Summary of a Recent
Judicial Development in
Cooperatives

Cooperative Member Bound by
Arbitration Clause

John D. Mead
National Ag Law Center Graduate Assistant

The South Carolina Court of Appeals has held that an agricultural cooperative was allowed to amend its bylaws to incorporate an arbitration clause and that a dispute between the cooperative and one of its members was required to be submitted to arbitration. McMillan v. Gold Kist, Inc., No. 3593, 2003 WL 173558 (S.C. Ct. App. Jan. 27, 2003).

Gold Kist, Inc. ("Gold Kist"), was an agricultural cooperative that adopted an arbitration policy on October 28, 1993, and amended its bylaws to reflect the new arbitration policy. See id. at *1. The policy required any disputes between Gold Kist and its members to be submitted to binding arbitration. See id. The policy also provided that any arbitration proceedings would be governed by the Federal Arbitration Act, 9 U.S.C. §§ 1-14. See id.

McMillan was a farmer who applied for membership with Gold Kist in 1986. See id. The membership agreement provided that all new members agreed to follow the existing bylaws of Gold Kist and any future bylaws enacted by Gold Kist's board of directors. See id.

In 1991, McMillan signed an acknowledgment that he had received a copy of his membership agreement with Gold Kist. See id. The 1991 agreement provided, in pertinent part, "[t]he member will be eligible for the benefits of membership and also that the member will honor and abide by the rules of membership as contained in the cooperative's Articles of Incorporation, By-Laws, and Board of Directors' policies, all of which may be changed from time to time." Id. (emphasis supplied). The arbitration clause became effective in 1994. See id.

On November 27, 2000, Gold Kist sent McMillan a demand for arbitration, alleging that he owed Gold Kist $57,337.40 for products he purchased from the cooperative. See id. at *2. On January 30, 2001, McMillan filed an action in circuit court seeking a declaratory judgment that he was not required to arbitrate his dispute with Gold Kist. See id.

The circuit court held that Gold Kist failed to show that McMillan was aware of the arbitration policy in the bylaws or that McMillan had agreed to be bound by the subsequent amendment to the bylaws. See id. Therefore, it determined that McMillan was not bound by the arbitration clause. See id. Gold Kist appealed the circuit court's decision to the South Carolina Court of Appeals. See id.

In determining whether Gold Kist could amend its bylaws to include an arbitration policy and because Gold Kist was organized under Georgia law, the court of appeals examined the Georgia Cooperative Marketing Act, § 2-10-86. See id. at *3. The court noted that § 2-10-86 required a cooperative to adopt bylaws within thirty days of incorporation, but it did not specifically address arbitration clauses. See id. Rather, Georgia law provided that "[i]t is a general rule that a corporation may enact any bylaw for its internal management so long as such bylaws are not contrary to its charter, a controlling statute, its articles of incorporation, or violative of any general law or public policy." Id. (emphasis added). The court noted that there was strong public policy in South Carolina law favoring arbitration and that the Georgia law did not specifically forbid agricultural cooperatives from having arbitration clauses in their bylaws. See id.

The court relied upon Rushing v. Gold Kist, Inc., 567 S.E.2d 384 (Ga. Ct. 2002), a Georgia Court of Appeals case in which a member agreed to be bound by future amendments to the bylaws of a cooperative when the member signed a membership agreement. See id. In Rushing, Gold Kist filed a motion to compel one of its members to submit a dispute between the two parties to arbitration. See id. The membership agreement that the member signed provided that the member "agreed to be bound by future amendments to the bylaws." Id. The member signed the agreement several years before Gold Kist amended its bylaws to include an arbitration clause. See id. The member argued that he was not bound by the arbitration clause because he did not agree to it. See id. The court rejected this argument, however, ruling that the member "agreed to be bound by future amendments to the bylaws when he signed the membership agreement, thus agreeing to bind himself to arbitration." Id. (citation omitted).

The court determined that the arbitration clause was deemed to be binding on McMillan because he had signed an agreement. See id. The court also determined that the arbitration clause was not in violation of the Georgia law because the court determined that arbitration is good public policy. See id.

McMillan also argued that the arbitration clause was invalid because it was governed by the requirements of the South Carolina Arbitration Act, rather than the Federal Arbitration Act ("FAA"), and that Gold Kist failed to adhere to the strict requirements under § 15-48-10(a) of the South Carolina Arbitration Act. See id. at *4. Section 15-48-10(a) provides that "[n]otice that a contract is subject to arbitration pursuant to this chapter shall be typed in underlined capital letters, or rubber-stamped prominently, on the first page of the contract and unless such notice is displayed thereon the contract shall not be subject to Arbitration." Id.

The court rejected this argument, ruling that the Federal Arbitration Act was the applicable law in the instant case. See id. Since some of the stock for Gold Kist's store came from Tennessee, the court stated that the Federal Arbitration Act preempted the South Carolina Arbitration Act because interstate commerce was involved. See id. The court also noted that the FAA did not impose specific procedures regarding how notice of arbitration must be given in contracts. See id. Therefore, the court held that Gold Kist was not required to use special fonts or lettering in its arbitration clause. See id.

The court held that McMillan was bound by the arbitration clause, even if he was never provided actual notice of the policy or had not specifically consented to the clause. See id. The court stated that McMillan agreed to future amendments in the bylaws when he signed the membership agreement. See id.

The court also stated that the terms of the contract between McMillan and Gold Kist were not affected by the subsequent adoption of the arbitration clause. See id. at *5. Therefore, the court determined that the arbitration policy was binding on McMillan and reversed the decision of the circuit court. See id.

Author's Note: As of the date of this publication, the following language precedes the text of the above-summarized decision:

NOTICE: THIS OPINION HAS NOT BEEN RELEASED FOR PUBLICATION IN THE PERMANENT LAW REPORTS. UNTIL RELEASED, IT IS SUBJECT TO REVISION OR WITHDRAWAL.

The case was decided on January 27, 2003; this summary was posted March 2003