popular alternative to litigation, great care must be given when drafting arbitration clauses. Like all other parts of a contract, arbitration clauses will not be enforceable if written in ways inconsistent with contract law. As always, one should consult an attorney before drafting or signing any contract document.