Summary of a Recent
Judicial Development in
Cooperatives

Ag Coop Member Ordered to Arbitrate

Harrison M. Pittman
Staff Attorney

The Georgia Court of Appeals has ruled that in a dispute between an agricultural cooperative and one of its members, the member was precluded from denying the validity of the parties' arbitration agreement when he had not timely moved to stay arbitration proceedings after he received a certified letter from the cooperative demanding that the parties submit to arbitration. Rushing v. Gold Kist Inc., No. A02A0522, 2002 WL 1363976 (Ga. App. June 25, 2002)). The Georgia Court of Appeals also ruled that the Federal Arbitration Act, 9 U.S.C. Secs. 1-14 (West 1999 & Supp. 2002), applied to the parties' agreement to arbitrate, that the arbitration clause incorporated into the cooperative's by-laws after the membership agreement was signed subjected the member to arbitration, and that the arbitration clause was supported by proper consideration required under Georgia law. Id.

Robert Rushing was a member of Gold Kist, Inc., ("Gold Kist"), an agricultural cooperative. Id. at *1. Rushing signed a membership agreement with Gold Kist on August 12, 1985. Id. He executed a promissory note in favor of Gold Kist on August 28, 1997. Id. at *2. Gold Kist assigned the promissory note to AgraTrade Financing, Inc. Id.

The parties' membership agreement stated that it was "'subject to and include[d] all of the applicable provisions contained in Gold Kist's charter and By-Laws now or hereafter in effect.'" Id. at *1. In October of 1993, Gold Kist adopted an "arbitration policy" which provided that effective January 1, 1994, the following matters would be subject to arbitration:

All disputes of fact or law between Gold Kist and members arising during the period of a member's membership, even if resolution of the dispute is attempted after termination of the member's membership, and even if the facts or events alleged in the dispute arose or existed prior to the disputing party's becoming a member. This arbitration policy is intended to cover all types of disputes to the maximum extent permissible by the law in effect at the time a dispute arises, whether the dispute arises under federal or state statutes or common law, except that this arbitration policy shall not include, nor shall it permit any arbitrator to decide, disputes relating to matters within the discretion of management of the Board of Directors, nor patronage or corporate power or governance matters since they could involve questions affecting the membership as a whole. Neither shall it apply to any purchases or sales between Gold Kist and members, or contracts for such purchases or sales, if the transactions were completed or the contracts executed prior to the effective date of this policy.

Id.

The arbitration policy also stated that all arbitration proceedings were subject to and governed by the Federal Arbitration Act ("FAA"). Id. Gold Kist amended its By-Laws on October 25, 1996, to reflect the adoption of this new arbitration policy. Id.

Asserting that Rushing had defaulted on the promissory note executed in August of 1997, Gold Kist sent a certified letter to Rushing demanding that the parties submit the dispute to arbitration. Id. Rushing did not respond to this letter. Id. Gold Kist and AgraTrade then filed a motion to compel arbitration with the trial court. Id. Rushing objected to the motion to compel, arguing that the arbitration clause lacked mutuality, that the Georgia Arbitration Act did not apply, and that he had never consented to the arbitration clause. Id.

The trial court granted Gold Kist's and AgraTrade's motion stating that "because Rushing had not timely moved to stay arbitration proceedings after receiving the certified demand letter, he was precluded from denying the validity of the agreement under OCGA Sec. 9-9-6(d) (Supp. 2001))." Id.

Sec. 9-9-6(d) of the Georgia Arbitration Code provides that:

[a]fter service of the demand, or any amendment thereof, the party served must make application within 30 days to the court for a stay of arbitration or he will thereafter be precluded from denying the validity of the agreement or compliance therewith or from asserting limitation of time as a bar in court.

Id. at *4, n.1.

Rushing argued on appeal that "the court erred in relying on the Georgia Arbitration Code in precluding him from challenging the validity of the [arbitration clause] because [the clause was] not governed by the state act but by the Federal Arbitration Act." Id. He also argued that the membership agreement was unenforceable because the parties never agreed to arbitrate and because the agreement was unsupported by consideration and lacked mutuality. Id.

The court first examined whether the membership agreement was governed by the FAA. Id. The court noted that "[t]he bylaws of a corporation are binding on the parties who enact them as contracts and must be construed according to the principles of the law of contracts." Id. (citing Gwin v. Thunderbird Motor Hotels, Inc., 119 S.E.2d 14 (Ga. 1961)). The court added that "'a contract must be enforced if [the parties intent] is clear and it contravenes no rule of law and sufficient words are used to arrive at the intention.'" Id. (quoting Choate Constr. Co. v. Ideal Elec. Contractors, Inc., 541 S.E.2d 435, 436 (Ga. App. 2000)).

The court determined that Rushing "intended to be bound by the rules and regulations adopted by Gold Kist's board" when he executed the membership agreement. Id. The court noted that the agreement "expressly provided that [Rushing's] membership was subject to the By-Laws, which [provided] the [Gold Kist] board [with] rule-making authority." Id. The court added that "[a]lthough Gold Kist now argues that the FAA does not control the agreement, the company's own board of directors expressly determined that the agreement was controlled by the FAA, and it is self-evident that Gold Kist consented to being governed and bound by the determinations of its board." Id. (citing Primerica Fin. Svcs., Inc., v. Wise, 456 S.E.2d 631 (Ga. App. 1995)) (and citing Results Oriented, Inc. v Crawford, 538 S.E.2d 73 (Ga. App. 2000) (observing that "'if the intent of the parties indicates that arbitration would be governed by the FAA, this court will enforce the intentions of the parties'")). The court concluded that the FAA applied to the parties' agreement to arbitrate. Id.

The court also rejected Rushing's argument that he was not bound by the arbitration clause because he never agreed to be subjected to arbitration. Id. at *3. The court reiterated that Rushing expressly consented to be bound by the arbitration provision contained in the by-laws when he executed his membership agreement which stated that his membership was subject to Gold Kist's by-laws. Id. The court added that "[i]t is inconsequential that the by-laws did not contain the arbitration clause when Rushing signed his membership agreement he agreed to be subject not only to existing by-laws, but also by-laws 'hereinafter in effect' . . . . Gold Kist . . . was permitted to amend it by-laws to require Rushing to arbitrate disputes even though no arbitration clause existed when Rushing joined the cooperative." Id.

Finally, the court rejected Rushing's argument that the arbitration clause was unenforceable because it lacked mutuality of obligation and consideration. Id. Rushing based this argument on an Eleventh Circuit decision that ruled that "'the consideration exchanged for one party's promise to arbitrate must be the other party's promise to arbitrate at least some specified classes of claims.'" Id. (quoting Hull v. Norcom, Inc., 750 F.2d 1547 (11th Cir. 1985)). Noting that the Hull decision was based on New York state law, the court of appeals stated that "under Georgia law, a promise is good consideration for another promise if there is an absolute mutuality of engagement, so that each party has the right at once to hold the other to a positive agreement." Id. at *3-4 (citing Pabian Outdoor-Aiken, Inc. v. Dockery, 560 S.E.2d 280 (2002)). The court added that "in cases of mutual promises, where the promise of one party is relied on as a consideration for the other, the promises must be concurrent and obligatory upon each at the same time, in order to render either binding." Id. at *4 (citing Pabian, 560 S.E.2d at 280)). The court concluded that the arbitration clause at issue here was supported by the type of consideration required by Georgia law. Id.

This case summary was prepared in August, 2002.